CANON
ANNUAL REPORT
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2004
Fiscal Year Ended December 31, 2004
CANON INC. 30-2, Shimomaruko 3-chome, Ohta-ku, Tokyo 146-8501, Japan
CORPORATE PROFILE
Canon Inc. (NYSE: CAJ) and the Canon Group develop, produce, and market
a wide range of products used in the home, the office, and industry, including
business machines, cameras, and optical products. The Canon Group provides
employment for over 108,000 people worldwide.
Under its corporate philosophy of kyosei, or living and working together
for the common good, the Group as a whole aims to create new technologies
and entire new genres of products, and, through their commercialization,
make new contributions to people and communications around the world.
The Canon Group pursues a variety of environmental and philanthropic
activities and focuses on fulfilling its duties to investors and society by stressing
good corporate governance throughout its activities.
In fiscal 2004, under our management strategy, Phase II of the Excellent
Global Corporation Plan, we reported the highest level of sales and net income
in our history, the fifth consecutive year of gains in both sales and income.
CORPORATE PHILOSOPHY: Kyosei
The corporate philosophy of Canon is kyosei. A concise definition of this word
would be “Living and working together for the common good,” but our
definition is broader: “All people, regardless of race, religion, or culture,
harmoniously living and working together into the future.” Unfortunately, the
presence of imbalance in our world—in areas such as trade, income levels, and
the environment—hinders the achievement of kyosei. Addressing these
imbalances is an ongoing mission, and Canon is doing its part by actively
pursuing kyosei. True global companies must foster good relations, not only
with their customers and the communities in which they operate, but also with
nations and the environment. They must also bear the responsibility for the
impact of their activities on society. For this reason, Canon’s goal is to contribute
to the prosperity of the world and the happiness of humanity, which will lead
to continuing growth and bring the world closer to achieving kyosei.
CORPORATE GOAL
Fiscal 2005 is the concluding year for Phase II of the Excellent Global Corporation
Plan, which the Company began to implement in fiscal 2001. The theme of the
next medium-term plan, Phase III, which will begin in fiscal 2006, will be “Toward
Healthy Growth,” maintaining a high margin structure.
CONTENTS
1 FINANCIAL HIGHLIGHTS
2 TO OUR SHAREHOLDERS
4 CORPORATE MANAGEMENT
Our Management Strategy
Our Corporate Governance Structure
Significant Differences in Corporate
Governance Practices between
Canon and U.S. Companies Listed
on the NYSE
10 CORPORATE FUNCTIONS
RESEARCH & DEVELOPMENT
PRODUCTION
SALES & MARKETING
CORPORATE SOCIAL RESPONSIBILITY
Canon’s Approach to CSR
Encouraging Employee Initiatives
Contributing to Society
Environment-Conscious Management
21 PRODUCT GROUP SUMMARY
22 CANON PRODUCT GROUPS
OFFICE IMAGING PRODUCTS
COMPUTER PERIPHERALS
CAMERAS
OPTICAL AND OTHER PRODUCTS
30 MAJOR CONSOLIDATED SUBSIDIARIES
31 FINANCIAL SECTION
83 TRANSFER AND REGISTRARS OFFICE
SHAREHOLDERS’ INFORMATION
Cover Photo:
Equipped with our original image-processing engine, iR
Controller, the imageRUNNER C3220(iR C3220 in some areas)
actively manages printing, copying, scanning, and e-mail
efficiently, while processing color as well as monochrome
images with equal ease. The Multifunctional Embedded
Application Platform (MEAP) also allows users to customize
their own applications.
TRANSFER AND REGISTRARS OFFICE
SHAREHOLDERS’ INFORMATION
Canon Inc.
30-2, Shimomaruko 3-chome, Ohta-ku, Tokyo 146-8501, Japan
Stock exchange listings:
Tokyo, Osaka, Nagoya, Fukuoka, Sapporo, New York and
Frankfurt stock exchanges
Transfer Office for Common Stock in Japan
Mizuho Trust & Banking Co., Ltd.
2-1, Yaesu 1-chome, Chuo-ku, Tokyo 103-8670, Japan
Depositary and Agent with Respect to American Depositary
Receipts for Common Shares
JPMORGAN Chase Bank
4 New York Plaza, New York, N.Y. 10004, U.S.A.
Depositaries and Agents with Respect to Global Bearer
Certificates for Common Shares
Clearstream Banking AG
Neue Börsenstraße 1, 60487 Frankfurt am Main, Germany
Deutsche Bank AG
Taunusanlage 12, 60325 Frankfurt am Main, Germany
American Depositary Receipts (ADRs) are traded on the New York
Stock Exchange.
Shareholders’ annual general meeting:
March 30, 2005, in Tokyo
Other information:
For publications or information, please contact the Corporate
Communications Center, Canon Inc., Tokyo, or access
Canon’s Website at
www.canon.com/
This publication was printed on 70% recycled paper by an
ISO 14001-accredited printer. The inks used, containing
neither VOCs (volatile organic compounds) nor mineral oils,
excel in decomposition and de-inking.
PUB. BEP014 0405SZ 17.9 Printed in Japan
83
FINANCIAL HIGHLIGHTS
Net sales
Operating profit
Income before income taxes
and minority interests
Millions of yen
(except per share amounts)
Thousands of U.S. dollars
(except per share amounts)
2004
2003 Change (%)
2004
¥ 3,467,853
3,198,072
543,793
552,116
454,424
448,170
+ 8.4
+ 19.7
+ 23.2
$ 33,344,740
5,228,779
5,308,808
Net income
343,344
275,730
+ 24.5
3,301,385
Net income per share:
-Basic
-Diluted
¥ 387.80
386.78
313.81
310.75
+ 23.6
+ 24.5
$ 3.73
3.72
Total assets
¥ 3,587,021
3,182,148
+ 12.7
$ 34,490,587
Stockholders’ equity
¥ 2,209,896
1,865,545
+ 18.5
$ 21,249,000
Notes:
1. Canon’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America.
2. U.S. dollar amounts are translated from yen at the rate of JPY104=U.S.$1, the approximate exchange rate on the Tokyo Foreign Exchange Market as of December 30, 2004, solely for the convenience of the reader.
Net Sales
(Millions of yen)
Net Income
(Millions of yen)
Net Income per Share
(yen)
3,500,000
350,000
400
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ROE/ROA
(%)
20
ROE
ROA
16.8
15.9
10.1
9.0
12.2 12.5
10.7
6.6
5.9
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04
1
TO OUR SHAREHOLDERS
The global economy was strong in the first half of 2004,
driven by ongoing growth in the United States and China.
While Asian countries generally reported economic expansion,
European nations, for the most part, experienced only
moderate growth. The world economy experienced a
temporary slowdown in the second half, however, indicated
by signs of decelerating growth. The average value of the yen
for the year was ¥108.12 to the U.S. dollar and ¥134.57 to
the euro, representing a year-on-year increase of 7% against
the U.S. dollar, and a decrease of 3% against the euro.
Canon adeptly navigated these conditions to post record
earnings and marked its fifth consecutive year of higher sales
and profits. Net sales grew 8.4% from the previous year, to
¥3,467.9 billion (US$33,345 million), while net income
climbed 24.5%, to ¥343.3 billion (US$3,301 million). We
also met our consolidated financial targets for Phase II of our
Excellent Global Corporation Plan, covering fiscal 2001 through
2005, ahead of schedule, achieving a shareholders’ equity
ratio of 61.6% and an debt to total assets ratio of 1.1%.
In addition, we were recognized by the investment
community for firmly rooting the objective of further
increasing corporate value in all aspects of our business
operations, as called for in Phase II. In fiscal 2005, we will
work to see Phase II to a successful conclusion while laying
a firm foundation for the implementation of Phase III,
Toward Healthy Growth, which will get under way in 2006.
Overview of Fiscal 2004
Revenue growth in fiscal 2004 was underpinned by
continued sharp growth in sales of digital cameras and
color network digital multifunction devices (MFDs) as well as
significantly higher demand for semiconductor production
equipment. By product segment, sales of business machines
advanced 4.1%, to ¥2,388.0 billion (US$22,961 million),
sales of cameras climbed 16.8%, to ¥763.1 billion
(US$7,337 million), and sales of optical and other products
jumped 26.9%, to ¥316.8 billion (US$3,046 million).
During the year, despite ongoing production-reform
efforts and the timely launch of competitive, new products,
the gross profit ratio declined 0.9% from the previous
year, to 49.4%, hurt by the yen’s appreciation against the
U.S. dollar and heightened price competition.
2
R&D expenditures grew by ¥16.2 billion and SG&A
expenses increased by just 1.3% year on year. As the rate of
increase in these expenses was slower than that of net sales,
operating profit rose ¥89.4 billion, or 19.7%, to ¥543.8 billion
(US$5,229 million). While the appreciation of the yen and
more intense price competition were negative factors, we
overcame the effects of these through increases in unit
volume and other efforts, including production reform and
the timely launch of competitive new products. As a result,
income before income taxes and minority interests advanced
23.2%, to ¥552.1 billion (US$5,309 million), aided by a ¥14.6
billion improvement in other income. The effective tax rate
declined 1.2 percentage points, to 35.1%. Consequently, net
income was ¥343.3 billion (US$3,301 million), exceeding the
¥300 billion mark for the first time in the Company’s history.
Basic net income per share was ¥387.80 (US$3.73),
up ¥73.99 from the previous year. Reflecting its strong
financial position, Canon increased the annual dividend
by ¥15, to ¥65 (US$0.63).
Aiming to be No. 1 in All Our Main Businesses
To realize the management objectives set for Phase II of our
Excellent Global Corporation Plan, we aim to capture the
No. 1 position in each of our main business fields worldwide.
We have already claimed the top position in the markets for
copying machines, laser beam printers, digital cameras, and
mask aligners for large LCD panels. In inkjet printers, the
PIXMA brand (PIXUS brand in Japan) was successful globally
and returned Canon to the No. 1 position in the Japanese
market for the first time in eight years. We plan to further
strengthen our lineups of photo-quality color printers and
MFDs. In semiconductor production equipment, our early
launch of new, industry-leading products will strengthen
our competitive position in this field.
We are upgrading our R&D capabilities to make our main
businesses No. 1 in their respective categories and to create
new businesses. We will endeavor to strengthen our
concurrent product development structure, and shorten the
time required to create and bring new products to the market,
while reducing costs. The use of our 3D-CAD infrastructure
will allow us to strengthen our capability for simulation,
inspection, and measuring technologies significantly and
enable us to introduce “prototype-less” development that
eliminates the need for building physical prototypes.
Preparing for Future, Sustainable Growth
To cultivate future growth businesses, in October 2004,
we established a joint venture with Toshiba Corporation to
develop and manufacture surface-conduction electron-emitter
display (SED) panels with an eye on gaining a strong foothold
in this promising area. The joint venture is now preparing to
begin full-scale operations. Moreover, we will work to bolster
our infrastructure for the future through the establishment of
new facilities, such as a new state-of-the-art technology
research center, and a production engineering technology
center, whose activities will include plastic injection molds
technology development.
Canon has made concern for the environment one of
its top management priorities. One way we do this is to
develop products that are environment-friendly throughout
their life cycles, from development, production, sales, use,
to collection and recycling. Moreover, we readily disclose
our environmental information and actively participate in
environmental preservation activities.
We will continue to work to improve profitability through
implementing a wide range of policies. These will include
pursuing further improvements in our innovative production
systems, developing and introducing a cutting-edge
automated assembly system, and shortening lead times for
production as well as optimizing inventories through
improvements in our supply chain management systems.
We will also promote the manufacturing of key components
in-house and reform our procurement processes.
Through these activities, we will strive for further growth
and aim to increase Canon’s corporate value.
Fujio Mitarai
President and CEO
Canon Inc.
3
CORPORATE MANAGEMENT
The most important value of a business is the pursuit of profit. It includes profit for the
customer who benefits from using our products and profit for local communities that benefit
from our job creation, economic vitality, and payment of taxes.
and through their commercialization,
make new contributions to people and
communities around the world.
Moreover, our management stance
emphasizes fair and sincere business
operations conducted in full respect
of all laws.
The most important value of a busi-
ness is the pursuit of profit. This does not
mean, however, simply pursuit of financial
profits for the company. It includes profit
for the customer who benefits from using
our products, and profit for local com-
munities that benefit from job creation,
economic vitality, and payment of
taxes. Of course, generating sufficient
financial profit to return a portion to our
shareholders and to the community is
essential. This is the meaning of our
corporate philosophy, kyosei.
Based on this fundamental manage-
ment strategy, Canon has taken initiatives
under the Excellent Global Corporate Plan
Phase I, launched in 1996, to implement
management innovation. The objective
of this plan has been to become a corpo-
ration worthy of admiration and respect
worldwide. The plan addressed such key
issues as focusing on profitability and
overall optimization, leading us to
embark on innovation in production and
other areas. We believe this innovation will
lead to sustainable corporate growth, which
is essential for enhancing corporate value.
In 2001, we began to put Phase II into
action. Canon already has 184 consoli-
dated subsidiaries around the world and
employs more than 108,000 people. But,
to become a “Truly Excellent Global
Corporation,” we believe it is essential
“to secure the No.1 position worldwide
in all core business areas,” “build up
R&D strength capable of continually
creating new business,” “achieve a strong
financial position” and “foster a corpo-
rate culture wherein all employees work
Canon Inc. Headquarters
Fiscal 2005 is the concluding year
for Phase II of the Excellent Global
Corporation Plan, which the Company
began to implement in fiscal 2001. The
theme of the next five-year plan, Phase III,
which will begin in 2006, will be “Toward
Healthy Growth,” while maintaining a
high margin structure.
Canon’s Approach to Management:
Our Management Strategy
Canon aims to create new technologies
and entire new genres of products,
Excellent Global Corporation Plan
Vision
In accordance with the kyosei philosophy,
Canon will continue contributing to
society through technological innovation,
aiming to be a corporation worthy of
admiration and respect worldwide.
Goals
1. Becoming No. 1 in the world in all of Canon’s major areas of business
2. Maintaining the R&D capability to continually create new business
3. Keeping a strong financial structure for the Group as a whole that can operate and handle long-term
investment without borrowed capital
4. Having all employees enthusiastically commited to achieving their ideals and taking pride in their work
Change in Thinking
Advancement of
Consolidated Management
Four Purposes of
Companies
Pursuit of
Company Innovation
Production Reform
Development
Innovation
Sales Innovations
New Diversification
● Pursuit of overall
optimum results
● Shift to profit focus
●Implementation of the
Consolidation Planning and
Measurement System (1997)
●Consolidated financial results
by Product Group Operation
●Performance evaluations for
each Product Group Operation
●Stability of livelihoods
of employees
●Returns to shareholders
●Cash-flow management
●Withdrawal from
unprofitable business
●Contributions to
society
●Investment for
continued existence
●Upgrade to cell production
from belt conveyor system
●100% implementation of
3D-CAD
●Foster multi-skilled
production employees
●Chie-tech (wisdom-tech):
Customize tools yourself
●Implementation of the
just-in-time concept
●Establish Color Technical
Center and Color Stadium
●Undertake “no-prototype
production”
●Restructure and
consolidate marketing
subsidiaries
●Development of new business
at headquarters
Enhancement of basic research
●Emphasize solution
business
●Construct Pan-European
business system
●Strengthen business in
China and other parts of Asia
●Group diversification
Individual Group companies
strengthen their own business
●Global diversification
Establish a three-regional-headquarters
global management system
4
ardently to acheive the company’s
goals.” These four goals are the heart of
Phase II and enable us to maintain and
further develop a corporate culture that
encourages us to pursue new challenges.
Under Phase II, we invested aggressively
in platform technologies, including
simulation, analysis and measurement
technologies, and brought in-house the
manufacture of key devices, such as
CMOS sensors. Along with this, we
invested in our corporate infrastructure.
As a result of such measures, all of
Canon’s digital SLRs and lenses can be seen in action at many
sports events, including the UEFA EURO 2004TM.
Canon began the development of SED technology in 1986. To accelerate its commercialization,
we formed a joint venture with Toshiba Corporation in 2004.
suited to the new era
3. Creation and strengthening of next-
generation businesses
4. Further improvement in technological
development capabilities, which is the
source of profitability
5. Improvement of Canon’s corporate
infrastructure
6. Development of human resources
and strengthening of compliance
systems
Canon’s products are highly competitive,
enabling us to stay ahead of the trend
toward digital products. We also
accelerated business diversification.
To commercialize the surface-conduction
electron-emitter display (SED), we formed a
joint venture with Toshiba Corporation in
2004. Canon is now making preparations
for mass production of SED products.
Our most important policies in 2005 will
be the following:
1. Further reduction in costs through
the integration of development
and production
2. Completion of a global sales system
Our Brand Management Strategy
For us at Canon, our brand is evidence of the trust that we have won over the years, and brand
management is equivalent in meaning and scope to management itself. In other words, the Canon
brand is the crystallization of the trust—our most valuable asset—that we have earned over the
more than 60 years since the Company was established. We believe the brand should be a source of
pride for Canon employees and an integral part of our corporate culture. Since its establishment,
Canon has focused on technologies and worked to nurture new technologies while creating
innovative and diverse products. This innovativeness is the core support of Canon’s corporate culture.
In our brand management basics, we encourage our customers to feel pride in Canon products
because of their excellent features, performance, reliability, and design.
Along with product excellence, we emphasize winning and maintaining the trust of society as another
major aspect of our activities to build an ever-stronger brand. We are convinced that such important
initiatives as environmental preservation, compliance with laws and regulations, corporate governance,
and social responsibility all contribute to the value of the Canon brand. We believe that implementing
management policies based on innovation and kyosei will contribute to creating an even stronger brand.
5
CORPORATE MANAGEMENT
Canon has been implementing various measures to improve its corporate governance. In addition
to our board of directors and board of corporate auditors, Canon Inc. has also upgrated its
system for internal auditing to promote the further development of its corporate governance.
Canon’s Management Systems: Our
Corporate Governance Structure
Canon, recognizing the extreme impor-
tance of bolstering management supervi-
sion functions aimed at increasing
management transparency and achieving
management objectives, has been imple-
menting various measures to improve its
corporate governance. In this manner, we
are striving to continuously elevate the
Company’s corporate value.
In creating our corporate governance
structure, we have not adopted the approach
of appointing independent, external direc-
tors for a number of reasons. Chief among
these is that since its founding, Canon has
relied on Guiding Principles focusing on the
“Three Selfs” concept, known as the
“Three Js” in Japanese: Ji-hatsu, or self-
motivation to do every job right; Ji-chi,
or self-management; and Ji-kaku, or self-
awareness of one’s working environment
and responsibilities. Group employees
understand these forward-looking concepts
and put them into practice daily in their work.
We therefore believe that appointing
directors from among Canon personnel,
who have followed the same codes of
behavior and have been subject to close
scrutiny within the Company over many
years, allows these carefully chosen members
of management to implement corporate
governance effectively. Also, to assure the
functions commonly associated with outside
directors, we require all directors to undergo
a thorough program of compliance education.
Implementation of Corporate
Governance Measures
In addition to our board of directors and
board of corporate auditors, Canon Inc.
has also created an original system of
internal audit for the further development
of its corporate governance.
Corporate Directors and Cross-
Company Management Strategy
Advisory Committee
There are 27 directors on the Company’s
board, as of the end of December 2004.
In order to realize a more streamlined
and efficient management decision-making
process, Canon has not adopted an
outside director system. Under the
current system, as a general rule, all
matters of importance are decided at
board and management meetings
attended by all directors. Moreover,
various cross-company management
strategy advisory committees have been
established to address important
management themes. Each committee
serves to accelerate and rationalize
the decision-making process while
supplementing and checking the
business-operations system.
How Canon Is Evaluated
Canon is evaluated highly around the world. For example, Canon placed 30th in the
Fortune magazine ranking of the world’s most respected companies, issued in February
2005. This was the second consecutive time for Canon to be included among the top 50
companies in the Fortune ranking, having ranked 34th in 2004.
Canon also placed among the world’s top 100 companies in the Business Week magazine
ranking of the world’s top 1,000 companies, which was issued in July 2004. Business Week
listed Canon’s corporate value at $36.6 billion and ranked Canon as number 89. Among
Japanese companies in this ranking, we have moved from 16th in 2002 to 9th in 2003, and
then to 4th in the most recent ranking for 2004. In the ranking of the world’s most respected
companies and top managers issued by the Financial Times in November 2004, Fujio Mitarai,
President and CEO of Canon, placed 10th and Canon received a ranking of 25th.
Canon has also received high evaluations from international and domestic financial rating
agencies. Standard and Poor’s has upgraded its rating of Canon’s long-term debt to AA,
as shown at right, and Moody’s Investors Services reviewed and increased its long-term
rating from Aa3 to Aa2 in 2004.
Current ratings are as follows:
Long-term
rating
Short-term
rating
Standard
& Poor’s
AA A-1+
Moody’s
Aa2 —
R&I
AA+ —
6
Board of Directors (as of December 31, 2004)
President & CEO
Fujio Mitarai
Chairman, Management Strategy Committee,
New Business Development Committee,
Corporate Ethics and Compliance Committee,
Internal Control Committee
Senior Managing Directors
Yukio Yamashita
Chief, Global Marketing Promotion Committee;
Group Executive, Human Resources
Management & Organization Headquarters
Toshizo Tanaka
Group Executive, Finance & Accounting
Headquarters
Kinya Uchida
President & CEO, Canon U.S.A., Inc.
Tsuneji Uchida
Chief Executive, Image Communication
Products Operations
Managing Directors
Yusuke Emura
Group Executive, Global Environment
Promotion Headquarters
Nobuyoshi Tanaka
Chief, Global Legal Affairs Coordination Committee;
Group Executive, Corporate Intellectual
Property & Legal Headquarters; Senior General
Manager, Legal Affairs Coordination Division
Junji Ichikawa
Chief Executive, Optical Products Operations
Hajime Tsuruoka
President, Canon Europa N.V.; President &
CEO, Canon Europe Ltd.
Akiyoshi Moroe
Group Executive, General Affairs Headquarters
Kunio Watanabe
Group Executive, Corporate Planning
Development Headquarters
Ikuo Soma
Chief Executive, Office Imaging Products
Operations
Hironori Yamamoto
Group Executive, Core Technology
Development Headquarters
Directors
Yoroku Adachi
President & CEO, Canon (China) Co., Ltd.
Yasuo Mitsuhashi
Chief Executive, Peripheral Products Operations
Katsuichi Shimizu
Chief Executive, Inkjet Products Operations
Ryoichi Bamba
Executive Vice President, Canon U.S.A., Inc.
Tomonori Iwashita
Deputy Chief Executive, Image Communication
Products Operations
Toshio Homma
Group Executive, L Printer Business Promotion
Headquarters
Shigeru Imaiida
Group Executive, Global Manufacturing
Headquarters
Masahiro Osawa
Group Executive, Global Procurement
Headquarters
Keijiro Yamazaki
Group Executive, Information &
Communication Systems Headquarters
Shunichi Uzawa
Group Executive, SED Development
Headquarters; President, SED Inc.
Masaki Nakaoka
Deputy Chief Executive, Office Imaging
Products Operations
Toshiyuki Komatsu
Group Executive, Leading-Edge Technology
Development Headquarters; Deputy Group
Executive, Core Technology Development
Headquarters
Shigeyuki Matsumoto
Group Executive, Device Technology
Development Headquarters
Haruhisa Honda
Chief Executive, Chemical Products
Operations
Corporate Auditors
Teruomi Takahashi
Kunihiro Nagata
Tadashi Ohe
Tetsuo Yoshizawa
In January 2004, we established new
standing committees, namely the
Corporate Ethics and Compliance
Committee and Internal Control
Committee, with the president appointed
as chairman of both groups. Accordingly,
the purpose of the Corporate Ethics and
Compliance Committee is to examine,
from various viewpoints, Canon’s social
responsibilities and to convey the findings
to the Company with the intention of
raising compliance and ethical awareness.
The Internal Control Committee not
only serves to ensure the reliability of the
Company’s financial reporting in accordance
with the Sarbanes-Oxley Act, but also aims
to ensure the effectiveness and efficiency
of our business operations, as well as
compliance with related laws, regulations
and internal controls. The committee
performs reviews of control systems for the
entire Canon Group and has documented
control activities related to the Company’s
operations. Subsequently, the committee
will evaluate and bolster documented
internal-control processes and, at the
same time, intensify efforts targeting
more efficient operation processes.
Corporate Auditors
and Internal Auditing
Canon’s Board of Corporate Auditors
consists of four members, two of whom are
outside corporate auditors. In accordance
with the Board of Corporate Auditors’
auditing policies and their assigned duties,
the auditors attend board, management,
and various committee meetings, listen to
business reports from the directors and
others, carefully examine documents related
to important decisions, and conduct strict
audits of the Company’s business and assets.
With regard to external audits, we
established regulations related to the pre-
approval of policies and procedures for
both auditing and non-auditing services
to reinforce the independence of our
accounting firms. Based on the regula-
tions, the Board of Corporate Auditors
must approve in advance the content and
related amounts of contracts between the
accounting firms and the company before
they are entered into.
Furthermore, the Corporate Audit
Center, which serves as an internal auditing
division, conducts audits covering such
areas as compliance and internal control
systems, and provides assessments and
proposals. The various relevant administra-
tive divisions also work very closely with the
Corporate Audit Center to inspect such
areas as quality, environmental issues,
information security, and physical security.
Canon Governance Structure (as of December 31, 2004)
Canon Inc.
Board of Directors
Board of Corporate Auditors
President and CEO
Executive Committee
Management Strategy Committee
Subsidiaries &
Affiliates
Corporate Audit Center
Headquarters Administrative Divisions
Product Group Operations
Marketing Subsidiaries & Affiliates
Manufacturing Subsidiaries & Affiliates
R&D Subsidiaries & Affiliates
New Business Development Committee
Corporate Ethics and Compliance Committee
Internal Control Committee
Global Legal Affairs Coordination Committee
Global Marketing Promotion Committee
7
CORPORATE MANAGEMENT
Significant Differences in Corporate
Governance Practices between Canon
and U.S. Companies Listed on the
NYSE
Section 303A of the NYSE listed
Company Manual (the “Manual”)
provides that companies listed on the
New York Stock Exchange (the “NYSE”)
must comply with certain corporate
governance standards. However, foreign
private issuers whose shares have been
listed on the NYSE, such as CANON INC.
(the “Company”), are permitted, with
certain exceptions, to follow the laws
and practice of their home country in
place of the corporate governance
practices stipulated under the Manual. In
such circumstances, the foreign private
issuer is required to disclose the signifi-
cant differences between the corporate
governance practices under Section
303A of the Manual and those required
in Japan. A summary of these differ-
ences as they apply to the Company is
provided below.
1. Directors
Currently, the Company’s board of
directors does not have any director who
could be regarded as an “independent
director” under the NYSE Corporate
Governance Rules for U.S. listed compa-
nies. Unlike the NYSE Corporate
Governance Rules, the Commercial
Code of Japan (the “Code”) and the
Law for Special Exceptions to the
Commercial Code concerning Audit, etc.
of Kabushiki-Kaisya (the “Special
Exception Law”) do not require Japanese
companies with a board of corporate
auditors such as the Company, to
appoint independent directors as
members of the board of directors. The
NYSE Corporate Governance Rules
require non-management directors of
U.S. listed companies to meet at
regularly scheduled executive sessions
without the presence of management.
However, unlike the NYSE Corporate
Governance Rules, the Code and the
Special Exception Law do not require
companies to implement an internal
corporate organ or committee
comprised solely of independent direc-
tors. Thus, the Company’s board of
directors currently does not include any
non-management directors.
2. Committees
Under the Code and the Special Exception
Law, the Company may choose to:
(i) establish an audit committee, nomina-
tion committee and compensation
committee and abolish the post of
corporate auditors; or
(ii) continue to retain a board of
corporate auditors.
The Company has elected, to retain a
board of corporate auditors, whose duties
include monitoring and reviewing the
management and reporting the results
of these activities to the shareholders or
board of directors of the Company.
While the NYSE Corporate Governance
Rules provide that U.S. listed companies
must have an audit committee, nominat-
ing committee and compensation
committee, each composed entirely of
independent directors, the Code and the
Special Exception Law do not require the
Company to have specified committees,
including those that are responsible for
director nomination, corporate governance
Information Disclosure
Disclosing accurate, fair, and timely infor-
mation on management, business strat-
egy, and financial results to capital
markets is a top priority at Canon. The
objective of these IR activities is to gain
the trust of capital markets and improve
the corporate value of Canon. IR functions
are carried out based on Disclosure
Guidelines, which are rules for informa-
tion disclosure to capital markets intended
to help the Group achieve these goals.
Some of the regularly conducted IR tasks
of the Group include briefings to securities
analysts and institutional investors on
quarterly financial results, briefings on
management policies given by the
President and CEO and updates on
business strategies. IR operations have also
been established in Europe and the United
States to respond quickly to the needs of
foreign investors (51.7% of all shareholders
at the end of 2004) in all regions. On the
Canon website, corporate information is
made available not only in Japanese, but also
in English to the extent possible, including
audio and video information as needed.
We carefully observe rules relating to
information disclosure, strictly controlling
undisclosed information and preventing
the possibility of insider trading. Further,
outside evaluations of Canon from the
capital markets are reported within the
Group whenever useful to management
and operations. The Security Analysts
Association of Japan selected Canon as
the top company in the Japanese electric
and precision machinery industry category
in its 2004 ranking of company disclosure.
8
and executive compensation.
The Company’s board of directors
nominates the candidate for directorship
and submits a proposal at the sharehold-
ers’ meeting for shareholder approval.
Pursuant to the Code, the shareholders
then vote to elect directors at a general
shareholders meeting. The Code requires
that the total amount or calculation
method of compensation for directors
and corporate auditors be determined by
a resolution of the general shareholders
meeting respectively, unless the amount
or calculation method is provided under
the Articles of Incorporation. As the
Articles of Incorporation of the Company
stipulates the requirements as expressed
under the Code, the amount of
compensation for the directors and
corporate auditors of the Company is
determined by a resolution of the general
meeting of shareholders. The allotment
of compensation for each director from
the total amount of compensation is
determined by the Company’s board
of directors and the allotment of
compensation to each corporate auditor
is determined by consultation among
the Company’s corporate auditors.
3. Audit Committee
The Company plans to avail itself of
paragraph (c)(3) of Rule 10A-3 of the
Exchange Act, which provides that a
foreign private issuer which has estab-
lished a board of corporate auditors shall
be exempt from the audit committee
requirements, subject to certain require-
ments which continue to be applicable
under Rule 10A-3.
Pursuant to the requirements of the
Code and the Special Exception Law, the
shareholders elect the corporate auditors
by resolution of a general meeting. The
Company currently has four (4) corpo-
rate auditors, although the minimum
number of corporate auditors required
pursuant to the Code and the Special
Exception Law is three (3).
Unlike the NYSE Corporate
Governance Rules, Japanese laws and
regulations, including the Code and the
Special Exception Law, do not require
corporate auditors to be experts in
accounting or to have any other area of
expertise. Under the Special Exception
Law, a board of corporate auditors may
determine the auditing policies and
methods for investigating the business
and assets of the Company, and may
resolve other matters concerning the
execution of the corporate auditor’s
duties. The board of corporate auditors
prepares auditors' reports and may veto a
proposal for the nomination of corporate
auditors and accounting auditors put
forward by the board of directors.
Under the Special Exception Law, at
least one of the corporate auditors of the
Company must be an “outside” corpo-
rate auditor. This is an individual who has
not been a director, executive officer,
manager, or employee of the Company
or its subsidiaries for five-years prior to
the date of appointment as an outside
corporate auditor. There are four (4)
members on the Company’s board of
auditors, two (2) of whom are outside
corporate auditors. As of the date of the
general shareholders meeting of the
Company relating to the fiscal year
ending December 31, 2005, in accor-
dance with the amendment of the
Special Exception Law, more than half of
the members of the board of auditors of
the Company must be outside corporate
auditors. From the same date, the five
year period referred to above will also be
amended so that it will be prohibited for
an outside corporate auditor to have ever
been a director, executive officer,
manager, or employee of the Company or
its subsidiaries. The Company’s current
corporate auditor system meets these
new requirements. The qualifications for
an “outside” corporate auditor under
the Special Exception Law are different
from the audit committee independence
requirement under the NYSE Corporate
Governance Rules.
4. Shareholder Approval of Equity
Compensation Plans
The NYSE Corporate Governance Rules
require that shareholders be given the
opportunity to vote on all equity
compensation plans and any material
revisions of such plans, with certain
limited exceptions. Under the Code,
however, the Company is only required
to obtain shareholder approval if the
Company desires to adopt an equity-
compensation plan under which stock
acquisition rights are granted to the
recipient on especially favorable terms
(except where such rights are granted to
all of its shareholders on a pro-rata basis
at the same time). In such circumstances,
the Company is required to obtain
approval by special resolution (as defined
in the Code) at the general meeting of
shareholders. The Company currently
has not adopted any stock option
compensation plans.
9
CORPORATE FUNCTIONS
RESEARCH & DEVELOPMENT
We at Canon view technology as the origin of our profit.
Looking to Canon’s development from 2010 through 2020,
we are working to identify fields for further growth.
Fujio Mitarai
Our Approach to R&D
Phase II of our Excellent Global
Corporation Plan, a blueprint of long-term
management objectives to be met in
2005, contains four goals, one of which
is “building up R&D strength to enable
Canon to continually create new business
opportunities.” We at Canon view
technology as the origin of our profit.
In fiscal 2004, research and development
expenses totaled ¥275.3 billion, an
increase of ¥16.2 billion from the previous
fiscal year, corresponding to 7.9% of
consolidated net sales. Because the sales
growth rate exceeded growth in research
and development expenses, the ratio of
such expenses to net sales declined
compared with fiscal 2003. Looking at
figures for individual business segments
in fiscal 2004, investment in business
machines was ¥120.9 billion, or 43.9% of
total research and development expenses,
while investment in cameras was ¥35.5
billion, or 12.9%.
One of these benefits is a wealth of intel-
lectual property, as attested to by the
number of patent registrations held.
Canon typically pursues 140-150 devel-
opment themes at any one time.
In 2004, the Company’s research and
development efforts resulted in the regis-
tration of 1,805 patents in the United
States (according to figures announced
by the U.S. Department of Commerce),
thus ranking Canon third, and the
Company continued its 13-year winning
streak of finishing among the top three
patent registrants.
Canon has designated the following five
fields as its imaging engines:
1. Image-capturing engines, such as
those in cameras
2. Electrophotographic engines, such
as those in copying machines and
laser beam printers
3. Inkjet printing engines, such as those
in inkjet printers
Investment in optical and other products
4. Photolithographic engines,
was ¥29.4 billion, or 10.7%, and basic
R&D that cannot be allocated by business
segment was ¥89.5 billion, or 32.5%.
Our emphasis on research and devel-
opment has yielded significant benefits.
Architect’s drawing of a new state-of-the-art technology
research center
10
encompassing optical and precision
technologies
5. Display engines, which will mark out
entry into a new field
In the fifth area of display engines, Canon
has developed an SED (surface-conduction
electronic emitter display) and is now
concentrating its efforts on commercial-
izing SED panels. SEDs will make it possi-
ble to meet the growing market demand
for even larger, high image quality display
screens that offer brightness and high
image resolution comparable with
cathode ray tubes but with a thin profile.
The Robotics Eye, now under development at Canon is a
cutting-edge sensor that can recognize and track human faces.
Our R&D Structure
Canon carries out research and develop-
ment at worldwide R&D centers, with
bases in each region possessing their
own particular core technologies. Canon
promotes cooperation among its global
network of research and development
centers in all areas, from basic research
to product development. In Japan, the
centers carry out basic R&D in such areas
as nanotechnology and biotechnology
and, moreover, each business unit has
research and development centers that
engage in product development.
Another important feature of Canon’s
research and development is its emphasis
on environmental issues.
In 2004, Canon positioned its Leading-
Edge Technology Development
Headquarters with the aim of creating
core technologies that will give birth
to next-generation, major businesses.
As the next step in this process, we
will complete a new state-of-the-art
technology research center at the Canon
Headquarters in Shimomaruko, Tokyo in
2005. In 2004, we built a new inkjet
printer development laboratory in Japan.
We plan to open a production engineering
technology research center with the aim
of accelerating the development of
production engineering technologies and
moving toward even higher levels of
automation and fully unmanned facilities.
In Europe, building on its advanced
technology development, Canon has
achieved solid results in developing
solutions, including the creation of
sophisticated customized tools for digital
MFDs. In the United States, in addition to
advanced development using Extensible
Markup Language (XML) in the area of
basic research, we have worked to
develop solutions that facilitate the
linkage of XML digital products with
networks. In Australia, we have estab-
lished a strong track record in the devel-
opment of digital image processing
technologies, while in Asia we have
focused on developing technologies and
software that address user needs in each
country and region in terms of language,
Top 10 Corporations Receiving U.S. Patents in 2004
(Preliminary count)
Rank
Organization
Number of Patents
1
2
3
4
5
6
7
8
9
IBM
Matsushita Electric
Canon
Hewlett-Packard
Micron Technology
Samsung Electronics
Intel
Hitachi
Toshiba
10
Sony
(Source:United States Patent and Trademark Office)
3,248
1,934
1,805
1,775
1,760
1,604
1,601
1,514
1,310
1,305
Our prototype-less design is made possible by our 3D-CAD infrastructure.
our top-of-the-line copying machine
manufacturing operations. All aspects of
these operations, from design through
prototypes, full production, quality
assurance, and delivery functions are
scheduled to be located in the same new
CMOS sensors sustain Canon’s strong competitive position
in digital SLR cameras.
building at the Toride Plant.
In addition, Canon takes a proactive
stance toward cooperating with other
companies rather than relying exclusively
on internal development to boost
research and development efficiency.
ethnicity, and culture. Canon also
engages in cooperative research world-
wide with industry, academia,
and government.
Research and Development
Focal Points and Future Steps
Canon is centering its production and
development reforms on prototype-less
designs and common platforms. In our
prototype-less design, which is based on
a cutting-edge 3D-CAD infrastructure,
we are drawing fully on simulation,
analysis, and measurement technologies
to shorten product development lead
times and reduce costs. All the process
improvements we develop in this area
will then be employed throughout
Canon’s business domains.
Another of our activities to speed up
development is concurrent engineering.
Our Toride Plant in Japan, which is due
for completion in 2005, will house
Canon’s Worldwide R&D Centers
1111
CORPORATE FUNCTIONS
PRODUCTION
Canon is driving forward with efforts to reduce its ratio of costs to sales. To attain this
goal, Canon is closely coordinating product development, production engineering technol-
Fujio Mitarai
ogy, and manufacturing technology.
First Step in Production Reform:
Cell Production System
Canon attained a consolidated gross
profit ratio of 49.4% in 2004 as a result
of production reforms inaugurated in
1998 aimed at cost reductions.
Canon’s production reforms started
with the introduction of the cell production
system, thus eliminating the inefficiency
of conveying goods in process on a
conveyor belt, and allowing each
worker to make adjustments and
perform tasks flexibly according to
his or her own ability.
By autumn 2002, an aggregate 12-
plus miles of conveyor belts had been
removed from 54 operations, and the
cell method is now in place in all plants.
In addition to reducing inventories, its
introduction has cut annual carbon dioxide
emissions by about 75,000 tons.
This system makes it possible to
lower costs and increase efficiency while
also responding flexibly and quickly to
the market needs of specific regions.
Through the adoption of the cell
production system, Canon has been
able to move forward even more
aggressively with its ongoing policy
of selecting optimal locations for its
manufacturing activities.
Optimum Worldwide Production
In 2004, production outside Japan
accounted for about 42% of total produc-
tion. Going forward, Canon plans to
maintain this level, even as production
continues to expand. To this end, Canon
will emphasize expanding its production
in Japan and apply its own original
manufacturing know-how. Specifically,
this means that even though Japan’s
labor costs are high, it is possible to
achieve close coordination of development
and production in Japan, facilitating the
easy, timely, and fast procurement of key,
high-valued components because they are
produced in Japan, and that it is possible
to lower costs through further automation.
To expand output of high-value-
added products in Japan, in November
2004, we began production at the new
The absence of internal pillar supports makes flexible cell production system layouts possible at the new plant at Oita Canon, Inc.
12
Canon’s cell production system is now around the world,
including this facility of Canon Bretagne S.A.S. in France.
plant at Oita Canon, Inc. Because this new
plant was designed without internal pillar
supports, it is possible to change cell
production system layouts flexibly and
respond to changes in market demand.
The new Oita plant will have an annual
combined production capacity of 6.8
million digital camera and video camera
units. In 2005, we are scheduled to bring
on line a new copying machine production
facility at our Toride Plant. These activities
will conclude our drive to upgrade our
production infrastructure as quickly as
possible for the time being.
At present, Canon’s production
facilities in China and other countries
in Asia are positioned as bases for
exporting products. However, in the near
future, these countries may experience
rising labor costs and thus may lose their
comparative cost advantages. On the
other hand, looking ahead, these
countries may well become even more
attractive as major markets. Amid these
fast-changing global business conditions,
we believe we must relentlessly improve
quality and reduce costs by closely
coordinating product development,
production engineering technology, and
manufacturing technology to continue
to grow our operations.
One of the ways we are going about
doing this is by shifting the production of
parts and devices in-house. In addition to
CMOS sensors and other key parts and
key devices, we are moving to bring in-
house the production of manufacturing
equipment and molds. In 2004, through
the acquisition of Igari Mold Co., Ltd.,
which has state-of-the-art plastic injection
molding technology, we were able to
strengthen the Canon Group’s technolog-
ical capabilities in this area.
Cost Reduction through Coordination
of Development and Production
The first initiative directed at further cost
reduction is to introduce “prototype-less
design.” This will have a major positive
impact on costs. The prototype-less
design infrastructure will accelerate
sophisticated information sharing
between development and production,
thus advancing Canon’s drive toward
concurrent engineering. Through these
Canon manufactures circuit boards.
An automated assembly system for toner cartridge production
activities, we will be able not only to
eliminate the costs of building prototypes
and losses incurred in production start-up,
but also to reduce the lead times
required for introducing new products.
Reforms in Procurement
Canon’s second initiative is to reform
its procurement activities. Accordingly,
we are promoting such measures as
processes to reduce costs from the
development stage and consolidating
purchasing by means of unified
guidelines. Through the fair assessment
of suppliers and parts based on EQCD
(Environment, Quality, Cost, Delivery)
considerations and competition, we aim
to increase the number of outstanding
suppliers with high technological
capabilities. This will contribute to
improved quality, enabling us to move
closer to realizing our goal of an inspection-
free procurement process.
Canon’s Worldwide Production Sites
Automation of Assembly Operations
Canon’s third initiative is to reform its
production activities by working toward
full automation of assembly operations.
We have already begun specific initiatives
in this area. Canon operated automated
assembly systems at some plants,
including Oita Canon Materials, Inc.,
which manufactures toner cartridges.
For further improvement in this area,
Canon intends to shift to fully automated
and unmanned assembly systems.
We will be able to minimize costs and
prevent the outflow of Canon technology
by manufacturing equipment for these
fully automated assembly systems inter-
nally. For the development of next-gener-
ation production engineering technology,
Canon will concentrate its production
engineering technology- related divisions
in a center in Kawasaki.
13
CORPORATE FUNCTIONS
SALES & MARKETING
Canon is nearing the completion of structural reforms in its sales companies
around the world. Going forward, we believe we will reap the full benefits
of these reforms through enhanced sales power and efficiency.
Fujio Mitarai
Canon’s Global Sales Structure
for the New Era
In 1955, Canon’s international deployment
began with the establishment of a branch
in New York, which was followed in 1957
with a sales branch in Europe.
We now have 98 consolidated
marketing subsidiaries worldwide.
Canon sells its products mainly through
these subsidiaries, each of which takes
responsibility for serving a defined
geographic territory. Each also undertakes
its own market research, and determines
its sales channels and advertising and
promotional activities.
Canon is presently implementing a
global sales headquarters system divided
into five regions. Under this system, the
head office provides general supervision
to reinforce the operations of marketing
companies in the Americas, Europe, Asia
outside Japan, Oceania and Japan.
The Americas
Consolidated sales in the Americas amounted
to ¥1,059 billion (US$10,187 million).
Headquartered in New York, Canon
U.S.A., Inc. markets an extensive product
line and digital solutions that enable
businesses and consumers in the
Canon is actively developing business activities in Russia.
14
Americas to capture, store, and distribute
information. In 2004, initiatives to
strengthen marketing capabilities included
further enhancing relationships with
leading dealers and retailers.
In the office imaging products field,
sales of color machines doubled over
the previous year, and monochrome
copying machines maintained the No.1
brand position in all subsegments for the
third consecutive year. Among consumer
products, sales of digital cameras contin-
ued to record rapid growth. Looking
forward, in 2005 and subsequent years,
we expect to draw on our human and
capital resources to acquire promising
technologies and products in the region.
Europe
Canon Europe’s 2004 consolidated net
sales were ¥1,093 billion (US$10,512
million). By geographic area, sales in
Europe exceeded those in the Americas
and became our largest market. At
present, Canon Europe employs more
than 12,000 people across 19 countries.
In 2004, 10 countries were newly
admitted to the EU, bringing the total
membership to 25. The market growth
in Eastern Europe and Russia contributed
to the European market’s expansion.
In November 2004, following approximately
two years of development work, we
began the operation of our pan-European
integrated information system. The
capabilities of this system are extensive
and include not only accounting and
personnel matters, but also logistics, sales,
and our copying machine service
business. We anticipate this system will
A Canon Corner at a Staples office supply store in the United States
contribute to consistency, uniformity,
and transparency as well as faster decision
making. Over the next two years, we plan
to introduce this system in all our sales
companies in Europe.
Moreover, we moved forward with
the consolidation of our logistics activities
with the goal of implementing a pan-
European distribution structure.
Japan and Asia, Oceania
By geographic segment, sales in Japan
amounted to ¥850 billion (US$8,171
million) and Other areas reported sales
of ¥465 billion (US$4,475 million).
Sales by Region (2004)
Other
areas
13%
Japan
25%
Europe
31%
The Americas
31%
The reorganization of the Group’s
sales companies in Japan, with Canon
Sales Co., Inc. as the core company, is
going forward with a view to the overall
optimization and reinforcement of each
Group company’s competitiveness. Canon
Sales has increased its sales and profit to
record highs and has also significantly
improved its financial position.
Boosted by market expansion, our
operations in China have also seen higher
sales. Ahead of the lifting of prohibitions
on domestic sales in China in 2005,
A camera sales store in Shanghai
Canon has opened sales branches in China,
including fast-growing Shenzhen.
Canon’s solution offerings successfully won ING as a customer, and Canon has supplied more than 3,000 MFDs to ING in Europe.
companies in all parts of the world. As of
December 2004, this system was being
accessed about four million times a
month in the United States, Canada,
Latin America, Singapore, Australia,
China, and Japan. Links to the European
region will begin in 2005.
In addition, as one method of
gathering information from our
customers, we developed and initiated
use of our Call Analysis Tracking System
(CATS), which globally collects informa-
tion from each of our call centers,
allows sharing of information among
Canon and its sales companies, and
efficiently provides feedback to our
R&D and production departments,
and sales companies.
preparations in 2004 included the expan-
sion of sales operations to 15 branches to
strengthen the Canon (China) Co., Ltd.
marketing network, as well as the installa-
tion of a distribution network. We can
now make deliveries anywhere in China
within two business days. Other Asian
operations, excluding those in Japan, also
marked high growth.
In Australia, sales and profits rose as the
country continued to enjoy stable economic
growth. We have been successful in
expanding sales of inkjet printers, and sales
of printer supplies have increased markedly.
Globally Responding to the Voice
of Our Customers
To support our customers for consumer
products around the world, we are
proceeding with the introduction of our
Web Self-Service System (WSSS). WSSS,
created by Canon Inc., contains all the
information needed for service support
and is linked to the websites of our sales
Sales Network of Canon (China) Co., Ltd.
Canon’s Worldwide Sales & Marketing Sites
15
CORPORATE FUNCTIONS
CORPORATE SOCIAL RESPONSIBILITY
The various activities that constitute the exercise of corporate social responsibility (CSR) are
exactly what we at Canon mean by kyosei. By conducting activities based on the philosophy
Fujio Mitarai
of kyosei, Canon is actively fulfilling its social responsibilities.
Canon’s Approach to CSR
Canon formally introduced its corporate
philosophy of kyosei—“living and working
together for the common good”—in 1988.
The concept, partially embodied in the
beliefs of Canon’s founders, is that the
Company should thrive in conjunction
with the many communities where it
operates and through contributions to
society at large. Kyosei is the concept of
working for the common good together
with all races, religions, and cultures with
an eye toward harmonious living both
now and into the future. In other words,
the overriding objective of kyosei is to
create a sustainable society.
In 1996, Canon embarked on its
“Excellent Global Corporation Plan,”
based on the philosophy of kyosei. The
aim of this plan is not simply to increase
sales and expand business operations, but
to improve corporate value to the level
necessary to ensure sustainable growth.
The foundation for our sustainable
growth consisted of maintaining excellent
relations with stakeholders, such as
shareholders and investors, customers,
employees, suppliers worldwide, and the
local communities where we operate.
At the same time, we are committed to
fulfilling our social responsibility and fully
understand the importance of improving
the transparency of management and
strengthening our systems for legal
compliance. Continuing efforts in the area
of governance help to ensure that Canon
achieves its management goals.
Corporate enterprises, particularly
manufacturers such as Canon, play a
vital role in furnishing the products and
services that enrich lives, promote happi-
ness, and enhance convenience for
consumers worldwide. At the same time,
Canon is firmly committed to building a
sustainable world that alleviates the
burden on the global environment, and to
balancing economic and environmental
needs in the manufacturing and market-
ing of its products.
Encouraging Employee Initiatives
To realize its aim of becoming a truly
excellent global corporation, Canon
requires each and every employee to be a
truly excellent person. At the same time,
in its role as an employer, Canon is in full
compliance with local laws,
cultural norms, and standards
for the workplace environment.
The Canon of today grew
out of broad-minded and
expansive thinking, and an
enterprising temperament.
To keep this corporate climate
fully alive and well, the
Company is careful to respect
the individuality and foster
the capabilities of all its
©WWF-Canon/Martin HARVEY
Canon is assisting the WWF in digitalizing its priceless collection
of photographs.
employees. All are encouraged to realize
their ambitions, and Canon fairly com-
pensates personnel who have striven to
improve their skills and achieve their goals.
Building an excellent company requires
providing the opportunities for each
employee to make the most of his or her
true capabilities. Amid an environment
where a just and fair evaluation of each
employee's work is guaranteed, Canon
makes available a vast array of training
programs to support the development of
employees with special skills. Also, at Canon
Inc. training programs are provided for
managerial personnel to help them improve
their personnel development skills.
Canon and all of its managers and
employees recognize the importance
of abiding by the law and adhering to
corporate ethical principles. Canon fosters
a corporate culture that takes the law
and corporate ethics fully into account
in all of its activities and focuses on
enhancing visibility and soundness in all
of its endeavors.
Canon places importance on enhancing
the role of women in the workplace and
fostering the career goals of its female
employees. For example, Canon Inc. has
16
established a reemployment system for
working mothers and a part-time employment
system for employees who must care for
their children and/or senior family members.
Moreover, Canon makes concerted
efforts to create mutually supportive
environments for the physically challenged.
The Company raised the percentage of
people with physical disabilities among
its employees to 1.8% in 2004.
Contributing to Society
In every corner of the globe, Canon is
responding to the needs of society with
social contribution activities based on
the philosophy of kyosei.
One of the prize-winning entries in the UNEP International
Photographic Competition on the Environment 2004-2005
Canon technology is used for educational purposes, including providing expanded access to the wonders of Yellowstone National Park.
Policy on Social Contribution Activities
With the corporate philosophy of kyosei
ever in mind, Canon makes social
contributions a natural part of its
business activities, while striving to fulfill
its responsibilities in various areas as well.
In addition to making social contributions
through business, we are striving to
help people around the world enjoy
richer lives by acting as a good
corporate citizen in the following six
areas: conservation of the environment,
social welfare, local communities, educa-
tion and science, art, culture
and sports, and humanitarian aid and
disaster relief.
Goals
Provide ongoing support to people
and organizations in need
Carry out a range of support activities in
cooperation with partner organizations
that have diverse values and expertise
Effectively apply Canon’s internal
resources accumulated over many
years, including employee skills, funds,
facilities, and technical know-how
One of our latest activities on a global
scale in 2004 has been a joint sponsor
of the fourth United Nations
Environmental Programme (UNEP)
photographic competition, “Focus on
Your World.” Canon has acted as sponsor
of this event since 1991. The awards for
the 2004 competition were presented at
the EXPO 2005, Aichi, Japan.
Eyes on Yellowstone Is Made Possible by Canon
Eyes on Yellowstone is a collaborative ecological research and teaching initiative
between Canon U.S.A., Inc., a subsidiary of Canon Inc., the Yellowstone Park
Foundation, and Yellowstone National Park. The program was established to
fund important scientific research and break new ground in conservation, endan-
gered species protection, and the application of cutting-edge science and technol-
ogy essential for the management of park wildlife and ecosystems. Another
element of the program is increased public access via the
Internet to the wonders of Yellowstone. Windows into Wonderland
(URL: http://www.windowsintowonderland.org/) showcases electronic field
trips, with images shot with Canon digital camcorders and digital cameras.
17
CORPORATE FUNCTIONS
CORPORATE SOCIAL RESPONSIBILITY
The fundamental concept that aims to maximize resource efficiency has been defined by the Factor 2
concept. By 2010, Canon plans to double the efficiency of all its activities in comparison with 2000,
while cutting the environmental burdens associated with its businesses.
Fujio Mitarai
Environment-Conscious Management
and the Canon Environmental Charter
The Canon Environmental Charter was
enacted in 1993 to enunciate basic
concepts and policies for protecting the
environment under Canon’s corporate
philosophy, kyosei, and the EQCD
concept*1, which stands for environment,
quality, cost, and delivery. In 2001, the
charter was revised to incorporate
concepts for “maximization of resource
efficiency”*2 based on the conviction that
the environment and the economy are
mutually sustainable through new
technologies and healthy social
mechanisms in the community.
In 2003, having further honed its
ideas, Canon devised Factor 2, an
overriding indicator for achieving environ-
mental targets. This indicator also provides
a visionary goal for the year 2010. One
aim of Factor 2 is to more than double
resource efficiency throughout the life
cycles of products within 10 years, from
2000 to 2010.
Canon fully recognizes its responsibility
as a manufacturer to focus on the product
life cycle and alleviate the environmental
burden. This concept is embodied in
Factor 2 as the ultimate means for counter-
acting environmental degradation. Based on
these ideas, Canon has set a goal of achieving
a 25% reduction in CO2 emissions related
to sales from the 2000 level.
*1 EQCD concept
Environment (environmental assurance): Companies
are not qualified to manufacture goods if they are
incapable of environmental assurance.
Quality: Companies are not qualified to market goods
if they are incapable of producing quality goods.
Cost, Delivery: Companies are not qualified to
compete if they are incapable of meeting cost
and delivery requirements.
*2 Maximization of resource efficiency
“Achieving maximum efficiency in the use of
resources—in other words, offering the highest
quality standards for products and services, while
minimizing resource consumption and practicing
reuse and recycling. The key objective is to add as
much value as possible, using as few resources and
as little energy as possible.
Canon’s Environmental Burden
Canon’s business activities commence
with the receipt of raw materials and
components from its suppliers. The Company
assembles these materials and components
into products that it then ships to sales
subsidiaries and other firms. Following
customer use, products are recycled to
the extent possible, and parts are reused.
The following paragraphs describe
Canon’s concern for the environment in
regard to the life cycles of its products.
Procurement of Materials and Components
Canon instituted its “Green Procurement”
program in 1997. Moreover, Canon took
the initiative in establishing the Japan
Green Procurement Survey Standardization
Initiative (JGPSSI), which prepares material
declaration guidelines. With major
electronics industry associations in the
United States (the EIA) and Europe (the
EICTA), JGPSSI is setting global standards
for material declarations.
At most of its plants worldwide, Canon
has installed equipment to analyze the
materials it procures, and, in anticipation of
the implementation of the European Directive
Restriction of the use of certain Hazardous
Substances in electrical and electronic
Canon personnel conducted on-site verifications at the plants of its
suppliers to confirm lead-free operations in Suzhou, China.
equipment (RoHS), has conducted on-site
confirmations of the facilities of its suppliers.
Research and Development
As a regular part of the “prototype-less”
product development process, the design
information in Canon’s 3D-CAD systems is
checked automatically for environmental
attributes. This includes suitability for
recycling, environmental impact (LCA/LCC),
and the environmental qualities of its
parts. In addition, the elimination of the
need for prototypes saves resources.
Production
In production activities, Canon has intro-
duced the cell production method as a
Environment analysis equipment is used at the company’s
production facilities throughout the world.
18
core element in its reforms. This method
helps to save resources and energy,
reduces carbon dioxide gas emissions and
waste, and lowers costs. The end result is
a contribution to profitability.
Looking at waste measures first, the
pursuit of company-wide reductions in
costs and the introduction of technologies
to sort collected items, and to disassemble
and recycle them into valuable goods all
contribute to reducing waste output. At
present, 39 of Canon’s production sites in
Japan and nine sites outside Japan have
achieved the goal of zero landfill waste.
Even greater efforts are being made to
reduce waste at the other plants and at
marketing subsidiaries and affiliates.
Canon is moving forward with water
conservation and recycling measures.
In 2004, Canon recycled 930,000 m3
of water. When we established Oita
Canon Materials Inc. in 1999, we made
its plant a zero wastewater facility by
installing a completely closed recycling
system that uses no outside water sources
other than rain. Canon also introduced
new closed wastewater processing systems
at the Utsunomiya Plant (Japan) and
Canon Zhuhai, Inc. (China), and the use of
Ultra-Pure Water Recycling Systems at
our semiconductor plants.
Sales and Logistics
Canon has been reducing carbon dioxide
emissions in its logistics operations and,
by developing a highly efficient system
for distribution and delivery, is working to
reduce the burden on the environment.
Canon is also working in other areas to
preserve the environment; for example,
Canon developed a new closed recycling system for processing, purifying, and reusing water and introduced it in Zhuhai, China.
through the introduction of low-emission
vehicles and by paying close attention to
product packaging. Moreover, Canon is
Canon is implementing a modal shift
to use of rail transportation.
Products in Use
Canon has improved the energy efficiency
of its products even further with the
introduction of on-demand, energy-
efficient technology and other proprietary
technologies. As copying machines
and laser beam printers use the most
energy when they are in standby mode,
Canon has adopted two types of on-
demand, energy-efficient technologies
to reduce their energy consumption
while in this mode.
In on-demand, energy-efficient
technology, a ceramic heater localizes
the heating to a specific area through
a fixing film during printing. Surplus
energy consumption is avoided and
energy efficiency realized. IH fixing
technology, which employs an
electromagnetic induction heater,
New railcar container designed jointly with a transport firm
and a railway company.
aggressively implementing a modal shift,
or a switch from truck transport to ship
or rail transport. In 2004, Canon Inc.
teamed up with a transport firm and
a railway company in Japan to jointly
design a new railcar container that is
similar in measurement to an ocean
container, with high storage capacity.
In the United States and Europe also,
Vision for 2010
Overriding Indicator: Factor 2
(Increase by at least a factor of 2.0 the ratio of net sales*1 to
life cycle CO2 emissions*2, using 2000 as the reference year)
*1 Annual consolidated sales of the Canon Group.
*2 The environmental burden from the business activity life cycle —the flow of business activities from production
of raw materials, to production and marketing by the Canon Group, use by the customer, and recycling/disposal
after use—is converted into total direct CO2 emissions.
19
CORPORATE FUNCTIONS
CORPORATE SOCIAL RESPONSIBILITY
achieves greater efficiency in the
high-speed machines.
Recycling
Canon is aggressively pursuing Inverse
Manufacturing (IM) in line with our
dedication to being a global corporation
supporting a recycling-oriented society.
Canon’s IM has been implemented
through a global recycling structure, with
centers in the Americas, Europe, and
Asia. The sharing of information and
resources among these regions makes it
possible to realize global recycling.
Specific activities include:
Remanufacture of Copying Machines
The Canon Group has expanded its
copying machine remanufacturing
program globally since 1992.
Remanufacturing begins with the
collection of used products and the
selection of parts according to rigor-
ous criteria. Selected parts are
thoroughly cleaned and worn parts
replaced to ensure that the reused
materials meet the same high quality
standards as new parts. We guarantee
that each reused part is as good as
a new one.
Parts Reuse
We initiated the TREE recycling
program in 1999 as a way to effec-
tively reuse machine parts. Short for
“Technology of Reusing for
Environment with Economy,” the TREE
program does not simply involve the
recycling of used products. Rather,
parts removed from used products are
reused in other machines, promoting
an effective use of resources.
Recycling of Cartridges
Since 1990, Canon has led other
companies around the world in intro-
ducing and operating a Toner
Cartridge Collection and Recycling
Program on a global scale. Collected
cartridges are separated by machine
Toner cartridge recycling
type, and parts that can be used again
are reused or 100% recycled. By the
end of 2004, the accumulated volume
of cartridges collected had risen to
127,000 tons.
Moreover, we believe that development
and utilization of new environmental
technologies are key to our goal of
reducing the burden on the environment.
Moving forward, we plan to establish
and to widen the application of this
technology to the greatest extent possible.
Canon’s Latest Response to Environmental Concerns: imageRUNNER 4570 (iR 4570 in Europe)
Equipped with our original image-processing engine, the iR Controller,
Canon’s iR 4570 monochrome multifunction device provides leading-edge
functions for creating and sharing office documents.
The iR 4570 is on the leading edge, not only in terms of function, but also for
its responsiveness to environmental concerns. For example, while it offers high-
performance with an output of 45 pages per minute, its compact size of only 565mm
in width, contributes to resource conservation. Thanks to energy-efficient on-demand
fixing technology, the power requirement of the iR 4570 in “sleep mode” has been
drastically cut to 1W. Also, Canon has implemented “green procurement” and
selected alternative materials in advance of the implementation of the EU’s new
RoHS Directive. Moreover, the external case adopted for the iR 4570 is made from
plastic recovered through a closed recycling system.
20
PRODUCT GROUP SUMMARY
Sales Results
(Millions of yen)
Business Machines
OFFICE IMAGING PRODUCTS
Office network digital multifunction devices (MFDs)
Color network digital MFDs
Office copying machines
Personal-use copying machines
Full-color copying machines, etc.
Business Machines
COMPUTER PERIPHERALS
Laser beam printers
Inkjet printers
Inkjet multifunction peripherals
Image scanners, etc.
Business Machines
BUSINESS INFORMATION PRODUCTS
Computer information systems
Micrographic equipment
Personal information products, etc.
CAMERAS
SLR cameras
Compact cameras
Digital cameras
Digital video camcorders, etc.
OPTICAL PRODUCTS
Semiconductor production equipment
Mirror projection mask aligners for LCD panels
Broadcasting equipment
Medical equipment, etc.
OTHER PRODUCTS
4
9
5
1
6
8
,
9
2
3
,
0
5
0
1,
7
8
4
8
9
1
,
4
3
2
,
8
1
3
9
4
3
1
7
1
,
,
5
9
9
1
8
0
1
,
2
1
3
,
9
8
0
,
1
3
9
4
,
3
2
1
0
4
5
3
5
6
,
,
2
7
9
0
2
1
1
,
Share of
Consolidated Sales
32.3%
33.2%
3.4%
22.0%
6.7%
4
1
9
,
9
4
,1
1
7
6
0
7,
1
1
9
7
0
,
3
6
7
0
7
,1
1
3
2
1
3
,1
3
2
0
1
,
,
3
5
0
0
8
9
5
8
3
,
7
4
0
,
1
6
5
9
,
5
5
0
,
1
8
0
1
,
7
4
1
8
7
7
,
5
8
4
1
5
0
,
6
9
1
7
6
3
1
8
3
,
3
7
3
,
8
0
2
7
3
1
,
7
3
1
4
2
8
1
6
1
,
96,427
94,344
91,018
87,908
85,651
00
01
02
03
04
21
CANON PRODUCT GROUPS
OFFICE IMAGING PRODUCTS
Although the office equipment market is
regarded as mature, Canon has achieved
steady growth by introducing new products,
improving its marketing channel policies,
and adopting effective strategies. These
activities made it possible for Canon to
report the highest level of profits to date
in the Office Imaging Products segment.
Ikuo Soma
Chief Executive*
Office Imaging Products Operations
Canon is the world’s largest manufacturer of office
copying machines and multifunction machines. Even
though the business machine market has matured,
during 2004, we focused on attaining steady growth.
We aim to create new business domains while setting
market trends. One way we plan to do this is to acceler-
ate the shift to color printing in the office market by
aggressively launching advanced color equipment.
At the same time, we are paying close attention to
strategies for maintaining price stability and profitability.
In parallel with these marketing strategies, we are
working to upgrade our global supply chain management
(SCM) strategy. We are working to make a complete
shift to a weekly production/sales system that matches
actual demand from our sales companies and meets
schedules for delivery to customers.
In the United States, Canon retained its No. 1
positions in both the monochrome and color equipment
markets in terms of brand share. In Canada, mid-range
color equipment is taking off as well. Moreover,
in Latin America, demand for low-speed equipment
was strong, lifting sales to a record high in this area.
In Europe, sales were strong across the board, with
sales volume in the monochrome market showing
double-digit growth compared with 2003. Eastern
Europe, including Russia, showed particularly strong
demand, with growth exceeding 20%. Under these
conditions, Canon increased its market share and
strengthened its No. 1 position.
In Japan, building on the trend from the previous
year, the shift to color equipment accelerated, with
the proportion of the market accounted for by color
models rising from less than 30% in 2003 to attain
40% at the end of 2004.
The Asia/Oceania market remained strong,
registering double-digit growth. In the key Chinese
market, amid falling prices for low-speed copying
machines, we increased our market share through
sophisticated marketing activities.
Going forward, we plan to cultivate the print-on-
demand market by offering high-speed machines.
In addition, we plan to expand sales of our multifunction
machines, that is, Java-based MEAP (Multifunctional
Embedded Application Platform) products, in the
small-office/home office (SOHO) market and grow our
solutions business. Our solutions business comprises
mainly components from three fields: MEAP in the devices
field, the imageWARE series in the software field, and
e-Service in the Internet field.
Color imageRUNNER C3200N
*Group Chief Executive in FY 2004.
22
Our Future Growth Engine:
High-Compression PDF Conversion Technology
Full-color document data typically contain 30 to 40 times
more digital information than monochrome data. Files
become extremely large when users employ JPEG and other
conventional compression methods to store or transmit files
in their original, high-resolution condition. This creates
problems because it takes considerable time to send them
over a network and places a heavy burden on servers.
Canon’s high-compression PDF conversion technology
makes it possible to compress image files to a fraction of the
size that would normally be required. For example, using
JPEG compression, scanning an A4-size color document
filled with text and photos at 150-dpi resolution would
create a file of about 2 MB in
size. However, using Canon’s
groundbreaking technology,
the file is compressed to about
one-tenth this size without
deterioration in image quality.
The secret is that Canon’s technol-
ogy can successfully separate the text from the background
and compress them separately. Using this technology, photo-
graphs remain clear and alphanumeric characters are repro-
duced crisply. Therefore, this technology maintains high
image quality even as it significantly reduces the volume of
data. This breakthrough is differentiating Canon’s network
MFDs from those of competitors.
High-compression PDF
Sales Results:
Office Imaging Products
(Millions of yen)
1,150,000
2
7
9
,
0
2
1
,
1
5
9
9
,
1
8
0
,
1
1
3
1
,
3
2
0
,
1
3
5
0
,
0
8
4 9
9
5
,
1
6
8
0
00
01
02
03
04
Fiscal 2004 Review
Demand for network digital MFDs
indicated a shift from monochrome
to color models, as well as a trend
toward higher-end features.
The Color imageRUNNER
C3200/iR C3200N, which offers
intelligent color sending to multi-
ple destinations and combines
scanning, printing, copying, and
distributing functions working
together concurrently, continued
to sell well in markets all around the world, thus sustaining
the momentum from 2003, when these models were
launched. The iR C3100 and the high-end model
iR C6800, introduced in Japan in 2003, were also launched
in Europe and the United States in the first half of 2004 and
have been well received in these markets. The iR C3220/iR
C3220N, which succeeds the iR C3200, was launched
in autumn 2004 and has similarly been well received.
In the United States, to counter mounting competition in
the steadily expanding color equipment market, we simulta-
neously launched 14 new models,
including color and monochrome
machines, in October 2004.
In the monochrome equipment
market, where prices have finally
stopped falling, we provided models
with enhanced functionality, lower
imageRUNNER C6800N
energy consumption, and smaller footprints. In addition to
extending the Multifunctional Embedded Application
Platform (MEAP), enabling customers to develop unique
functions on the imageRUNNER platform, we launched new
MEAP machines with output capabilities of between 72 to
105 pages per minute in the promising high-speed machine
segment in November 2004. Supplies, including toner
and drums, posted steady growth.
Overall, sales of office imaging products in 2004 saw
a year-on-year increase of 3.6%, to ¥1,121 billion
imageRUNNER C3220
(US$10,779 million).
23
CANON PRODUCT GROUPS
COMPUTER PERIPHERALS
In the inkjet printer business, Canon is seeking to
achieve balanced growth throughout the “triangle”
constituting operating cash flow, profits, and market
share. Canon is continuing to sustain profitability in
this consumer product business even under highly
competitive conditions by building on the power
of its brand and its technological capabilities
for product development and production.
Katsuichi Shimizu
Chief Executive
Inkjet Products Operations
Canon is one of the few companies in the world boasting
world-class technologies for both cameras and photo-
quality color printers. Leveraging this outstanding
competitive technological advantage in cameras and its
strong brand name, Canon aims to be No. 1 in the home
printing market. Today’s market is moving toward digital
photos, and customers need photographic quality prints
for a wide range of applications. Canon is therefore
exceptionally well positioned to take advantage of
emerging business opportunities.
In managing its activities, the inkjet printer business
draws a triangle with profits as the base and operating
cash flow and market share forming the other two sides.
The business generates profits, which are indispensable
for expanding and renewing its activities, and seeks to
maintain high growth. The biggest difference between
Canon and its competitors is its drive to manufacture
its products internally. By leveraging its in-house
production capabilities, Canon aims to improve its
cost-competitiveness and further strengthen its systems
to generate profits.
In 2004, primarily as a result of the introduction in the
latter half of the year of the
PIXMA brand (PIXUS brand in
Japan), unit sales expanded
nearly 20% from the previ-
ous year. As a result, Canon
showed excellent performance
MP-780
24
for the year, returning to the No. 1 position in the
Japanese market for the first time in eight years.
These inkjet printers incorporate Canon’s original FINE
technology, which that gives them the strengths that
Canon printers have become known for, namely photo-
quality imaging together with high printing speed.
Reflecting these strengths, the number of machines
installed in the field is growing,
and this promises to lead to
increases in the consumption of
printing supplies.
PIXMA iP8600
In the field of supplies, we also
introduced a new technology in Japan. This technology
offers photographic prints with greatly enhanced durability
through the use of genuine Canon paper and ink. Our
new products in Japan, which include our new print head
and original Canon ink and paper, is capable of printing
images that can be preserved in an album for 100 years
without fading. We plan to introduce this technology to
the global market and leverage our technology in printing
supplies to expand sales.
In the field of flatbed scanners, in 2005, we introduced
a new, advanced design that can scan from either a verti-
cal or horizontal orientation. Going forward, Canon will
draw on its original FARE (Film Automatic Retouching
and Enhancement) and LiDE (LED Indirect Exposure)
technologies to offer scanners that meet the growing
need for high-resolution, high-speed processing.
Our Future Growth Engine:
FINE
Canon has created “FINE: Full-photolithography Inkjet Nozzle
Engineering,” which offers a rich repertoire of capabilities for
picture-perfect results. Achieving this level of quality required
each individual dot to be printed at a smaller size and with
greater accuracy. However, as the ink droplets become
smaller, variations in droplet size and dot placement have an
adverse effect on overall image quality. FINE is based on new
concepts for the ink ejection mechanism and an innovative
manufacturing technology for the nozzles. Born of advanced
semiconductor manufacturing technology, FINE print heads
have an array of 6,144 nozzles, or 23 per millimeter in our
iP8500. Each of the nozzles in this unit can eject a maximum
of 24,000 ink droplets of only
two picoliters each per second.
Moreover, our PIXMA iP5000 is
capable of ejecting ink droplets
of only one picoliter. Using these
advanced Canon inkjet printers,
the droplets hit the paper with a
high degree of accuracy and
achieve both high levels of image
quality and speed.
Conventional Bubble Jet
printing technology
“FINE” technology
Sales Results:
Computer Peripherals
(Millions of yen)
1,150,000
4
1
9
,
9
4
1
,
1
2
1
3
,
9
8
0
,
1
9
2
3
,
0
5
0
,
1
5
8
3
,
7
4
0
,
1
6
5
9
,
5
5
0
,
1
0
00
01
02
03
04
Fiscal 2004 Review
In fiscal 2004, the spread of digital
cameras and heightened print
quality fueled the steady spread of
a “home-printing” culture, where
people enjoy making digital photo-
graphs using their own peripherals.
Although the inkjet printer market
on the whole has recently shown
only modest growth, Canon is
further developing its lineup of
single function and multifunction
models with FINE printing heads and PictBridge direct-printing
compatibility. Canon’s PIXMA series of advanced-design,
box-type printers, which were introduced in fall 2004, won
praise for their exceptional functionality, including dual-path
paper feeding and built-in automatic duplexing for double-
sided printing.
In the laser beam printer (LBP) area, we experienced explosive
sales growth in low-priced monochrome units that led to a
temporary shortage of units. Along with increases in demand in
growing markets, we reported major expansion overall in our
monochrome units because of their
superior energy-saving properties, fast
printing speeds, and reliability. In the
color LBP area, our printers are well
received because of our original
energy-saving technologies.
LBP-5200
In 2004, to expand demand, we added new models to provide
a full lineup and introduced low-priced machines. As a result, unit
sales doubled from the previous year. In addition, sales of cartridges
for both monochrome and color printers showed steady growth.
The market for flatbed scanners is contracting because of
the shift in demand in major countries toward multifunction
printers. In response to this shift, we have introduced a high-speed,
high-resolution scanner and a slim-type scanner incorporating
Canon’s original contact image
sensor. We are expanding our market
share in countries around the world,
PIXMA iP4000
especially in Europe.
CanonScan 9950F
25
CANON PRODUCT GROUPS
CAMERAS
As unit sales of digital cameras have expanded
nearly 60% annually, Canon has moved forward
with aggressive innovations in all phases of its
activities, from development through production
and other aspects of its digital camera business.
Tsuneji Uchida
Chief Executive
Image Communication Products Operations
The digital SLR camera market has expanded since the intro-
duction of our EOS Digital Rebel (EOS 300D in some areas)
in 2003. In 2004, the worldwide market size was estimated
to be about 2.4 million units, or three times the market size
of the previous year. Amid these market conditions, Canon
moved well ahead of its competitors by introducing a strong
lineup. These included the EOS-1D Mark II and EOS-1Ds Mark II
for the professional market, as well as the EOS 20D for the
advanced amateur market. As a result, we succeeded in
capturing a more than 50% market share.
Our success was largely thanks to our large-size CMOS
sensors, which we produce internally, including a full-size 35mm
CMOS sensor with 16.7 million pixels. Another important
accomplishment was further improvements to the DIGIC, our
most advanced image processing engine. The DIGIC II has
enhanced capabilities for high-quality image reproduction
and high-speed data processing. The superior performance
resulting from these improvements enabled Canon to establish
a dominant presence at major sporting events in 2004.
Turning next to the compact digital camera field, where
market competition has become increasingly aggressive,
Canon is working to accurately identify market trends
while achieving competitive production costs. In 2005, we
will expand our lineup of models incorporating DIGIC II.
Our aim is to sustain product quality while maintaining
appropriate levels of profitability.
In product development improvements, we are shortening
the time to market by taking advantage of simulation,
analysis, and measurement technologies that move us
closer to “prototype-less design.” These improvements
allow us to pursue concurrent development from the trial
production stage all the way to mass production. With the
opening of our new, cutting-edge manufacturing plant in
Oita, Kyushu (Japan), our production capacity has been
expanded substantially, and we believe we can strengthen
our No.1 position in digital cameras.
At the same time, we are now
much better positioned to respond
flexibly to changes in the market.
PowerShot SD500
(Digital IXUS 700 in some areas)
In the video camcorder
world market, where more
than 80% of units sold are now digital, Canon is aiming
to expand its market share by continuing to introduce new
products that feature high image quality in a compact body
at competitive prices. In the U.S. market, we further
strengthened our position in the professional and advanced
amateur market segments by introducing the XL2, a new
model to follow our long-term, best-selling XL1.
Furthermore, in 2005 and beyond, we are taking steps to
expand into new areas, including the compact photo printer
and LCD projector fields. We developed a new projector
that uses reflective liquid crystal on silicon, or LCOS, that we
introduced near the end of 2004. We have also developed
a new optical engine, “AISYS” (Aspectual Illumination
System), for LCOS that features ultrafine image quality and
responds to SXGA+ (1400 x 1050 pixels) requirements.
26
Sales Results:
Cameras
(Millions of yen)
800,000
9
7
0
,
3
6
7
0
4
5
,
3
5
6
8
7
7
,
5
8
4
7
6
3
,
1
8
3
4
3
2
,
8
1
3
Fiscal 2004 Review
Products in the Cameras segment
include compact digital cameras,
digital SLR cameras, digital video
camcorders (DVCs), film cameras,
lenses, visual communication
products, and LCD projectors.
Sales of digital cameras are
expanding throughout the world.
In 2004, we introduced three digital
0
SLR models and 16 compact types in
00
01
02
03
04
rapid succession. The number of
units shipped rose nearly 60% from the prior year. To maintain
our position as the leading company in compact digital cameras,
we are implementing initiatives to expand our presence in
rapidly growing markets, such as Europe and China.
At the same time, with compact photo printers that can
print images directly from all PictBridge-compatible digital
cameras, we are exercising strong leadership to accelerate
sales in those fast growing markets.
Reflecting continued strong sales of digital SLR cameras
during the period under review, sales of interchangeable lenses
also increased. Amid these market
conditions, Canon reported strong
sales results. Although demand for
film cameras is declining, we still retain
the No. 1 market position in SLR
cameras and a high position in the
market for compact cameras.
Optura 500
(MVX35i in some areas)
Throughout all categories of video camcorders, including
analog models, the global market grew a marginal 2%, but
the DVC market posted significant growth of nearly 20%.
In 2004, we introduced 11 new DVC models and substantially
increased our global market share.
In the LCD projector field, although the world market expanded
more than 30% in unit terms, prices continued to decline, and
market growth in monetary terms remained
in the single-digit range. Canon is expand-
ing unit sales with a strong momentum that
exceeds growth in the market as a whole.
SX-50
Our Future Growth Engine:
DIGIC
High image quality is the pride of Canon’s digital cameras,
and DIGIC is the image processing “brain” that provides it.
The role of the image processor is to process the visual infor-
mation from the light that enters the lens and is captured
by the light sensors, and develop the image, preserving its
original beauty without alteration.
EOS-1Ds Mark II
Canon developed its DIGIC image
processor by concentrating all its photo-
graphic know-how, gained over more
than 60 years, in a single microchip,
making it possible to process a vast
amount of complex image information instantly. For example,
in the case of white balance, which is the basis for color, DIGIC
divides the relevant information into several hundred thousand
images and makes judgments based on an abundance of exper-
tise that only a leading camera manufacturer could realize. In 2004,
we introduced DIGIC II, which is faster and has even more
sophisticated functions and capabilities, first in our EOS-1D Mark II,
digital SLR camera, and then in
our other SLR and compact
models. DIGIC II will ensure that
our customers continue to
equate Canon digital cameras
with top image quality.
DIGIC II
Equipped with DIGIC II, Canon’s digital SLR cameras and lenses offered
unmatched strengths for sporting event photography in 2004.
27
CANON PRODUCT GROUPS
OPTICAL AND OTHER PRODUCTS
Canon implemented major structural reforms
in its Optical Products Operations and these
activities got off to a new start in April 2004.
In our Medical Equipment business,
we focused on shortening product
development time through various reforms
and introduced products that meet
market needs in a timely fashion.
Junji Ichikawa
Chief Executive
Optical Products Operations
We implemented major structural reforms in our
semiconductor-production equipment business in April
2004 and these operations made a new start. These
reforms included a review of product development, the
accelerated introduction of next-generation platforms,
lead-time compression, and reductions in production costs.
The market for semiconductor-production equipment,
which has been expanding, is forecast to enter an adjust-
ment phase in 2005. We are aiming to expand the volume
of unit sales and develop new, cutting-edge models.
In the semiconductor-production industry, circuit
patterns continue to shrink at an accelerating pace,
and responding to this trend is becoming increasingly
urgent. As the core technology in the semiconductor
design process, photolithography is the driver of faster
and more highly integrated semiconductors as well as
cost reductions. Currently, the design rules for a circuit’s
width call for 90 nanometers (one nanometer is equivalent
to a millionth of a millimeter).
Among next-generation technologies, somewhere in
the 2006 to 2007 period, the market is expected to move
toward the full-scale use of products incorporating liquid
immersion technologies that
employ argon fluoride (ArF)
lasers. At Canon, we plan to
introduce products based on
this next-generation platform
FPA-6000 AS4
in 2007. In view of this trend, we have reviewed our
product development processes and introduced a product
manager system with the aim of exerting strong leadership
to speed up our development. Moreover, we plan to
strengthen our position vis-a-vis competitors by substan-
tially shortening the interval between the receipt of orders
and the installation of equipment. As an up and coming
technology, we are developing equipment that makes use
of EUV (extreme ultra violet) light sources.
In the LCD mask aligner business, demand for large-
scale units is very strong, and we have won the No. 1
market share for high-end mask aligners. Canon will
continue to develop and introduce new equipment and
units capable of processing low-temperature polysilicon,
while working to maintain its No. 1 position.
In the medical equipment field, we have begun to
market an all-digital fundus camera for retinal imaging.
We have also begun the full-scale development of systems
products for ophthalmic applications and have introduced
support systems for ophthalmic imaging diagnosis. In the
field of digital radiography systems, we are promoting
market expansion by taking full advantage of handheld
sensors in applications that require mobile photography.
Moreover, Canon is proceeding with the development of
high-performance sensors seeking to adapt to a wider
range of applications in the digital X-ray imaging field.
28
Sales Results:
Optical and Other Products
(Millions of yen)
350,000
1
2
8
,
6
1
3
7
1
7
,
2
0
6 3
7
7
,
7
6
2
2
3
7
,
9
4
2
5
5
1
,
8
2
2
0
00
01
02
03
04
Fiscal 2004 Review
In fiscal 2004, conditions in the
semiconductor market improved
and, along with recovery in capital
investment by semiconductor
manufacturers, demand in the
stepper market was strong,
especially in Japan and other Asian
countries. The number of units sold
rose approximately 50% over the
number for 2003. To take full
advantage of strong market
demand, Canon introduced new products, including the
Our Future Growth Engine:
Large-Scale Concave Mirror Technology
Demand for LCD displays is expanding globally. The key
to manufacturing LCD display panels is the photolithographic
technology that enables microscopic pixel patterns to be
printed on glass substrates. There are several photolitho-
graphic methods for this, but from the point of view of
productivity, the best method is the
“mirror projection” method. This
involves creating an optical mask of
the desired microscopic pattern,
which is then used in conjunction
with a concave mirror to expose the
pattern on glass substrate.
FPA-5000ES4b and FPA-6000ES6, and captured high market
To manufacture increasingly large
Large-scale concave mirror
LCD panels that have large areas to be exposed requires
large-scale, ultrahigh-performance concave mirrors. Canon
has been a pioneer in applying optical technology and has
been successful in manufacturing the world’s largest
concave mirrors with a diameter of approximately 1.5 meters
and with the highest levels of
surface precision. This has made
it possible to manufacture 48-
inch wide-screen LCD TV panels
with a single exposure.
MPA-8500
shares in Japan and other Asian countries, where semiconductor
manufacturers are making major investments.
Along with the expansion in the use of LCD panels for PC
monitors and growth in the market for LCD TVs, sales of mask
aligners for LCD production are also increasing. We now
occupy the No. 1 position in LCD mask aligners for making
seventh-generation large panels (1,870mm x 2,200mm).
Expansion in this area will be sustained by our technology
for full-screen exposure of large substrates, which is based
on our capabilities for manufacturing large-scale, ultrahigh-
performance concave mirrors and our technology for process-
ing and measuring large-scale stages.
Canon also reported major progress in mainstay products
in the medical equipment segment. In ophthalmic equipment,
Canon is vying for the top share of the market for non-mydri-
atic fundus cameras. In the digital-radiography system area,
Canon continues to hold the top market share with
its wide-ranging product offerings.
In other product areas, lenses for TV broadcast cameras
staged a gradual recovery in 2004 as a result of the movement
toward use of digital equipment and other factors. Especially
strong increases in demand were recorded for HDTV camera
lenses used for broadcasting sporting events. Canon continues
to hold the leading market share in this product area.
Sales in 2004 amounted to ¥316.8 billion (US$3,046 mil-
Ultra-large stage of the LCD mask aligner
lion), 26.9% higher than for the previous year.
29
MAJOR CONSOLIDATED SUBSIDIARIES
MANUFACTURING
Canon Electronics Inc.
Canon Finetech Inc.
Nisca Corporation
Canon Semiconductor Equipment Inc.
Canon Ecology Industry Inc.
Canon Chemicals Inc.
Canon Components, Inc.
Canon Precision Inc.
Oita Canon Inc.
Nagahama Canon Inc.
Oita Canon Materials Inc.
Ueno Canon Materials Inc.
Fukushima Canon Inc.
Canon Optron, Inc.
Igari Mold Co. Ltd.
Canon Virginia, Inc.
Custom Integrated Technology, Inc.
Industrial Resource Technologies, Inc.
Canon Giessen GmbH
Canon Bretagne S.A.S.
Canon Inc., Taiwan
Canon Dalian Business Machines, Inc.
Canon Zhuhai, Inc.
Canon Zhongshan Business Machines Co., Ltd.
Guang-Dong United Optical Instrument Co., Ltd.
Tianjin Canon Co., Ltd.
Canon (Suzhou) Inc.
Canon Opto (Malaysia) Sdn. Bhd.
Canon Hi-Tech (Thailand) Ltd.
Canon Engineering (Thailand) Ltd.
Canon Vietnam Co., Ltd.
Canon Electronic Business Machines (H.K.) Co., Ltd.
Canon Engineering Singapore Pte. Ltd.
Canon Engineering Hong Kong Co., Ltd.
RESEARCH & DEVELOPMENT
Canon Development Americas, Inc.
Canon Research Centre Europe Ltd.
Canon Research Centre France S.A.S.
Canon Information Systems Research Australia Pty. Ltd.
Canon Information Technology (Beijing) Co., Ltd.
Canon (Suzhou) System Software Inc.
30
As of December 31, 2004
MARKETING & OTHER
Canon Sales Co., Inc.
Canon System and Support Inc.
Canon System Solutions Inc.
Canon Software Inc.
Canon U.S.A., Inc.
Canon Canada, Inc.
Canon Mexicana, S. de R.L. de C.V.
Canon Latin America, Inc.
Canon do Brasil Industria e Comercio Limitada
Canon Chile, S.A.
Canon Panama, S.A.
Canon Argentina, S.A.
Canon Business Solutions-Central, Inc.
Canon Business Solutions-West, Inc.
Canon Business Solutions-East, Inc.
Canon Financial Services, Inc.
Canon Information Technology Services, Inc.
Canon Europa N.V.
Canon Europe Ltd.
Canon (UK) Ltd.
Canon Deutschland GmbH
Canon France S.A.S.
Canon Italia S.p.A.
Canon España S.A.
Canon Nederland N.V.
Canon Danmark A/S
Canon Belgium N.V./S.A.
Canon (Schweiz) AG
Canon Gesellschaft m.b.H.
Canon Svenska AB
Canon Oy
Canon North-East Oy
Canon Norge A.S.
Canon CEE GmbH
Canon Middle East FZ-LIC
Canon South Africa Pty. Ltd.
Canon Australia Pty. Ltd.
Canon New Zealand Ltd.
Canon Finance Australia Ltd.
Canon Finance New Zealand Ltd.
Canon (China) Co., Ltd.
Canon Singapore Pte. Ltd.
Canon Hongkong Co., Ltd.
Canon Marketing (Singapore) Pte. Ltd.
Canon Marketing (Malaysia) Sdn. Bhd.
Canon Marketing (Philippines), Inc.
Canon Marketing (Thailand) Co., Ltd.
Canon Semiconductor Engineering Korea Inc.
Canon Semiconductor Equipment Taiwan Inc.
FINANCIAL SECTION
TABLE OF CONTENTS
32 FINANCIAL OVERVIEW
50 TEN-YEAR FINANCIAL SUMMARY
52 CONSOLIDATED BALANCE SHEETS
53 CONSOLIDATED STATEMENTS OF INCOME
54 CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
55 CONSOLIDATED STATEMENTS OF CASH FLOWS
56 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation and Significant Accounting Policies
60
(2) Basis of Financial Statement Translation
(3)
Foreign Operations
(4) Marketable Securities and Investments
62
63
64
65
66
67
70
73
74
77
78
79
80
(5) Trade Receivables
(6)
Inventories
(7) Property, Plant and Equipment
(8)
Finance Receivables and Operating Leases
(9) Goodwill and Other Intangible Assets
(10) Short-Term Loans and Long-Term Debt
(11) Trade Payables
(12) Employee Retirement and Severance Benefits
(13) Income Taxes
(14) Common Stock
(15) Legal Reserve and Retained Earnings
(16) Other Comprehensive Income (Loss)
(17) Net Income per Share
(18) Derivatives and Hedging Activities
(19) Commitments and Contingent Liabilities
(20) Disclosures about the Fair Value of Financial Instruments and
Concentrations of Credit Risk
81
(21) Supplemental Cash Flow Information
82 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
31
FINANCIAL OVERVIEW
GENERAL
The following discussion and analysis provides information
that management believes to be relevant to understanding
Canon’s consolidated financial condition and result of
operations. References in this discussion to the “Company”
are to Canon Inc. and, unless otherwise indicated, references
to the financial condition or operating results of “Canon”
refer to Canon Inc. and its consolidated subsidiaries.
OVERVIEW
Canon is one of the world’s leading manufacturers of copying
machines, laser beam printers, inkjet printers, cameras,
steppers and aligners. Canon earns revenues primarily from
the manufacture and sale of these products domestically and
internationally. Canon’s basic management policy is to
contribute to the prosperity and well-being of the world while
endeavoring to become a truly excellent global corporate
group targeting continued growth and development.
Canon divides its businesses into three product groups:
business machines, cameras, and optical and other products.
The business machines product group has three sub-groups:
office imaging products, computer peripherals and business
information products.
Economic environment
Looking back at the global economy in 2004, although the
U.S. economy experienced a temporary slowdown in the
second half of the year due to the diminishing effectiveness of
tax cuts, the high price of crude oil, and rising interest rates,
economic growth was realized as consumer spending
increased modestly, and an upturn in corporate earnings
fueled continued growth in private-sector capital spending.
Economic growth in Europe remained moderate through
2004, held back somewhat in the second half by a sluggish
world economy combined with high crude oil prices and the
negative impact of the appreciation in value of the euro. In
Asia, China’s economy continued to achieve steady growth,
driven by strong consumer spending and increased capital
investment, while other Asian economies were also in recovery
mode. In Japan, while the economy slowed down somewhat in
the second half due to the global downward economic trend,
the economy continued to recover gradually, supported by
stable consumer spending and an increase in capital
investment.
Market environment
With respect to the markets in which Canon operates,
although sales of digital cameras slowed in Japan due to a
rising household penetration rate, demand overseas, especially
in Europe, continued to grow significantly during fiscal 2004.
Demand for network digital multifunction devices (MFDs)
remained strong, especially in the office market, fueled by the
shift toward multifunctionality and color. Although the market
for computer peripherals, including printers, grew overall,
mainly among color models, the segment experienced severe
price competition and a shift in demand for lower priced
models offering improved functionality. In the field of optical
equipment, capital spending for semiconductor-production
equipment recovered strongly owing to such factors as the
sustained high demand for memory devices resulting from
replacement demand for personal computers, and a growing
digital consumer electronics market, along with the high rate
of capacity utilization by semiconductor manufacturers.
Moreover, increased demand for liquid crystal display (LCD)
televisions fueled growth in the market for projection aligners,
which are used in the production of LCDs.
Summary of operations
Canon achieved record highs in both consolidated net sales
and net income, and a fifth consecutive year of sales and
profit growth, mainly due to a significant increase in sales of
digital cameras and color network digital MFDs, along with a
substantial increase in sales of semiconductor-production
equipment. In fiscal 2004, Canon achieved 8.4% growth in
net sales, to ¥3,467,853 million (U.S.$33,345 million), and a
24.5% increase in net income, to ¥343,344 million
(U.S.$3,301 million). Canon’s gross profit increased by 6.5%,
to ¥1,713,343 million (U.S.$16,474 million).
Key performance indicators
Following are the key performance indicators (“KPI”) that
Canon uses in managing its business. The changes from year to
year in these KPI are set forth in the table shown on page 33.
Revenues
As Canon seeks to become a truly excellent global
company, one indicator which Canon’s management places
strong emphasis on is revenue. Following are some of the KPI
relating to revenues that management considers to be
important.
Net sales is one of the KPI. Canon derives net sales
primarily from the sale of products, and providing of services
relating to its products. Sales vary based on such factors as
product demand, the number and size of transactions within
the reporting period, product reputation for new products,
and changes in sales prices. Other factors involved are market
share and market environment. In addition, management
considers an evaluation of net sales by product group
important in assessing Canon’s performance in sales in various
product groups in light of market trends.
Gross profit ratio (ratio of gross profit to net sales) is
another KPI for Canon. Through its reforms in product
development, Canon has been striving to shorten product
development lead times in order to launch new, competitively
priced products at a faster pace. In addition, Canon has
achieved cost reductions through efficiency enhancements in
production. Canon believes that these achievements have
contributed to improving Canon’s gross profit ratio, and
32
Canon intends to continue to pursue further shortening of
product development lead times and reductions in production
costs.
Operating profit ratio (ratio of operating profit to net sales)
and research and development (“R&D”) expense to net sales
ratio are considered by Canon to be KPI. Canon is focusing on
two areas for improvement. On one hand, Canon strives to
control and reduce its selling, general and administrative
expenses. On the other hand, Canon’s R&D policy is designed
to maintain a high level of spending in core technology in
order to sustain Canon’s leading position in its current fields of
business, and to explore possibilities in other markets. Canon
believes such investments will be the basis for future success in
its business and operations.
Cash Flow Management
Canon also places significant emphasis on cash flow
management. The following are the KPI relating to cash flow
management that management believes to be important.
Inventory turnover within days is a KPI because it is a
measure of supply-chain management efficiency. Inventories
have inherent risks of becoming obsolete, deteriorating or
otherwise decreasing in value significantly, which may
adversely affect Canon’s operating results. To mitigate these
risks, management believes that it is important to continue
reducing inventories and shorten production lead times in
order to achieve early recovery of related product expenses by
strengthening supply-chain management.
Canon’s management seeks to meet its liquidity and
capital requirements primarily with cash flow from operations
and also seeks debt-free operations. For a manufacturing
company such as Canon, the process for realizing profit on
any endeavor can be lengthy, involving as it does R&D,
manufacturing, and sales activities. Management, therefore,
believes that it is important to have sufficient financial
strength so that it does not have to rely on external funding.
Canon has continued to reduce its reliance on external
funding for capital investments in favor of generating the
necessary funds from its own operations.
KEY PERFORMANCE INDICATORS
Net sales (Millions of yen)
Gross profit to net sales ratio
R&D expense to net sales ratio
Operating profit to net sales ratio
Inventory turnover within days
Debt to total assets ratio
2004
¥ 3,467,853
49.4%
7.9%
15.7%
49 days
1.1%
2003
¥ 3,198,072
50.3%
8.1%
14.2%
49 days
3.1%
2002
¥ 2,940,128
47.6%
7.9%
11.8%
51 days
5.0%
2001
¥ 2,907,573
44.0%
7.5%
9.7%
57 days
10.4%
Note: Inventory turnover within days; Inventory divided by net sales for the previous six months, multiplied by 182.5.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The consolidated financial statements are prepared in
accordance with accounting principles generally accepted in
the United States of America, and based on the selection and
application of significant accounting policies, which require
management to make significant estimates and assumptions.
Canon believes that the following are some of the more
critical judgment areas in the application of its accounting
policies that currently affect its financial condition and results
of operations.
Revenue recognition
Canon generates revenue principally through the sale of
consumer products, equipment, supplies, and related services
under separate contractual arrangements. Canon recognizes
revenue when persuasive evidence of an arrangement exists,
delivery has occurred and title and risk of loss have been
transferred to the customer, the sales price is fixed or
determinable, and collectibility is probable.
For arrangements with multiple elements, which may
include any combination of equipment, installation and
maintenance, Canon allocates revenue to each element based
on its relative fair value if such element meets the criteria for
treatment as a separate unit of accounting as prescribed in the
Emerging Issues Task Force Issue 00-21 (“EITF 00-21”),
“Revenue Arrangements with Multiple Deliverables.”
Otherwise, revenue is deferred until the undelivered elements
are fulfilled as a single unit of accounting.
Revenue from sales of consumer products including office
imaging products, computer peripherals, business information
products and cameras is recognized upon shipment or
delivery, depending upon when title and risk of loss transfer to
the customer.
Revenue from sales of optical equipment such as steppers
and aligners sold with customer acceptance provisions related
to their functionality is recognized when the equipment is
installed at the customer site and the specific criteria of the
equipment functionality are successfully tested and
demonstrated by Canon. Service revenue is derived primarily
from maintenance contracts on equipment sold to customers
and is recognized over the term of the contract.
Most office imaging products are sold with service
maintenance contracts for which the customer typically pays a
base service fee plus a variable amount based on usage.
Revenue from these service maintenance contracts are
recognized as services are provided.
33
Revenues from the sale of equipment under sales-type leases
are recognized at the inception of the lease. Income on sales-
type leases and direct-financing leases is recognized over the
life of each respective lease using the interest method. Leases
not qualifying as sales-type lease or direct-financing lease are
accounted for as operating leases and related revenue is
recognized over the lease term.
Canon records estimated reductions to sales at the time of
sale for sales incentive programs including product discounts,
customer promotions and volume-based rebates. Estimated
reductions in sales are based upon historical trends and other
known factors at the time of sale. In addition, Canon provides
price protection to certain resellers of its products, and records
reductions to sales for the estimated impact of price
protection obligations when announced.
A liability for estimated product warranty cost is recorded
at the time revenue is recognized and is included in accrued
expenses. Estimates for accrued product warranty cost are
based on historical experience, and are affected by ongoing
product failure rates, specific product class failures outside of
the baseline experience, material usage and service delivery
costs incurred in correcting a product failure.
Allowance for doubtful receivables
Allowance for doubtful receivables is determined using a
combination of factors to ensure that Canon’s trade and
financing receivables are not overstated due to uncollectibility.
Canon maintains a bad debt reserve for all customers based
on a variety of factors, including the length of time receivables
are past due, trends in overall weighted average risk rating of
the total portfolio, macroeconomic conditions, significant one-
time events and historical experience. Also, Canon records
specific reserves for individual accounts when Canon becomes
aware of a customer’s inability to meet its financial obligations
to Canon, such as in the case of bankruptcy filings or
deterioration in the customer’s operating results or financial
position. If circumstances related to customers change,
estimates of the recoverability of receivables would be further
adjusted.
Valuation of inventories
Inventories are stated at the lower of cost or market value.
Cost is determined principally by the average method for
domestic inventories and the first-in, first-out method for
overseas inventories. Market value is the estimated selling price
in the ordinary course of business less the estimated costs of
completion and the estimated costs necessary to make a sale.
Canon routinely reviews its inventories for their salability and
for indications of obsolescence to determine if inventories
should be written-down to market value. Judgments and
estimates must be made and used in connection with
establishing such allowances in any accounting period. In
estimating the market value of its inventories, Canon considers
the age of the inventories and the likelihood of spoilage or
changes in market demand for its inventories.
Environmental liabilities
Canon is subject to liability for the investigation and clean-up
of environmental contamination at each of the properties that
Canon owns or operates, as well as at certain properties
Canon formerly owned or operated. Canon employs extensive
internal environmental protection programs that focus on
preventive measures. Canon conducts environmental
assessments for a number of its locations and operating
facilities. If Canon was to be held responsible for damages in
any future litigation or proceedings, such costs may not be
covered by insurance and may be material. The liability for
environmental remediation and other environmental costs is
accrued when it is considered probable and costs can be
reasonably estimated.
Deferred tax assets
Canon currently has significant deferred tax assets, which are
subject to periodic recoverability assessments. Realization of
Canon’s deferred tax assets is principally dependent upon its
achievement of projected future taxable income. Canon’s
judgments regarding future profitability may change due to
future market conditions, its ability to continue to successfully
execute its operating restructuring activities and other factors.
Any changes, in any of these factors may require possible
recognition of significant valuation allowance to these
deferred tax asset balances. When Canon determines that
certain deferred tax assets may not be recoverable, the
amounts which will not be realized are charged to income tax
expense and will adversely affect net income.
Employee retirement and severance benefit plans
Canon has significant employee retirement and severance
benefit obligations which are recognized based on actuarial
valuations. Inherent in these valuations are key assumptions,
including discount rates and expected return on plan assets.
Management must consider current market conditions,
including changes in interest rates, in selecting these
assumptions. Other assumptions include assumed rate of
increase in compensation levels, mortality rate, and
withdrawal rate. Changes in these assumptions inherent in the
valuation are reasonably likely to occur from period to period.
These changes in assumptions may lead to changes in related
employee retirement and severance benefit costs in the future.
Actual results that differ from the assumptions are
accumulated and amortized over future periods and,
therefore, generally affect future pension expenses. While
management believes that the assumptions used are
appropriate, the differences may affect employee retirement
and severance benefit costs in the future.
In preparing its financial statements for fiscal 2004, Canon
estimated a discount rate of 2.7% and an expected long-term
rate of return on plan assets of 3.6%. In estimating the
34
discount rate, Canon uses available information about rates of
return on high-quality fixed-income governmental and
corporate bonds currently available and expected to be
available during the period to the maturity of the pension
benefits. Canon establishes the expected long-term rate of
return on plan assets based on management’s expectations of
the long-term return of the various plan asset categories in
which it invests. Management develops expectations with
respect to each plan asset category based on actual historical
returns and its current expectations for future returns.
Decreases in discount rates lead to increases in actuarial
pension benefit obligations which, in turn, could lead to an
increase in service cost and amortization cost through
amortization of actuarial gain or loss, a decrease in interest
cost, and vice versa. A decrease of 50 basis points in the
discount rate increases the projected benefit obligation by
approximately 11%. The net effect of changes in the discount
rate, as well as the net effect of other changes in actuarial
assumptions and experience, are deferred until subsequent
periods, as permitted by Statement of Financial Accounting
Standards No. 87, “Employers’ Accounting for Pensions.”
Decrease in expected return on plan assets may increase
net periodic benefit cost by decreasing expected return
amounts, while differences between expected value and actual
fair value of those assets could affect pension income
(expense) in the following years, and vice versa. For fiscal
2005, if a change of 50 basis points in the expected long-term
rate of return on plan assets is to occur, that may cause a
change of approximately ¥2,090 million in net periodic benefit
cost. Canon multiplies management’s expected long-term rate
of return on plan assets by the value of its plan assets, to arrive
at the expected return on plan assets that is included in
pension income (expense). Canon defers recognition of the
difference between this expected return on plan assets and the
actual return on plan assets. The net deferral of unrecognized
asset gains (losses) affects the value of plan assets in fiscal
years and, ultimately, future pension income (expense).
The Company and certain of its domestic subsidiaries
realized a net gain ¥17,141 million (U.S.$165 million) for fiscal
2004 due to the return to the Japanese Government of the
substitutional portion of the Employee’s Pension Funds.
“Accrued pension and severance cost” decreased in fiscal
2004 compared to fiscal 2003, as a result of the return.
CONSOLIDATED RESULT OF OPERATIONS
SUMMARY OF OPERATIONS
Net sales
Operating profit
Income before income taxes and minority interest
Net income
(Millions of yen)
2004
¥ 3,467,853
change
2003
+8.4% 3,198,072
543,793 +19.7
552,116 +23.2
343,344 +24.5
454,424 +31.2
448,170 +35.8
275,730 +44.6
(Thousands of
U.S. dollars)
change
2002
2004
+8.8% 2,940,128 $ 33,344,740
5,228,779
5,308,808
3,301,385
346,359
330,017
190,737
Sales
Canon’s consolidated net sales in fiscal 2004 totaled
¥3,467,853 million (U.S.$33,345 million). This represents an
8.4% increase from the previous fiscal year, reflecting
significant growth in sales of digital cameras, color network
digital MFDs and semiconductor-production equipment.
Overseas operations are significant to Canon’s operating
results and generated approximately 73% of total net sales in
fiscal 2004. Such sales are denominated in the applicable local
currency and are subject to fluctuations in the value of the yen
in relation to such other currencies. Despite efforts to reduce
the impact of currency fluctuations on operating results,
including localizing some manufacturing and procuring parts
and materials from overseas suppliers, Canon believes such
fluctuations have had and will continue to have a significant
effect on results of operations.
The average value of the yen in fiscal 2004 was ¥108.12
to the U.S. dollar, and ¥134.57 to the euro, representing an
appreciation of 7% against the U.S. dollar, and a depreciation
of 3% against the euro, compared with the previous year.
These effects of foreign exchange rate fluctuations
unfavorably impacted net sales by approximately ¥57,000
million. Net sales denominated in foreign currency decreased
by approximately ¥77,700 million in U.S. dollars, increased by
¥20,300 million in euro, and increased by ¥400 million in
other foreign currencies.
Cost of sales
Cost of sales principally reflects the cost of raw materials, parts
and labor used by Canon in the manufacture of its products. A
portion of the raw materials used by Canon is imported or
includes imported materials. Such raw materials are subject to
fluctuations in world market prices and exchange rates that
may affect Canon’s cost of sales. Other components of cost of
sales include depreciation expenses from plants, maintenance
expenses, light and fuel expenses and rent expenses. The ratio
35
Income taxes
Provision for income taxes increased by ¥31,361 million
(U.S.$302 million) from fiscal 2003, primarily as a result of the
increase in income before income taxes and minority interests.
The effective tax rate during fiscal 2004 declined by 1.2%
compared with fiscal 2003.
Net income
Net income in fiscal 2004 increased by 24.5% to ¥343,344
million (U.S.$3,301 million), which exceeds the growth rate of
income before income taxes and minority interests. This
represents a 9.9% return on net sales.
Product information
Canon divides its businesses into three product groups:
business machines, cameras and optical and other products.
•The business machines product group includes office
imaging products, computer peripherals and business
information products.
Office imaging products include office network digital
MFDs, color network digital MFDs, office copying
machines, personal-use copying machines and full-color
copying machines.
Computer peripherals include laser beam printers, inkjet
printers, inkjet multifunction peripherals and image
scanners.
Business information products include micrographic
equipment, personal computers and calculators.
•The cameras product group includes single lens reflex
(“SLR”) cameras, compact cameras, digital cameras and
digital video camcorders.
•The optical and other products product group
includes steppers for semiconductor chip production,
mirror projection mask aligners used in the production of
LCDs, television broadcasting lenses and medical
equipment.
Effective January 2004, Canon has changed classification
of product categories with regards to information system
business, which had been classified in “Optical and other
products,” to “Business machines (Office imaging products)”
in order to better reflect current relation with those products.
Accordingly, information for previous fiscal years has been
reclassified to conform with the current classification.
of cost of sales to net sales for fiscal 2004, 2003 and 2002
was 50.6%, 49.7% and 52.4%, respectively.
Gross profit
Canon’s gross profit in fiscal 2004 increased by 6.5% to
¥1,713,343 million (U.S.$16,474 million) from fiscal 2003.
Despite ongoing efficiency enhancements in production during
fiscal 2004 and the timely launch of competitive new products,
the gross profit ratio decreased 0.9% from the previous year to
49.4%, mainly due to severe price competition and the
appreciation of the yen against the U.S. dollar.
Selling, general and administrative expenses
The major components of selling, general and administrative
expenses are payroll, R&D, advertising expenses and other
marketing expenses. Although R&D expenditures grew 6.2%
from the previous year to ¥275,300 million (U.S.$2,647
million) along with increased advertising and sales-promotion
spending, selling, general and administrative expenses for the
year increased by just 1.3% year on year, mainly due to other
selling, general and administrative expenses remaining at a
lower level than the year-ago period, coupled with a ¥17,141
million (U.S.$165 million) gain realized from the return to the
Japanese Government of the substitutional portion of the
Employees’ Pension Funds (EPF) that the company and certain
of its subsidiaries in Japan had operated. In general, Canon
maintains a high level of R&D expenditure to strengthen its
R&D capabilities. R&D expenditures grew in fiscal 2004 from
the previous year, resulting from increased R&D activities.
Advertising and other marketing expenses increased by 11.5%
from the previous year to ¥111,770 million (U.S.$1,075
million), reflecting management’s policy to strengthen
Canon’s corporate and brand image.
Operating profit
Operating profit in fiscal 2004 increased by 19.7% to
¥543,793 million (U.S.$5,229 million) from fiscal 2003.
Operating profit in fiscal 2004 was 15.7% of net sales,
compared with 14.2% in fiscal 2003.
Other income (deductions)
Other income (deductions) improved by ¥14,577 million
(U.S.$140 million), attributable to gains from sales of
subsidiary companies’ shares which totaled ¥9,082 million
(U.S.$87 million), along with a decrease in currency exchange
losses and improved equity gains (losses) of affiliated
companies.
Income before income taxes and minority
interests
Income before income taxes and minority interests in fiscal
2004 was ¥552,116 million (U.S.$5,309 million), a 23.2%
increase from fiscal 2003, and constituted 15.9% of net sales.
36
Sales by product
Canon’s sales by product group are summarized as follows:
SALES BY PRODUCT
(Millions of yen)
2004
change
2003
change
2002
(Thousands of
U.S. dollars)
2004
Business machines:
Office imaging products
Computer peripherals
Business information products
Cameras
Optical and other products
Total
¥ 1,120,972
1,149,914
117,067
2,387,953
+3.6% 1,081,995
+5.6
1,089,312
–5.2
+4.1
763,079 +16.8
316,821 +26.9
+8.4
+5.8% 1,023,131 $ 10,778,577
11,056,865
+3.2
1,125,644
123,493 –16.1
22,961,086
+3.1
7,337,298
653,540 +34.5
+9.5
249,732
3,046,356
2,940,128 $ 33,344,740
+8.8
3,198,072
1,055,956
147,108
2,226,195
485,778
228,155
¥ 3,467,853
2,294,800
Sales of business machines, constituting 69% of
consolidated net sales, increased 4.1%, to ¥2,387,953 million
(U.S.$22,961 million) in fiscal 2004.
Sales of office imaging products increased 3.6%, to
¥1,120,972 million (U.S.$10,779 million). Demand for
network digital MFDs continues to shift from monochrome
machines to color models, as well as towards higher-end
features. The Color imageRUNNER(iR) C3200/iRC3200N
recorded strong sales in both the domestic Japanese and
overseas markets. The iRC3100 and the high end model
iRC6800, introduced in Japan in the second half of fiscal
2003, were also launched in Europe and the United States in
the first half of fiscal 2004 and have also recorded strong
sales. The iRC3220/iRC3220N, which succeeds the iRC3200,
and the iRC2620/iRC2620N were launched in September
2004 and have also recorded strong sales. Among
monochrome network digital MFDs, such low-end models as
the iR1600/2000 series recorded considerable sales increases,
while mid-level models, such as the iR2200 series, and high-
end models, such as the iR5000 series, also achieved strong
sales. Color office imaging products accounted for 24% and
20% and monochrome office imaging products accounted for
62% and 67% of office imaging products sales in fiscal 2004
and 2003, respectively. Sales of facsimiles and information
system business accounted for 14% and 13% of sales of
office imaging products in both fiscal 2004 and 2003.
Return on sales
(%)
Sales by product
(Millions of yen)
Business Machines
Office imaging products
Computer peripherals
Business information products
Cameras
Optical and other products
Sales by region
(Millions of yen)
Japan
Americas
Europe
Other areas
10
0
9.9
3,500,000
3,467,853
3,500,000
8.6
3,198,072
2,907,573 2,940,128
2,696,420
3,467,853
3,198,072
2,907,573 2,940,128
2,696,420
6.5
5.8
5.0
00
01
02
03
04
00
01
02
03
04
00
01
02
03
04
0
0
37
Sales of computer peripherals increased 5.6% to ¥1,149,914
million (U.S.$11,057 million). Despite the effects of the yen’s
appreciation against the U.S. dollar and a shift in demand
toward lower priced models in the monochrome and color
segment, laser beam printer sales substantially increased due
to an increase in sales of color models. Inkjet printers recorded
an approximately 20% increase in unit sales with the PIXMA
iP3100 and iP4100 models, especially in Japan and Europe,
along with the PIXMA MP700 and MultiPASS MP370 high-
speed multifunction systems, as the adverse effect of severe
price competition on sales of computer peripherals was more
than offset by a rise in unit sales.
Sales of business information products decreased 5.2%, to
¥117,067 million (U.S.$1,126 million) in fiscal 2004, mainly
due to the intentional curtailing of personal computer sales in
the domestic market.
Sales of cameras continued to achieve significant sales
growth of 16.8%, totaling ¥763,079 million (U.S.$7,337
million). Amid the continued strong demand for digital models
worldwide, sales of compact digital cameras showed
significant growth, boosted by the launch of eight new
PowerShot-series models for fiscal 2004, including the
PowerShot S500 Digital ELPH and PowerShot A75. Canon’s
digital SLR cameras also continued to enjoy robust growth,
bolstered by strong sales of the EOS Digital Rebel, and the EOS
20D which is successor of the EOS 10D. As a result, unit sales
of digital cameras grew by nearly 60% compared with the
previous year. Digital cameras accounted for 69% and 61%
and conventional film cameras accounted for 16% and 21%
of camera sales in fiscal 2004 and 2003, respectively. Video
camcorders accounted for the remaining 15% and 18% of
camera sales in fiscal 2004 and 2003, respectively. In the field
of digital video camcorders, new models such as the Optura
500/400, Elura 70/65/60 and Optura 40/30 achieved favorable
sales during fiscal 2004. Sales of cameras constituted 22% of
consolidated net sales in fiscal 2004, an increase of 2% from
fiscal 2003, primarily due to increased sales of digital cameras.
Sales of optical and other products increased 26.9%, to
¥316,821 million (U.S.$3,046 million). Sales of aligners for the
production of LCDs realized notable growth as the PC monitor
industry continued to shift from CRT to LCD computer displays,
and the LCD television market continued to expand. Sales of
steppers, used for the production of semiconductors, also
increased as investment in semiconductor-production
equipment showed a recovery owing to the improved
conditions in the semiconductor-device market. Sales of optical
and other products constituted 9% of consolidated net sales in
fiscal 2004, an increase of 1 % from fiscal 2003, primarily due
to increased sales of aligners for LCDs and steppers.
Sales by region
A geographical analysis indicates that net sales in fiscal 2004
increased in every region.
In Japan, net sales increased by 6.0% in fiscal 2004 from
fiscal 2003. The results were mainly attributable to increased
sales of office imaging products and digital cameras. Color
network digital MFDs, which include the Color
imageRUNNER(iR) C3200/iRC3200N, Canon’s first color
offering in the powerful imageRUNNER-series lineup, have
contributed to increased sales of office imaging products.
In the Americas, net sales increased by 8.3% on a local
currency basis, mainly due to increased sales of digital
cameras, and laser beam printers. Sales of digital cameras
experienced continued strong demand and benefited from the
effect of newly-launched products such as PowerShot-series
models and Canon’s digital SLR. On a yen basis, after
accounting for the appreciation of the yen against the U.S.
dollar, net sales in the Americas increased by 1.4%.
In Europe, net sales increased by 11.6% on a local
currency basis mainly due to increased sales of digital cameras,
Color network digital MFDs and laser beam printers. On a yen
basis, after accounting for the depreciation of the yen against
the euro, net sales in Europe grew 12.8% in fiscal 2004.
Sales in other areas increased by 21.7% on a yen basis in
fiscal 2004, reflecting overall sales growth, particularly in
digital cameras and semiconductor equipment.
A summary of net sales by region is provided below:
SALES BY REGION
Japan
Americas
Europe
Other areas
Total
¥
(Millions of yen)
2004 change
2003
+6.0% 801,400
849,734
1,059,425
1,045,166
+1.4
1,093,295 +12.8
465,399 +21.7
+8.4
(Thousands of
U.S. dollars)
change
2002
2004
+9.4% 732,551 $ 8,170,519
10,186,779
+3.5
10,512,452
969,042 +13.1
382,464 +12.4
4,474,990
2,940,128 $ 33,344,740
+8.8
1,010,166
857,167
340,244
3,198,072
¥ 3,467,853
Note: This summary of net sales by region of destination is determined by the location of the customer.
38
SEGMENT INFORMATION BY PRODUCT
(Millions of yen)
2004: Net sales:
Unaffiliated customers
Intersegment
Total
Operating cost and expenses
Operating profit
Assets
Depreciation and amortization
Capital expenditure
2003: Net sales:
Unaffiliated customers
Intersegment
Total
Operating cost and expenses
Operating profit
Assets
Depreciation and amortization
Capital expenditure
2002: Net sales:
Unaffiliated customers
Intersegment
Total
Operating cost and expenses
Operating profit
Assets
Depreciation and amortization
Capital expenditure
(Thousands of U.S. dollars)
2004: Net sales:
Unaffiliated customers
Intersegment
Total
Operating cost and expenses
Operating profit
Assets
Depreciation and amortization
Capital expenditure
Business
machines
Cameras
Optical and
other products
Corporate and
Eliminations
¥ 2,387,953
—
2,387,953
1,866,869
¥
521,084
¥ 1,338,817
115,830
134,128
¥ 2,294,800
—
2,294,800
1,809,235
¥
485,565
¥ 1,266,881
118,806
106,013
¥ 2,226,195
—
2,226,195
1,815,179
¥
411,016
¥ 1,296,829
106,865
104,877
763,079
—
316,821
(138,419)
— 138,419
(138,419)
455,240
(1,498)
426,408
28,832
(136,921)
418,418 1,430,579
30,087
24,895
92,555
52,264
763,079
632,281
130,798
399,207
21,880
39,783
653,540
249,732
— 132,389
382,121
392,004
(9,883)
—
(132,389)
(132,389)
15,187
(147,576)
412,117 1,185,478
26,810
20,276
46,961
31,170
653,540
527,222
126,318
317,672
17,712
25,894
485,778
—
228,155
(139,608)
— 139,608
(139,608)
367,763
(16,313)
379,415
(11,652)
(123,295)
338,377 1,043,968
24,460
19,817
54,431
23,767
485,778
415,488
70,290
263,532
14,118
15,627
Consolidated
3,467,853
—
3,467,853
2,924,060
543,793
3,587,021
192,692
318,730
3,198,072
—
3,198,072
2,743,648
454,424
3,182,148
183,604
210,038
2,940,128
—
2,940,128
2,593,769
346,359
2,942,706
165,260
198,702
Business
machines
Cameras
Optical and
other products
Corporate and
Eliminations
Consolidated
$22,961,086 7,337,298
—
22,961,086 7,337,298
17,950,663 6,079,625
$ 5,010,423 1,257,673
$12,873,240 3,838,529
210,385
382,529
1,113,750
1,289,692
3,046,356
— 1,330,952 (1,330,952)
4,377,308 (1,330,952)
(14,404)
4,100,077
277,231 (1,316,548)
4,023,250 13,755,568
289,298
889,952
239,375
502,539
— 33,344,740
—
33,344,740
28,115,961
5,228,779
34,490,587
1,852,808
3,064,712
Notes:
1 Beginning first quarter of 2004, Canon has changed classification of product categories with regards to information system business, which had been classified
in “Optical and other products,” to “Business machines (Office imaging products)” in order to better reflect current relation with those products. Accordingly,
information for previous fiscal years has been reclassified to conform with the current classification.
2 General corporate expenses of ¥136,929 million (U.S.$1,317 million) and ¥147,616 million for fiscal 2004 and 2003, respectively, are included in “Corporate
and Eliminations.” For fiscal 2004, a gain of ¥17,141 miillion (U.S.$165 million) is also included, which relates to the Transfer to the Japanese Government of the
Substitutional Portion of Employee Pension Fund Liabilities.
3 Corporate assets of ¥1,430,599 million (U.S.$13,756 million) and ¥1,185,506 million as of December 31, 2004 and 2003, respectively, which mainly consist of
cash and cash equivalents, marketable securities, investments and corporate properties, are included in “Corporate and Eliminations.”
4 The segments are defined under Japanese GAAP.
39
SEGMENT INFORMATION BY GEOGRAPHIC AREA
(Millions of yen)
2004: Net sales:
Japan
Americas
Europe
Others
Corporate and
Eliminations
Consolidated
Unaffiliated customers
Intersegment
Total
Operating cost and expenses
Operating profit
Assets
¥ 919,153
1,882,973
2,802,126
2,206,141
¥ 595,985
¥ 1,793,679
1,057,066
8,863
1,065,929
1,025,628
40,301
341,616
1,090,712
4,161
1,094,873
1,071,552
23,321
533,865
— 3,467,853
400,922
—
591,677 (2,487,674)
992,599 (2,487,674) 3,467,853
965,080 (2,344,341) 2,924,060
(143,333)
543,793
27,519
3,587,021
646,295
271,566
2003: Net sales:
Unaffiliated customers
Intersegment
Total
Operating cost and expenses
Operating profit
Assets
¥ 856,851
1,662,172
2,519,023
2,025,442
¥ 493,581
¥ 1,600,726
1,044,998
8,101
1,053,099
998,492
54,607
306,140
2002: Net sales:
Unaffiliated customers
Intersegment
Total
Operating cost and expenses
Operating profit
Assets
¥ 789,066
1,475,091
2,264,157
1,867,817
¥ 396,340
¥ 1,485,238
1,007,572
9,791
1,017,363
969,542
47,821
346,021
968,938
3,861
972,799
946,282
26,517
546,625
852,931
4,639
857,570
836,341
21,229
460,521
327,285
— 3,198,072
—
503,119 (2,177,253)
830,404 (2,177,253) 3,198,072
806,281 (2,032,849) 2,743,648
454,424
(144,404)
24,123
3,182,148
478,902
249,755
— 2,940,128
290,559
426,914 (1,916,435)
—
717,473 (1,916,435) 2,940,128
699,420 (1,779,351) 2,593,769
346,359
(137,084)
18,053
2,942,706
448,538
202,388
(Thousands of U.S. dollars)
2004: Net sales:
Unaffiliated customers
Intersegment
Total
Operating cost and expenses
Operating profit
Assets
Japan
Americas
Europe
Others
Corporate and
Eliminations
Consolidated
85,221
$ 8,838,010 10,164,096 10,487,615
18,105,509
40,010
26,943,519 10,249,317 10,527,625
9,861,807 10,303,385
21,212,894
224,240
$ 5,730,625
5,133,318
$ 17,246,913
387,510
3,284,769
— 33,344,740
3,855,019
5,689,202 (23,919,942)
—
9,544,221 (23,919,942) 33,344,740
9,279,615 (22,541,740) 28,115,961
264,606 (1,378,202) 5,228,779
6,214,375 34,490,587
2,611,212
Notes:
1 General corporate expenses of ¥136,929 million (U.S.$1,317 million) and ¥147,616 million for fiscal 2004 and 2003, respectively, are included in “Corporate
and Eliminations.” For fiscal 2004, a gain of ¥17,141 miillion (U.S.$165 million) is also included, which relates to the Transfer to the Japanese Government of the
Substitutional Portion of Employee Pension Fund Liabilities.
2 Corporate assets of ¥1,430,599 million (U.S.$13,756 million) and ¥1,185,506 million as of December 31, 2004 and 2003, respectively, which mainly consist of
cash and cash equivalents, marketable securities, investments and corporate properties, are included in “Corporate and Eliminations.”
3 Segment information by geographic area is determined by the location of the Company or its relevant subsidiary making the sale. The segments are defined
under Japanese GAAP.
40
Operating profit by product
Operating profit for business machines in fiscal 2004
increased ¥35,519 million (U.S.$342 million) to ¥521,084
million (U.S.$5,010 million). Despite the effects of the stronger
yen, the gross profit ratio remained at prior year levels, due to
cost reduction efforts, and the sales-to-expense ratio declined,
contributing to an increase in operating profit.
Operating profit for cameras increased ¥4,480 million
(U.S.$43 million) to ¥130,798 million (U.S.$1,258 million).
Despite the negative effects of the stronger yen and price
competition, along with the impact of increased advertising
and sales-promotion spending, a increase in unit sales of digital
cameras contributed to improved profitability.
Optical and other products generated operating profits of
¥28,832 million (U.S.$277 million) in fiscal 2004, as compared
to losses of ¥9,883 million in fiscal 2003, due to a significant
increase in sales of aligners and 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
consist mainly of marketing activities. Return on foreign
operation sales is calculated by dividing net income of foreign
subsidiaries, after factoring in a consolidation adjustment
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 2004, 2003 and 2002 were 2.8%, 3.2% and 2.7%,
respectively. This compares with returns of 9.9%, 8.6% and
6.5% on total operations for the respective years.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents in fiscal 2004 increased
¥197,476 million (U.S.$1,899 million) to ¥887,774 million
(U.S.$8,536 million), compared with ¥690,298 million in fiscal
2003 and ¥521,271 million in fiscal 2002. 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 2004
increased by ¥95,880 million (U.S.$922 million) from the
previous year to ¥561,529 million (U.S.$5,399 million). 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 2004, cash inflow from cash received from
customers 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, due to the increase in advertising and
marketing expenses, reflecting management’s policy to
strengthen Canon’s corporate brand image. Cash outflow for
payments of income taxes increased, due to the increase in
taxable income.
Net cash used in investing activities in fiscal 2004 was
¥252,967 million (U.S.$2,432 million), compared with
¥199,948 million in fiscal 2003 and ¥230,220 million in fiscal
2002, consisting primarily of capital expenditures. Capital
expenditures in fiscal 2004 totaled ¥318,730 million
(U.S.$3,065 million), mainly due to expanding production
capabilities in Japan and overseas, as well as to bolster
Canon’s R&D-related infrastructure. In November 2004,
Canon also entered into an agreement whereby certain assets
were deposited into an irrevocable trust to meet the debt
service requirements of 1.88% Japanese yen notes, 2.95%
Japanese yen notes, and 2.27% Japanese yen notes in the
aggregate amount of ¥25,000 million (U.S.$240 million).
Upon this agreement, Canon used cash aggregating to
¥26,637 million (U.S.$256 million).
41
As a result, free cash flow, or cash flow from operating
activities minus cash flow from investing activities, totaled
¥308,562 million (U.S.$2,967 million) for fiscal 2004 as
compared to ¥265,701 million for fiscal 2003.
Net cash used in financing activities totaled ¥102,268
million (U.S.$983 million) in fiscal 2004, mainly resulting from
Canon’s active efforts to repay loans toward the goal of
improving Canon’s financial position. The company also paid
dividends in fiscal 2004 of 65 yen (U.S.$ 0.63) per share,
which was an increase of 15 yen (U.S.$ 0.14) per share over
the prior year.
Canon seeks to meet its liquidity and capital requirements
principally with cash flow from operations and, to a lesser
extent, with short-term loans and long-term debt. Consistent
with this objective, Canon continued to reduce its reliance on
external funding for capital investments in favor of relying
upon internally generated cash flows. This approach is
supplemented with group-wide treasury and cash
management activities undertaken at the parent company
level. Canon believes that its working capital is sufficient for its
present requirements.
To the extent Canon relies on external funding for its
liquidity and capital requirements, it generally has access to
various funding sources, including issuance of additional share
capital, long-term debt or short-term loans. While Canon has
been able to obtain funding from its traditional 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 current portion of long-term
debt) amounted to ¥9,879 million (U.S.$95 million) at
December 31, 2004 compared to ¥39,136 million at
December 31, 2003. Long-term debt (excluding their current
portions) amounted to ¥28,651 million (U.S.$275 million) at
December 31, 2004 compared to ¥59,260 million at
December 31, 2003.
Canon’s long-term debt generally consists of secured or
partially-secured term loans from banks, bearing interest at
fixed rates and floating rates, as well as fixed rate-notes and
convertible debentures which Canon has issued in the
domestic market with original maturities of five to fifteen
years.
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 Rating 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.
42
As of January 14, 2005, Canon’s debt ratings are:
Moody’s: Aa2 (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.
Capital expenditure in fiscal 2004 amounted to ¥318,730
million (U.S.$3,065 million) compared with ¥210,038 million
in fiscal 2003 and ¥198,702 million in fiscal 2002. In fiscal
2004, capital expenditures were mainly used to expand
production capabilities in both domestic and overseas regions,
and to bolster the company’s R&D-related infrastructure. In
addition, Canon has been continually investing in tools and
dies for business machines, in which the amount invested is
generally the same each year. For fiscal 2005, Canon projects
its capital expenditures will be approximately ¥375,000 million
(U.S.$3,606 million). The capital expenditures include an
investment in new production plants and new facilities of
Canon.
Employer contributions to Canon’s worldwide defined
benefit pension plans were ¥31,018 million (U.S.$298 million)
in fiscal 2004, ¥29,944 million in fiscal 2003, ¥33,661 million
in fiscal 2002. During fiscal 2005, Canon expects to make cash
contributions of approximately ¥36,183 million (U.S.$348
million) to its defined benefit pension plans.
Capital expenditure
(Millions of yen)
300,000
0
3
7
8
1
3
,
4
7
6
7
0
2
,
2
0
7
8
9
1
,
8
3
0
0
1
2
,
6
8
9
0
7
1
,
0
00
01
02
03
04
OFF-BALANCE SHEET ARRANGEMENTS
As part of its ongoing business, Canon does not participate in
transactions that generate relationships with unconsolidated
entities or financial partnerships, such as entities often referred
to as structured finance or special purpose entities, which
would have been established for the purpose of facilitating
off-balance sheet arrangements or other contractually narrow
or limited purposes.
Canon provides guarantees to third parties of bank loans
of its employees, affiliates and other companies. Canon would
have to perform under a guarantee, if the borrower defaults
on a payment within the contract periods of 1 year to 30 years
in the case of employees with housing loans, and of 1 year to
10 years in the case of affiliates and other companies. The
maximum amount of undiscounted payments Canon would
have had to make in the event of default by all borrowers was
¥43,634 million (U.S.$420 million) at December 31, 2004. The
carrying amounts of the liabilities recognized for Canon’s
obligations as a guarantor under those guarantees are
insignificant.
Working capital in fiscal 2004 increased ¥145,513 million
(U.S.$1,399 million), to ¥1,248,987 million (U.S.$12,009
million), compared with ¥1,103,474 million in fiscal 2003 and
¥903,134 million in fiscal 2002. This increase was primarily a
result of an increase in cash and cash equivalents and a
decrease in short-term loans. Canon believes its working
capital will be sufficient for its requirements for the
foreseeable future. Canon’s capital requirements are primarily
dependent on management’s business plans regarding the
levels and timing of capital expenditures and investments. The
working capital ratio (ratio of current assets to current
liabilities) for fiscal 2004 was 2.27, compared to 2.33 for fiscal
2003 and 2.13 for fiscal 2002.
Return on assets (Net income divided by the average of total
assets as of December 31, 2004, 2003 and 2002) increased to
10.1% in fiscal 2004, compared to 9.0% in fiscal 2003 and
6.6% in fiscal 2002. This increase was due mainly to an
increase in net income.
Return on stockholders’ equity increased to 16.8% in fiscal
2004, compared with 15.9% in fiscal 2003 and 12.5% in
fiscal 2002.
Debt to total assets ratio was 1.1%, 3.1% and 5.0% as of
December 31, 2004, 2003 and 2002, respectively. Canon had
short-term loans and long-term debt of ¥38,530 million as of
December 31, 2004, ¥98,396 million as of December 31,
2003 and ¥148,103 million as of December 31, 2002.
Working capital ratio
Return on stochholder's equity
(%)
2.33
2.27
2.13
1.91
1.71
2.5
0
15.9
16.8
12.2
12.5
10.7
16
0
00
01
02
03
04
00
01
02
03
04
43
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following summarizes Canon’s contractual obligations at December 31, 2004.
Contractual Obligations:
Long-Term Debt
Capital Lease Obligations
Other Long-Term Debt
Operating Leases Obligations
Purchase Commitments for
Property Plant and Equipment
Parts and Raw Materials
Total
Contractual Obligations:
Long-Term Debt
Capital Lease Obligations
Other Long-Term Debt
Operating Leases Obligations
Purchase Commitments for
Property Plant and Equipment
Parts and Raw Materials
Total
Total
Less than 1 year
1-3 years
3-5 years More than 5 years
Payments Due By Period
(Millions of yen)
8,585
29,945
49,532
39,286
55,666
183,014
4,144
5,735
12,714
39,286
55,666
117,545
3,782
12,665
15,858
—
—
32,305
635
11,544
10,671
—
—
22,850
24
1
10,289
—
—
10,314
Total
Less than 1 year
1-3 years
3-5 years More than 5 years
Payments Due By Period
(Thousands of U.S. dollars)
82,548
287,932
476,269
39,846
55,144
122,250
377,750
535,250
1,759,749
377,750
535,250
1,130,240
36,366
121,779
152,481
—
—
310,626
6,106
110,999
102,605
—
—
219,710
230
10
98,933
—
—
99,173
¥
¥
$
$
Canon provides warranties generally less than one year
against defects in materials and workmanship on most of its
consumer products. A liability for estimated product warranty
related cost is established at the time revenue is recognized
and is included in accrued expenses. Estimates for accrued
product warranty cost are primarily based on historical
experience, and are affected by ongoing product failure rates,
specific product class failures outside of the baseline
experience, material usage and service delivery costs incurred
in correcting a product failure. As of December 31, 2004, the
accrued product warranty cost amounted to ¥14,264 million
(U.S.$137 million).
At December 31, 2004, commitments outstanding for the
purchase of property, plant and equipment approximated
¥39,286 million ($378 million), and commitments outstanding
for the purchase of parts and raw materials approximated
¥55,666 million ($535 million), both for use in the ordinary
course of its business. Canon anticipates that funds needed to
fulfill these commitments will be generated internally through
operations.
44
On September 14, 2004, the Company and Toshiba
Corporation (“Toshiba”) entered into an agreement to jointly
establish SED Inc. for the development, production and
marketing of next-generation flat-screen SED (Surface-
conduction Electron-emitter Display) panels. The Company
and Toshiba initially contributed approximately ¥500 million
($5 million) in cash, each. Under the agreement, the Company
is further committed to contribute 50% of the financing
requirements for SED Inc. through the establishment of a
prototype production line.
Canon’s management believes that current financial
resources, cash generated from operations and Canon’s
potential capacity for additional debt and/or equity financing
will be sufficient to fund current and future capital
requirements.
Canon had R&D expenditures of ¥275,300 million
(U.S.$2,647 million) in fiscal 2004, ¥259,140 million in fiscal
2003 and ¥233,669 million in fiscal 2002. The ratio of R&D
expenditure to total net sales for fiscal 2004, 2003 and 2002
was 7.9%, 8.1% and 7.9%, respectively.
Canon seeks to produce new products that are protected
by patents and to set market product standards in order to
enhance its market position. The United States Patent and
Trademark Office (USPTO) announced that Canon obtained
the third-greatest number of private sector patents in 2004.
This achievement marks Canon’s thirteenth consecutive year
as one of the top three patent-receiving private-sector
organizations.
Canon aims to realize production procedures that
dramatically reduce the need for prototypes, in the design
process, through the effective utilization of 3D-CAD systems,
in order to accelerate product development and curtail costs.
RECENT DEVELOPMENTS
On October 15, 2004, the Company entered into an
agreement with Canon Sales Co., Inc. and Canotec Co., Inc.
(“Canotec”), joint equity shareholders of Niigata Canotec Co.,
Inc. (“Niigata Canotec”), to acquire all outstanding shares of
Niigata Canotec. Therefore, on January 1, 2005, Niigata
Canotec became a wholly owned subsidiary of the Company
and changed its name to Canon Imaging System
Technologies’ Inc. By making Canon Imaging System
Technologies Inc. a wholly owned subsidiary of the Company,
Canon aims to raise the level of its technical capacity and
improve development efficiency by enabling closer
coordination each other.
On January 1, 2005, Canotec and FastNet, Inc. merged,
and changed its name to Canon Network Communications,
Inc. The purpose of the merger was to increase management
efficiency by consolidating the Canon Group’s network and
Internet service operations. Canon Network Communications,
Inc. aims to strengthen Information Technology Management
Services, dealing with all stages from the establishment of
comprehensive network systems to their operation and
management.
RESEARCH AND DEVELOPMENT, PATENTS AND
LICENSES
Canon is now in Phase II of its Excellent Global Corporation
Plan, which started in 2001 and will end in 2005. The
management plan aims to guide Canon to the No.1 position
worldwide in all core business areas, to build on its R&D
capabilities and to continually create new businesses and to
further strengthen its financial position.
With respect to its R&D goals, Canon formulated as part of
its management plan the “Canon Over IP” concept, through
which Canon intends to connect its digital products to the
Internet and lay the foundations for Internet-businesses for the
future. Canon envisions Canon products and systems
interconnected over networks, as well as a variety of Web
services that expand its business domains while creating new
value for customers.
Canon has R&D centers worldwide that closely collaborate
in their R&D activities. Some regional R&D centers conduct
basic research into technology, and others apply their
expertise to develop new products and businesses.
The Company’s R&D activities are conducted in the
following four organizations:
• Core Technology Development Headquarters (where
component engineering and base technology R&D, such
as optics technology, nanotechnology and production
engineering, is conducted)
• Leading-Edge Technology Development Headquarters
(where most advanced technology R&D aiming to create
new technological capabilities, is conducted)
• Platform Technology Development Headquarters (where
platform technology R&D, such as system Large Scale
Integration (LSI) chips, network technology and visual
information technology, is conducted)
• Device Technology Development Headquarters (where
key device R&D, such as for semiconductor devices, is
conducted)
R&D expenditure
(Millions of yen)
300,000
0
0
3
5
7
2
,
,
0
4
1
9
5
2
9
6
6
3
3
2
,
6
1
6
8
1
2
,
2
5
5
4
9
1
,
0
00
01
02
03
04
45
MARKET RISK EXPOSURE
Canon is exposed to market risks, including changes in foreign
exchange rates, interest rates and prices of marketable
securities and investments. In order to hedge the risks of
changes in foreign exchange rates and interest rates, Canon
uses derivative financial instruments.
Equity price risk
Canon holds marketable securities included in current assets
for short-term investments, which consists generally of highly-
liquid and low-risk instruments. Investments included in
noncurrent assets are held as long-term investments. Canon
does not hold marketable securities and investments for
trading purposes.
Maturities and fair values of such marketable securities
and investments were as follows at December 31, 2004.
Foreign exchange rate and interest rate risk
Canon operates internationally, exposing it to the risk of
changes in foreign currency exchange rates and interest rates.
Derivative financial instruments are comprised principally of
foreign exchange contracts and interest rate swaps utilized by
the Company and certain of its subsidiaries to reduce these
risks. Canon assesses foreign currency exchange rate risk and
interest rate risk by continually monitoring changes in these
exposures and by evaluating hedging opportunities. Canon
does not hold or issue derivative financial instruments for
trading purposes. Canon is also exposed to credit-related
losses in the event of non-performance by counterparties to
derivative financial instruments, but it is not expected that any
counterparties will fail to meet their obligations, because most
of the counterparties are internationally recognized financial
institutions and contracts are diversified across a number of
major financial institutions.
Available-for-sale securities
Due within one year
Due after one year through five years
Due after five years
Equity securities
Held-to-maturity securities
Millions of yen
Cost
Fair Value
¥
301
1,607
1,049
10,302
¥
13,259
341
2,191
1,047
26,950
30,529
Millions of yen
Cost
Fair Value
Thousands of U.S. dollars
$
Cost
2,895
15,452
10,086
99,058
$ 127,491
Fair Value
3,279
21,068
10,067
259,134
293,548
Thousands of U.S. dollars
Cost
Fair Value
206,346
Due after one year through five years
¥
21,460
21,460
$ 206,346
Canon’s international operations expose Canon to the risk
of changes in foreign currency exchange rates. Canon uses
foreign exchange contracts to manage certain foreign
currency exchange exposures principally from the exchange of
U.S. dollar and euro into Japanese yen. These contracts are
primarily used to hedge the foreign currency exposure of
forecasted intercompany sales and intercompany trade
receivables which are denominated in foreign currencies. In
accordance with Canon’s policy, a specific portion of foreign
currency exposure resulting from forecasted intercompany
sales are hedged using foreign exchange contracts which
principally mature within three months.
The following table provides information about Canon’s
major derivative financial instruments related to foreign
Forwards to sell foreign currencies:
Contract amounts
Estimated fair value
Forwards to buy foreign currencies:
Contract amounts
Estimated fair value
Forwards to sell foreign currencies:
Contract amounts
Estimated fair value
Forwards to buy foreign currencies:
Contract amounts
Estimated fair value
46
U.S.$
315,117
3,526
euro
237,851
(8,147)
Millions of yen
Total
584,208
(4,714)
Others
31,240
(93)
19,149
(136)
5,290
(220)
9,762
(1,075)
34,201
(1,431)
U.S.$
euro
Thousands of U.S. dollars
Total
Others
3,029,971
33,904
2,287,029
(78,337)
300,385
(894)
5,617,385
(45,327)
184,125
(1,308)
50,865
(2,115)
93,866
(10,337)
328,856
(13,760)
¥
¥
$
$
currency exchange transactions existing at December 31,
2004. All of the foreign exchange contracts described in the
following table have a contractual maturity date in 2005.
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
interest rate swaps when it is determined to be appropriate
based on market conditions. The interest rate swaps change
variable-rate debt obligations to the fixed-rate debt
obligations by primarily entering into pay-fixed, receive-
variable interest rate swaps.
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, 2003 and
2002 as the critical terms of the interest rate swaps match the
terms of the hedged debt obligations.
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 obligations, 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
LONG-TERM DEBT (including due within one year)
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
material for the years ended December 31, 2004, 2003 and
2002. The amounts of net gains or losses excluded from the
assessment of hedge effectiveness which are recorded in
other income (deductions) are net losses of ¥2,096 million
($20 million), ¥490 million and ¥668 million for the years
ended December 31, 2004, 2003 and 2002, respectively.
Canon has entered into certain foreign currency exchange
contracts to manage its foreign currency exposures. These
foreign 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
For Canon, 2005 marks the fifth and the final year of Phase II
of its Excellent Global Corporation Plan (2001-2005). Canon
will continue to move forward with several initiatives designed
to ensure that it meets its goals, including enhancements of
efficiencies in all areas of Canon’s operation, from R&D and
production processes to head-office administrative operations,
by simultaneously targeting improved productivity and the
elimination of waste. In the area of development, Canon will
target the further shortening of product development periods
and improvements in design quality. Canon will also continue
to strive to substantially reduce product development costs by
implementing digital trial production procedures that make it
unnecessary to create prototypes. As for production, Canon
will focus its energies on the in-house production of key
components and development of innovative high-efficiency
factory automation equipment to realize even greater cost
Japanese yen notes
Japanese yen convertible
debentures
Other long-term debt
Total
Weighted average
interest rates
2.46% ¥
Expected maturity date
Total
25,200
2005
5,200
2006
2007
2008
— 10,000 10,000
1.28%
2.38%
1,796
11,534
38,530
309
4,370
9,879
—
— 1,487
587
1,401
5,046
5,046 11,401 12,074
¥
LONG-TERM DEBT (including due within one year)
Japanese yen notes
Japanese yen convertible
debentures
Other long-term debt
Total
Weighted average
interest rates
2005
2.46% $ 242,308 50,000
Total
Expected maturity date
2006
2007
2008
— 96,154 96,154
1.28%
2.38%
2,971
17,269
110,903 42,019 48,520 13,471
— 14,298
5,643
$ 370,480 94,990 48,520 109,625 116,095
—
Note: All long-term debt is fixed rate except loans, principally from banks which include both fixed and floating rate debt.
(Millions of yen)
Thereafter
Estimated
Fair Value
— 26,559
—
25
25
6,634
11,427
44,620
2009
—
—
105
105
(Thousands of U.S. dollars)
2009
—
Thereafter
Estimated
Fair Value
— 255,375
—
1,010
1,010
— 63,788
109,875
429,038
240
240
47
reductions. With regard to marketing activities, in addition to
promoting marketing reforms through structural
reorganization and strengthening marketing channels, Canon
is also working to expand and strengthen its solutions business
and improve its hardware solutions offerings through greater
customization to better meet customer needs. Canon also
views the protection of the environment as an essential part of
its management activities and will continue to develop
environmentally-conscious products and introduce resource-
recycling systems while actively expanding its green
procurement and purchasing programs.
Business machines segment
Office imaging products
In the office imaging products segment, it has become more
important to provide added value in the form of networking,
integration, color printing, and high-speed models. Also, in
addition to the mid-level models for office market which
enjoys steady growth, Canon expects that the market will
expand into higher-end models and low-end multi-function
models. The market for color digital devices continued to
grow rapidly, and sales of monochrome digital multifunction
devices were stable, reflecting the market trend shifting from
single-function to multifunction.
To maintain and enhance a competitive edge and to meet
more sophisticated customer demands, Canon is strengthening
its marketing capabilities by reinforcing its hardware and
software product lineups and by improving functionality.
Canon strengthened the product lineups of its color digital
devices in addition to its existing full line of monochrome
machines and maintained its market share by executing
business strategies in line with the current market trend.
Manufacturing in the new Canon Suzhou facility in China
has been progressing satisfactorily. While competitors seek to
transfer manufacturing facilities to China, Canon regards its
manufacturing bases in Japan important as well, in order to
pursue total cost reduction by strengthening and reinforcing
of technology, through the collaboration of R&D division,
manufacturing division and quality management division.
Computer peripheral products
In the inkjet printer market, Canon expects a continuation of
declines in market prices, a shift from single-function printers
to multi-function printers, and an expanding size of the digital
photo market. To manage these trends, Canon has newly
established the PIXMA, brand name for its inkjet single-
function printers/multi-function printers worldwide (other
than Japan in which already introduced as PIXUS brand) with
new functions and technologies.
Canon’s laser beam printer business has a strong position
in the market. In the monochrome laser beam printer market,
Canon expects that the transition to a low price segment will
expand sales in the consumer market and in the emerging
markets. In the color laser beam printer market, Canon
expects continued strong growth in demand. In general,
competition will become more intense as competitors
implement aggressive price strategies in order to establish
themselves as market leaders. Canon seeks to remain
competitive by developing technologies that can be deployed
in a timely fashion to produce innovative products in all
segments. Canon is also working to lower costs by
automating production of consumables and to secure
procurement of essential parts through internal sourcing.
Canon expects that the size of the scanner market will
continue to contract, but Canon has increased its share in the
market with the new CanonScanLiDE series introduced in
fiscal 2003.
The size of the worldwide facsimile market has remained
stable, as expansion in Asia, mainly China, has offset declines
in other regions. Due to price declines for inkjet multi-function
printers with facsimile function, prices are also declining for
stand-alone machines.
Business information products
With regard to personal computers, demand from corporate
clients on the Japanese market held steady, but a decline in
sales was caused by our change in marketing strategy from
selling single products to a solutions business involving the
proposal of unique combinations of various products. This
trend is expected to continue in fiscal 2005.
Cameras segment
The entire digital camera market continues to expand.
Although in Japan and USA, it has started showing slow
growing curve, the emerging market, especially China and
Eastern Europe, have shown steep growth. In addition, the
emergence of new photo imaging systems, such as PC free
direct printing system, expands the digital imaging possibilities
through networking connectivity, along with the
improvement of the user-friendly image processing interface
and software.
Canon expects the market for compact digital cameras
will expand in the intermediate term. In general, declines in
prices and intense competition are causing decrease in
profitability in the industry.
The compact photo printer market is developing rapidly.
Canon expects that the ratio of Compact Photo printers that
is attached to digital cameras will reach around 30% within a
few years, and Canon will take an initiative to lead the
expansion of the market.
Canon played a major role in the rapid expansion of the
digital single lens reflex(SLR) market in fiscal 2004. The market
size almost tripled from fiscal 2003, easily taking over the
majority of the SLR market from the film cameras. With the
introduction of the new models, Canon is determined to stay
atop of the expanding market in fiscal 2005.
While industry enjoy many positive impact to motivate the
industry’s growth, as a nature of the Digital Consumer Goods,
the market will face with price competition as well as
technological competition focused on image quality and high
48
performance. Though profit levels in the industry have recently
declined, Canon has succeeded in maintaining profitability by
carrying out production and procurement reforms.
Film camera market is suffering from this rapid digital shift
of the camera market. Canon anticipates the trend to continue,
both in the film SLR, and in the film compact category.
Canon expects to see growth in the interchangeable lens
market as a result of the rapid market penetration of digital
single lens reflex cameras. In response to the rapid shift of the
single lens reflex camera market from film to digital, Canon
began to introduce interchangeable lenses exclusively for
digital single lens reflex cameras in the last half of fiscal 2003,
and so far has introduced four models in this market. Canon
seeks to expand its sales and share by introducing products
especially made for popular class digital single lens reflex
cameras.
For video camcorders, analog camcorder sales has been
further replaced by digital sales in the fiscal 2004 worldwide
market, including the most significant transition occurring in
United States, where the speed of transition used to be
moderate. At the same time, while Mini DV (Mini Digital
Video) is currently the main recording media, camcorders with
new media such as DVD (Digital Versatile Drive), SD (Secure
Digital) memory card, HDD (Hard Disk Drive), and new
recording format such as HDV are starting to emerge. Canon
expects that Mini DV (Mini Digital Video) will remain the
mainstream of format while the emerging new media will
drive new expansion of the entire camcorder market. Canon
will seek to continue sales growth with a stronger product
lineup for the Mini DV market, while keeping investment on
R&D to follow this trend in the market.
Canon expects that the market for liquid crystal business
will continue to grow by about 30% per year on a unit basis,
while market prices will continue to decline, resulting in a
moderate growth in monetary basis. Canon introduced to the
market in fiscal 2004 the reflective liquid crystals (LCOS (Liquid
Crystal on Silicon)) type projector, the SX50 that was
developed independently by Canon. Canon will expand its
business with products that will be distinguished by high
brightness, high resolution, and high picture quality and that
will be easy to use (stress-free); all achieved using its advanced
optical technologies.
Optical and other products segment
Within the semiconductor-production equipment market,
Canon expects that the pace of new orders will likely slow
somewhat in fiscal 2005, as semiconductor manufacturers
grow more cautious in their capital investment spending. In
general, the trend toward high resolution and higher speed
equipment will likely to continue in the semiconductor
industry. In order to manage theses trends, Canon introduced
FPA-6000AS4 Stepper, the fastest ArF Stepper which also has
the highest NA (0.85) and an ultra-low aberration lens system.
With recommended illumination, the FPA-6000AS4 Stepper
will be used for the most advanced IC mass-production.
For fiscal 2004, sales of aligners for the production of
LCDs realized notable growth as the PC monitor industry
continued to shift from CRT to LCD displays, and the LCD
television market continued to expand. In the LCD production
mask aligner market, demand is expected to decline gradually
as the trend toward increased capital investment tapers off.
Canon expects the overall market size for TV broadcasting
lenses to remain relatively stable in the long run. Since fiscal
2002, the market has expanded slightly, recovering from a
slump after 9/11 and benefiting from a trend digitalization of
broadcast equipment. The gradual increase in the TV lens
market in part reflected studio equipment replacement by
major TV stations in Japan, and outside broadcast vehicle
equipment replacement in the United States. In coming years,
Canon anticipates local station equipment replacement in
Japan and studio equipment replacement in the United States.
Equipment replacement in Europe, China and other Asian
nations will likely follow. China, with the 2008 Olympics in
Beijing, is an attractive market for Canon’s 100x television
broadcasting zoom lens. Though Canon already has a major
market share worldwide for this class of lens, Canon will
continue to strengthen its position in this market.
Forward looking statements
The foregoing discussion and other disclosure in this report
contains forward-looking statements that reflect
management’s current views with respect to certain future
events and financial performance. Actual results may differ
materially from those projected or implied in the forward-
looking statements. Further, certain forward-looking
statements are based upon assumptions of future events that
may not prove to be accurate. The following important factors
could cause actual results to differ materially from those
projected or implied in any forward-looking statements:
exchange rate fluctuations; the uncertainty of Canon’s ability
to implement its plans to localize production and other
measures to reduce the impact of exchange rate fluctuations;
uncertainty as to economic conditions, in Canon’s major
markets; uncertainty of continued demand for Canon’s high-
value-added products; uncertainty as to the recovery of
computer and related markets; uncertainty of recovery in
demand for Canon’s semiconductor production equipment;
Canon’s ability to continue to develop products and to market
products that incorporate new technology on a timely basis,
are competitively priced and achieve market acceptance; the
possibility of losses resulting from foreign currency
transactions designed to reduce financial risks from changes
in foreign exchange rates; and inventory risk due to shifts in
market demand.
49
TEN-YEAR FINANCIAL SUMMARY
(Millions of yen except per share amounts)
Net sales:
Domestic
Overseas
Total
Percentage of
previous year
Net income
Percentage of sales
Advertising
Research and development
Depreciation of property, plant and equipment
Capital expenditure
Long-term debt, excluding current installments
Stockholders’ equity
Total assets
Per share data:
Income before cumulative effect of change
in accounting principle:
Basic
Diluted
Net income:
Basic
Diluted
Cash dividends declared
Stock price:
High
Low
2004
2003
2002
2001
¥
849,734
2,618,119
3,467,853
801,400
2,396,672
3,198,072
732,551
2,207,577
2,940,128
827,288
2,080,285
2,907,573
108.4%
343,344
9.9%
111,770
275,300
174,397
318,730
108.8
101.1
107.8
275,730
8.6
100,278
259,140
168,636
210,038
190,737
6.5
71,725
233,669
158,469
198,702
167,561
5.8
66,837
218,616
147,286
207,674
28,651
2,209,896
3,587,021
59,260
1,865,545
3,182,148
81,349
1,591,950
2,942,706
95,526
1,458,476
2,844,756
387.80
386.78
387.80
386.78
65.00
5,820
4,910
313.81
310.75
313.81
310.75
50.00
6,210
3,910
217.56
214.80
217.56
214.80
30.00
5,250
3,620
187.07
184.55
191.29
188.70
25.00
5,330
3,150
Average number of common shares in thousands
Number of employees
885,365
108,257
878,649
102,567
876,716
97,802
875,960
93,620
Common stock price range (Tokyo stock exchange)
(Yen)
6,500
6,000
5,500
5,000
4,500
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
50
95 96 97 98 99 00 01 02 03 04
2000
1999
1998
1997
1996
1995
(Thousands of U.S. dollars
except per share amounts)
2004
779,366
1,917,054
2,696,420
718,513
1,812,383
2,530,896
725,063
2,011,021
2,736,084
811,455
1,858,079
2,669,534
784,917
1,687,920
2,472,837
677,692
1,408,186
2,085,878
$ 8,170,519
25,174,221
33,344,740
106.5
134,088
5.0
67,840
194,552
144,043
170,986
92.5
70,234
2.8
67,544
177,922
155,682
200,386
102.5
108.0
109,569
4.0
76,911
176,967
159,888
221,401
118,813
4.5
75,800
170,793
137,777
219,779
118.6
94,177
3.8
68,354
150,085
117,263
176,357
112.0
55,036
2.6
53,033
125,253
104,474
123,560
142,925
1,298,914
2,832,125
165,277
1,202,003
2,587,532
180,320
1,155,520
2,728,329
226,889
1,109,511
2,872,779
192,254
1,007,434
2,644,452
298,055
880,150
2,506,152
153.66
151.51
153.66
151.51
21.00
5,620
3,400
80.66
79.50
80.66
79.50
17.00
4,200
2,170
126.10
123.93
126.10
123.93
17.00
3,400
1,930
137.73
134.60
137.73
134.60
17.00
3,820
2,280
111.29
106.96
111.29
106.96
15.00
2,630
1,780
65.96
62.73
65.96
62.73
13.00
1,940
1,230
872,606
86,673
870,699
81,009
868,916
79,799
862,664
78,767
846,224
75,628
834,329
72,280
108.4
3,301,385
9.9
1,074,712
2,647,115
1,676,894
3,064,712
275,490
21,249,000
34,490,587
3.73
3.72
3.73
3.72
0.63
55.96
47.21
Notes: U.S. dollar amounts are translated from yen at the rate of U.S.$1 = ¥104,
the approximate exchange rate on the Tokyo Foreign Exchange Market as
of December 30, 2004.
51
CANON INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2004 and 2003
ASSETS
Current assets:
Cash and cash equivalents
Marketable securities (note 4)
Trade receivables, net (note 5)
Inventories (note 6)
Prepaid expenses and other current assets (notes 8, 10 and 13)
Total current assets
Noncurrent receivables (note 19)
Investments (notes 4 and 10)
Property, plant and equipment, net (notes 7, 8 and 10)
Other assets (notes 8, 9, 12 and 13)
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Short-term loans and current portion of long-term debt (note 10)
Trade payables (note 11)
Income taxes (note 13)
Accrued expenses (note 19)
Other current liabilities (note 13)
Total current liabilities
Long-term debt, excluding current installments (note 10)
Accrued pension and severance cost (note 12)
Other noncurrent liabilities (note 13)
Total liabilities
Minority interests
Commitments and contingent liabilities (note 19)
Stockholders’ equity:
Common stock
Authorized 2,000,000,000 shares;
issued 887,977,251 shares in 2004
and 881,338,645 shares in 2003 (note 14)
Additional paid-in capital (note 14)
Legal reserve (note 15)
Retained earnings (note 15)
Accumulated other comprehensive income (loss) (note 16)
Treasury stock, at cost 1,120,867 shares in 2004 and
1,606,513 shares in 2003
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes to consolidated financial statements.
Millions of yen
Thousands of
U.S. dollars (note 2)
2004
2003
2004
¥
887,774
1,554
602,790
489,128
250,906
2,232,152
14,567
97,461
961,714
281,127
¥ 3,587,021
¥
9,879
465,396
105,565
205,296
197,029
983,165
28,651
132,522
45,993
1,190,331
186,794
690,298
1,324
539,006
444,244
255,905
1,930,777
16,543
78,912
846,433
309,483
3,182,148
39,136
391,181
83,064
193,657
120,265
827,303
59,260
238,001
30,843
1,155,407
161,196
$
8,536,288
14,942
5,796,058
4,703,154
2,412,558
21,463,000
140,067
937,125
9,247,250
2,703,145
$ 34,490,587
$
94,990
4,474,962
1,015,048
1,974,000
1,894,510
9,453,510
275,490
1,274,250
442,240
11,445,490
1,796,097
173,864
401,773
41,200
1,699,634
(101,312)
168,892
396,939
39,998
1,410,442
(143,275)
1,671,769
3,863,202
396,154
16,342,634
(974,154)
(5,263)
2,209,896
¥ 3,587,021
(7,451)
1,865,545
3,182,148
(50,605)
21,249,000
$ 34,490,587
52
CANON INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31, 2004, 2003 and 2002
Net sales
Cost of sales (notes 9, 12 and 19)
Gross profit
Selling, general and administrative expenses
(notes 1, 9, 12 and 19)
Operating profit
Other income (deductions):
Interest and dividend income
Interest expense
Other, net (notes 1, 4 and 18)
Income before income taxes and minority interests
Income taxes (note 13)
Income before minority interests
Minority interests
Net income
Net income per share (note 17)
Basic
Diluted
Cash dividends per share
See accompanying notes to consolidated financial statements.
2004
¥ 3,467,853
1,754,510
1,713,343
Millions of yen
2003
3,198,072
1,589,172
1,608,900
2002
2,940,128
1,540,097
1,400,031
Thousands of
U.S. dollars (note 2)
2004
$ 33,344,740
16,870,288
16,474,452
1,169,550
543,793
1,154,476
454,424
1,053,672
346,359
11,245,673
5,228,779
7,118
(2,756)
3,961
8,323
552,116
194,014
358,102
14,758
343,344
9,284
(4,627)
(10,911)
(6,254)
448,170
162,653
285,517
9,787
275,730
Yen
9,198
(6,788)
(18,752)
(16,342)
330,017
134,703
195,314
4,577
190,737
68,442
(26,500)
38,087
80,029
5,308,808
1,865,520
3,443,288
141,903
3,301,385
$
U.S. dollars (note 2)
387.80
386.78
65.00
313.81
310.75
50.00
217.56
214.80
30.00
$
3.73
3.72
0.63
¥
¥
53
CANON INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Year ended December 31, 2004, 2003 and 2002
Common stock:
Balance at beginning of year
Conversion of convertible debt
Balance at end of year
Additional paid-in capital:
Balance at beginning of year
Conversion of convertible debt and other
Stock exchanged under exchange offering
Capital transactions by consolidated subsidiaries
Balance at end of year
Legal reserve:
Balance at beginning of year
Transfers from retained earnings
Other
Balance at end of year
Retained earnings:
Balance at beginning of year
Net income for the year
Cash dividends
Transfers to legal reserve
Balance at end of year
Accumulated other comprehensive income (loss):
Balance at beginning of year
Other comprehensive income (loss) for the year,
net of tax
Balance at end of year
Treasury stock:
Millions of yen
Thousands of
U.S. dollars (note 2)
2004
2003
2002
2004
¥
168,892
4,972
173,864
396,939
4,966
114
(246)
401,773
39,998
1,202
—
41,200
167,242
1,650
168,892
394,088
1,649
—
1,202
396,939
38,803
1,195
—
39,998
165,287
1,955
167,242
392,456
1,953
1,052
(1,373)
394,088
38,330
477
(4)
38,803
1,410,442
343,344
(52,950)
(1,202)
1,699,634
1,164,445
275,730
(28,538)
(1,195)
1,410,442
997,848
190,737
(23,663)
(477)
1,164,445
$
1,623,962
47,807
1,671,769
3,816,721
47,750
1,096
(2,365)
3,863,202
384,596
11,558
—
396,154
13,561,942
3,301,385
(509,135)
(11,558)
16,342,634
(143,275)
(166,467)
(135,168)
(1,377,644)
41,963
(101,312)
23,192
(143,275)
(31,299)
(166,467)
403,490
(974,154)
Balance at beginning of year
Repurchase, net
Stock exchanged under exchange offering
Balance at end of year
Total stockholders’ equity
(7,451)
(503)
2,691
(5,263)
¥ 2,209,896
(6,161)
(1,290)
—
(7,451)
1,865,545
(277)
(5,884)
—
(6,161)
1,591,950
(71,643)
(4,837)
25,875
(50,605)
$ 21,249,000
¥
343,344
275,730
190,737
$
3,301,385
4,050
686
(396)
37,623
41,963
385,307
(15,277)
7,952
37
30,480
23,192
298,922
(15,864)
(1,732)
2,089
(15,792)
(31,299)
159,438
38,942
6,596
(3,808)
361,760
403,490
3,704,875
$
Disclosure of comprehensive income:
Net income for the year
Other comprehensive income (loss) for the year,
net of tax (note 16)
Foreign currency translation adjustments
Net unrealized gains and losses on securities
Net gains and losses on derivative instruments
Minimum pension liability adjustments
Other comprehensive income (loss)
Total comprehensive income for the year
¥
See accompanying notes to consolidated financial statements.
54
CANON INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31, 2004, 2003 and 2002
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization
Loss on disposal of property, plant and equipment
Deferred income taxes
Increase in trade receivables
(Increase) decrease in inventories
Increase in trade payables
Increase in income taxes
Increase in accrued expenses
Increase (decrease) in accrued pension and
severance cost
Other, net
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of property, plant and equipment
Proceeds from sale of property, plant and equipment
Purchases of available-for-sale securities
Purchases of held-to-maturity securities
Proceeds from sale of available-for-sale securities
Proceeds from sale of subsidiary common stock
Purchases of other investments
Other, net
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from issuance of long-term debt
Repayments of long-term debt
Decrease in short-term loans
Dividends paid
Purchases of treasury stock, net
Other, net
Net cash used in financing activities
Effect of exchange rate changes on cash and
cash equivalents
Net increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosure for cash flow information
(note 21):
Cash paid during the year for:
Interest
Income taxes
See accompanying notes to consolidated financial statements.
Millions of yen
Thousands of
U.S. dollars (note 2)
2004
2003
2002
2004
¥
343,344
275,730
190,737
$
3,301,385
192,692
24,597
9,060
(53,595)
(40,050)
65,873
21,689
8,196
(16,924)
6,647
561,529
(256,714)
7,431
(388)
(21,544)
9,735
9,731
(8,628)
7,410
(252,967)
2,115
(43,175)
(3,046)
(52,950)
(494)
(4,718)
(102,268)
(8,818)
197,476
690,298
887,774
183,604
12,639
(3,035)
(36,638)
(15,823)
1,129
3,441
37,131
29,445
(21,974)
465,649
(199,720)
9,354
(249)
—
6,544
—
(24,341)
8,464
(199,948)
4,132
(25,301)
(49,224)
(28,538)
(1,071)
(2,037)
(102,039)
5,365
169,027
521,271
690,298
165,260
13,137
(1,788)
(47,077)
14,029
64,040
14,935
12,901
20,993
1,783
448,950
(205,139)
11,971
(2,751)
—
1,099
—
(30,331)
(5,069)
(230,220)
10,609
(60,690)
(101,125)
(23,663)
(5,884)
(2,961)
(183,714)
(19,979)
15,037
506,234
521,271
2,981
164,450
4,570
162,247
6,890
121,556
¥
¥
1,852,808
236,510
87,115
(515,337)
(385,096)
633,394
208,548
78,808
(162,731)
63,913
5,399,317
(2,468,404)
71,452
(3,731)
(207,154)
93,606
93,567
(82,962)
71,251
(2,432,375)
20,337
(415,144)
(29,288)
(509,135)
(4,750)
(45,366)
(983,346)
(84,789)
1,898,807
6,637,481
8,536,288
28,663
1,581,250
$
$
55
CANON INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation and
Significant Accounting Policies
(a) Description of Business
Canon Inc. (the “Company”) and subsidiaries (collectively
“Canon”) is one of the world’s leading manufacturers in such
fields as office imaging products, computer peripherals,
business information products, cameras, and optical related
products. Office imaging products consist mainly of copying
machines and digital multifunction devices. Computer
peripherals consist mainly of laser beam and inkjet printers.
Business information products consist mainly of computer
information systems, micrographics and calculators. Cameras
consist mainly of single lens reflex (“SLR”) cameras, compact
cameras, digital cameras and video camcorders. Optical
related products include steppers and aligners used in
semiconductor chip production, projection aligners used in the
production of liquid crystal displays (“LCDs”), broadcasting
lenses and medical equipment. Canon’s consolidated net sales
for the years ended December 31, 2004, 2003 and 2002 were
distributed as follows: office imaging products 33%, 34% and
35%, computer peripherals 33%, 34% and 36%, business
information products 3%, 4% and 5%, cameras 22%, 20%
and 16%, and optical and other products 9%, 8% and 8%,
respectively.
Sales are made principally under the Canon brand name,
almost entirely through sales subsidiaries. These subsidiaries
are responsible for marketing and distribution, and primarily
sell to retail dealers in their geographical area. Approximately
73% of consolidated net sales for each of the years ended
December 31, 2004, 2003 and 2002 were generated outside
Japan, with 30%, 33% and 34% in the Americas, 31%, 30%
and 29% in Europe, and 12%, 10% and 10% in other areas,
respectively.
Canon sells laser beam printers on an OEM basis to
Hewlett-Packard Company; such sales constituted
approximately 21%, 20% and 21% of consolidated net sales
for the years ended December 31, 2004, 2003 and 2002,
respectively.
Canon’s manufacturing operations are conducted primarily
at 18 plants in Japan and 14 overseas plants which are located
in the United States, Germany, France, Taiwan, China,
Malaysia, Thailand and Vietnam.
(b) Basis of Presentation
The Company and its domestic subsidiaries maintain their
books of account in conformity with financial accounting
standards of Japan. Foreign subsidiaries maintain their books
of account in conformity with financial accounting standards
of the countries of their domicile.
Certain adjustments and reclassifications have been
incorporated in the accompanying consolidated financial
statements to conform with accounting principles generally
accepted in the United States of America. These adjustments
were not recorded in the statutory books of account.
(c) Principles of Consolidation
The consolidated financial statements include the accounts of
the Company, its majority owned subsidiaries and those
variable interest entities where the Company is the primary
beneficiary under FASB Interpretation No. 46 (revised
December 2003) (“FIN 46R”), “Consolidation of Variable
Interest Entities.” All significant intercompany balances and
transactions have been eliminated.
(d) Use of Estimates
The preparation of the consolidated financial statements in
conformity with accounting principles generally accepted in
the United States of America requires management to make
estimates and assumptions that affect the reported amount of
assets and liabilities and the disclosure of contingent assets
and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and
expenses during the period. Significant estimates and
assumptions are reflected in valuation and disclosure of
revenue recognition, allowance for doubtful receivables,
valuation of inventories, environmental liabilities, deferred tax
assets and employee retirement and severance benefit plans.
Actual results could differ materially from those estimates.
(e) Cash Equivalents
All highly liquid investments acquired with an original maturity
of three months or less are considered to be cash equivalents.
(f) Translation of Foreign Currencies
Assets and liabilities of the Company’s subsidiaries located
outside Japan with functional currencies other than Japanese
yen are translated into Japanese yen at the rates of exchange
in effect at the balance sheet date. Income and expense items
are translated at the average exchange rates prevailing during
the year. Gains and losses resulting from translation of
financial statements are excluded from earnings and are
reported in other comprehensive income (loss).
Gains and losses resulting from foreign currency
transactions, including foreign exchange contracts, and
translation of assets and liabilities denominated in foreign
currencies are included in other income (deductions). Foreign
currency exchange losses were ¥17,800 million ($171,154
thousand), ¥20,311 million and ¥23,468 million for the years
ended December 31, 2004, 2003 and 2002, respectively.
(g) Marketable Securities and Investments
Canon classifies investments in debt and marketable equity
securities as available-for-sale, or held-to-maturity securities.
Canon does not hold any trading securities which are bought
56
and held primarily for the purpose of sale in the near term.
Available-for-sale securities are recorded at fair value.
Unrealized holding gains and losses, net of the related tax
effect, are reported as a separate component of other
comprehensive income (loss) until realized. Held-to-maturity
securities are recorded at amortized cost, adjusted for the
amortization or accretion of premiums or discounts.
Available-for-sale and held-to-maturity securities are
regularly reviewed for other-than-temporary declines in
carrying value based on criteria that include the length of time
and the extent to which the market value has been less than
cost, the financial condition and near-term prospects of the
issuer and Canon’s intent and ability to retain the investment
for a period of time sufficient to allow for any anticipated
recovery in market value. When such a decline exists, Canon
recognizes an impairment loss to the extent by which the cost
basis of the investment exceeds the fair value of the
investment. Fair value is determined based on quoted market
prices, projected discounted cash flows or other valuation
techniques as appropriate.
Realized gain and losses are determined on the average
cost method and reflected in earnings.
Other securities are stated at cost and reviewed
periodically for impairment.
(h) Allowance for Doubtful Receivables
Allowance for doubtful trade and finance receivables is
maintained for all customers based on a combination of
factors, including aging analysis, macroeconomic conditions,
significant one-time events, and historical experience. An
additional reserve for individual accounts is recorded when
Canon becomes aware of a customer’s inability to meet its
financial obligations, such as in the case of bankruptcy filings.
If circumstances related to customers change, estimates of the
recoverability of receivables would be further adjusted. When
all collection options are exhausted including legal recourse,
the accounts or portions thereof are deemed to be
uncollectible and charged against the allowance.
(i) Inventories
Inventories are stated at the lower of cost or market value.
Cost is determined principally by the average method for
domestic inventories and the first-in, first-out method for
overseas inventories.
(j) Investments in Affiliated Companies
Investments in 20% to 50% owned affiliates in which Canon
has the ability to exercise significant influence over their
operating and financial policies are accounted for by the
equity method.
(k) Impairment of Long-Lived Assets
Long-lived assets, such as property, plant and equipment, and
acquired intangibles subject to amortization, are reviewed for
impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of the asset to estimated
undiscounted future cash flows expected to be generated by the
asset. If the carrying amount of the asset exceeds its estimated
future cash flows, an impairment charge is recognized by the
amount by which the carrying amount of the asset exceeds the
fair value of the asset. Assets to be disposed of by sale are
reported at the lower of the carrying amount or fair value less
costs to sell, and are no longer depreciated.
(l) Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is
calculated principally by the declining-balance method, except for
certain assets which are depreciated by the straight-line method
over the estimated useful lives of the assets. The depreciation
period ranges from 3 years to 60 years for buildings and 2 years
to 20 years for machinery and equipment.
Assets leased to others under operating leases are stated at
cost and depreciated by the straight-line method over the period
ranging from 2 years to 5 years.
(m) Goodwill and Other Intangible Assets
Goodwill and intangible assets with indefinite useful lives are not
amortized, but instead tested for impairment at least annually.
Intangible assets with finite useful lives, consisting primarily of
software and license fees, are amortized using the straight-line
method over the estimated useful lives, which range from 3 years
to 5 years for software and 5 years to 10 years for license fees.
Certain costs incurred in connection with developing or obtaining
internal use software are capitalized. These costs consist of
payments made to third parties and the salaries of employees
working on such software development. Costs incurred in
connection with developing internal use software are capitalized
at the application development stage. In addition, Canon develops
or obtains certain software to be sold where related costs are
capitalized after establishment of technological feasibility.
(n) Environmental Liabilities
Liabilities for environmental remediation and other
environmental costs are accrued when environmental
assessments or remedial efforts are probable and the costs can
be reasonably estimated. Such liabilities are adjusted as further
information develops or circumstances change. Costs of future
obligations are not discounted to their present values.
(o) Income Taxes
Deferred tax assets and liabilities are recognized for the estimated
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax
57
CANON INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
Canon records a valuation allowance to reduce the deferred
tax assets to the amount that is more likely than not realizable.
(p) Issuance of Stock by Subsidiaries and
Equity Investees
The change in the Company’s proportionate share of a
subsidiary’s or equity investee’s equity resulting from the issuance
of stock by the subsidiary or equity investee is accounted for as an
equity transaction.
(q) Net Income per Share
Basic net income per share is computed by dividing net income by
the weighted-average number of common shares outstanding
during each year. Diluted net income per share includes the effect
from potential issuance of common stock based on the
assumption that all convertible debentures were converted into
common stock.
(r) Revenue Recognition
Canon generates revenue principally through the sale of
consumer products, equipment, supplies, and related services
under separate contractual arrangements. Canon recognizes
revenue when persuasive evidence of an arrangement exists,
delivery has occurred and title and risk of loss have been
transferred to the customer, the sales price is fixed or
determinable, and collectibility is probable.
For arrangements with multiple elements, which may include
any combination of equipment, installation and maintenance,
Canon allocates revenue to each element based on its relative fair
value if such element meets the criteria for treatment as a separate
unit of accounting as prescribed in the Emerging Issues Task Force
Issue No. 00-21 (“EITF 00-21”), “Revenue Arrangements with
Multiple Deliverables.” Otherwise, revenue is deferred until the
undelivered elements are fulfilled as a single unit of accounting.
Revenue from sales of consumer products including office
imaging products, computer peripherals, business information
products and cameras is recognized upon shipment or delivery,
depending upon when title and risk of loss transfer to the
customer.
Revenue from sales of optical equipment such as steppers and
aligners sold with customer acceptance provisions related to their
functionality is recognized when the equipment is installed at the
customer site and the specific criteria of the equipment
functionality are successfully tested and demonstrated by Canon.
Service revenue is derived primarily from maintenance contracts
on equipment sold to customers and is recognized over the term
of the contract.
Most office imaging products are sold with service
maintenance contracts for which the customer typically pays a
base service fee plus a variable amount based on usage. Revenue
from these service maintenance contracts are recognized as
services are provided.
Revenues from the sale of equipment under sales-type leases
are recognized at the inception of the lease. Income on sales-type
leases and direct-financing leases is recognized over the life of
each respective lease using the interest method. Leases not
qualifying as sales-type lease or direct-financing lease are
accounted for as operating leases and related revenue is
recognized over the lease term.
Canon records estimated reductions to sales at the time of
sale for sales incentive programs including product discounts,
customer promotions and volume-based rebates. Estimated
reductions in sales are based upon historical trends and other
known factors at the time of sale. In addition, Canon provides
price protection to certain resellers of its products, and records
reductions to sales for the estimated impact of price protection
obligations when announced.
A liability for the estimated product warranty cost is recorded
at the time revenue is recognized and is included in accrued
expenses. Estimates for accrued product warranty cost are based
on historical experience, and are affected by ongoing product
failure rates, specific product class failures outside of the baseline
experience, material usage and service delivery costs incurred in
correcting a product failure.
(s) Research and Development Costs
Research and development costs are expensed as incurred.
Research and development expenses were ¥275,300 million
($2,647,115 thousand), ¥259,140 million and ¥233,669 million
for the years ended December 31, 2004, 2003 and 2002,
respectively.
(t) Advertising Costs
Advertising costs are expensed as incurred. Advertising expenses
were ¥111,770 million ($1,074,712 thousand), ¥100,278 million
and ¥71,725 million for the years ended December 31, 2004,
2003 and 2002, respectively.
(u) Shipping and Handling Costs
Shipping and handling costs totaled ¥46,953 million ($451,471
thousand), ¥40,660 million and ¥39,170 million for the years
ended December 31, 2004, 2003 and 2002, respectively, and are
included in selling, general and administrative expenses in the
consolidated statements of income.
(v) Derivative Financial Instruments
All derivatives are recognized at fair value and are included in
prepaid expenses and other current assets, or other current
liabilities on the consolidated balance sheets. On the date the
derivative contract is entered into, Canon designates the derivative
58
Canon’s consolidated results of operations and financial position.
In November 2004, the FASB issued SFAS No. 151, “Inventory
Costs – an amendment of ARB No. 43, Chapter 4” (“SFAS 151”).
SFAS 151 amends the guidance in ARB No. 43, Chapter 4,
“Inventory Pricing,” to clarify the accounting for abnormal
amounts of idle facility expense, freight, handling costs, and
wasted material (spoilage). Among other provisions, the new rule
requires that items such as idle facility expense, excessive spoilage,
double freight, and rehandling costs be recognized as current-
period charges regardless of whether they meet the criterion of
“so abnormal” as stated in ARB No. 43. Additionally, SFAS 151
requires that the allocation of fixed production overheads to the
costs of conversion be based on the normal capacity of the
production facilities. SFAS 151 is effective for fiscal years
beginning after June 15, 2005 and is required to be adopted by
Canon in the first quarter beginning January 1, 2006. Canon is
currently evaluating the effect that the adoption of SFAS 151 will
have on its consolidated results of operations and financial
condition but does not expect SFAS 151 to have a material impact.
In December 2004, the FASB issued SFAS No. 153,
“Exchanges of Nonmonetary Assets – an amendment of APB
Opinion No. 29” (“SFAS 153”). SFAS 153 eliminates the exception
from fair value measurement for nonmonetary exchanges of
similar productive assets in paragraph 21(b) of APB Opinion No.
29, “Accounting for Nonmonetary Transactions,” and replaces it
with an exception for exchanges that do not have commercial
substance. SFAS 153 specifies that a nonmonetary exchange has
commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange. SFAS
153 is effective for the fiscal periods beginning after June 15,
2005 and is required to be adopted by Canon in the first quarter
beginning January 1, 2006. Canon is currently evaluating the
effect that the adoption of SFAS 153 will have on its consolidated
results of operations and financial condition but does not expect it
to have a material impact.
(y) Reclassification
Certain reclassifications have been made to the prior years’
consolidated financial statements to conform with the
presentation used for the year ended December 31, 2004.
as either a hedge of the fair value of a recognized asset or liability
or of an unrecognized firm commitment (“fair value” hedge), or a
hedge of a forecasted transaction or the variability of cash flows
to be received or paid related to a recognized asset or liability
(“cash flow” hedge). Canon formally documents all relationships
between hedging instruments and hedged items, as well as its
risk-management objective and strategy for undertaking various
hedge transactions. Canon also formally assesses, both at the
hedge’s inception and on an ongoing basis, whether the
derivatives that are used in hedging transactions are highly
effective in offsetting changes in fair values or cash flows of
hedged items. When it is determined that a derivative is not highly
effective as a hedge or that it has ceased to be a highly effective
hedge, Canon discontinues hedge accounting prospectively.
Changes in the fair value of a derivative that is designated and
qualifies as a fair-value hedge, along with the loss or gain on the
hedged asset or liability or unrecognized firm commitment of the
hedged item that is attributable to the hedged risk, are recorded
in earnings. Changes in the fair value of a derivative that is
designated and qualifies as a cash-flow hedge are recorded in
other comprehensive income (loss), until earnings are affected by
the variability in cash flows of the hedged item. Gains and losses
from hedging ineffectiveness are included in other income
(deductions). Gains and losses excluded from the assessment of
hedge effectiveness (time value component) are included in other
income (deductions).
Canon also uses certain derivative financial instruments which
are not designated as hedges. Canon records these derivative
financial instruments on the consolidated balance sheets at fair
value. The changes in fair values are immediately recorded in
earnings.
(w) Guarantees
Canon recognizes, at the inception of a guarantee, a liability for
the fair value of the obligation it has undertaken in issuing
guarantees.
(x) New Accounting Standards
In March 2004, the Emerging Issues Task Force reached a
consensus on Issue No. 03-1 (“EITF 03-1”), “The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain
Investments.” EITF 03-1 provides guidance on other-than-
temporary impairment models for marketable debt and equity
securities accounted for under Statement of Financial Accounting
Standards (“SFAS”) No. 115, “Accounting for Certain Investments
in Debt and Equity Securities” (“SFAS 115”), and non-marketable
equity securities accounted for under the cost method. The EITF
developed a basic three-step model to evaluate whether an
investment is other-than-temporarily impaired. The Financial
Accounting Standards Board (“FASB”) issued FASB Staff Position
EITF 03-1-1 in September 2004 which delayed the effective date
of the recognition and measurement provisions of EITF 03-1. The
adoption of EITF 03-1 is not expected to have a material effect on
59
CANON INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(2) Basis of Financial Statement Translation
The consolidated financial statements presented herein are
expressed in yen and, solely for the convenience of the reader,
have been translated into United States dollars at the rate of
¥104 = U.S.$1, the approximate exchange rate prevailing on
the Tokyo Foreign Exchange Market on December 30, 2004.
This translation should not be construed as a representation
that the amounts shown could be converted into United
States dollars at such rate.
(3) Foreign Operations
Amounts included in the consolidated financial statements
relating to subsidiaries operating in foreign countries are
summarized as follows:
Total assets
Net assets
Net sales
Net income
2004
¥ 1,500,197
632,657
2,548,700
70,227
Millions of yen
2003
1,339,854
564,041
2,341,221
74,274
2002
1,238,800
518,927
2,151,062
58,883
Thousands of
U.S. dollars
2004
$ 14,424,971
6,083,240
24,506,731
675,260
(4) Marketable Securities and Investments
The cost, gross unrealized holding gains, gross unrealized
holding losses and fair value for available-for-sale securities
and held-to-maturity securities by major security type at
December 31, 2004 and 2003 were as follows:
December 31
(Millions of yen)
2004: Current:
Available-for-sale:
Corporate debt securities
Bank debt securities
Fund trusts
Equity securities
Noncurrent:
Available-for-sale:
Governmental bond securities
Corporate debt securities
Fund trusts
Equity securities
Held-to-maturity:
Corporate debt securities
60
Gross
Unrealized
Holding
Gains
Gross
Unrealized
Holding
Losses
—
—
40
100
140
26
19
574
16,628
17,247
—
17,247
—
—
—
4
4
25
—
12
76
113
—
113
Fair Value
138
71
132
1,213
1,554
537
75
2,626
25,737
28,975
21,460
50,435
¥
¥
¥
Cost
138
71
92
1,117
1,418
536
56
2,064
9,185
11,841
21,460
¥ 33,301
(Millions of yen)
2003: Current:
Available-for-sale:
Governmental bond securities
Corporate debt securities
Bank debt securities
Fund trusts
Equity securities
Noncurrent:
Available-for-sale:
Governmental bond securities
Corporate debt securities
Fund trusts
Equity securities
(Thousands of U.S. dollars)
2004: Current:
Available-for-sale:
Corporate debt securities
Bank debt securities
Fund trusts
Equity securities
Noncurrent:
Available-for-sale:
Governmental bond securities
Corporate debt securities
Fund trusts
Equity securities
Held-to-maturity:
Corporate debt securities
Gross
Unrealized
Holding
Gains
Gross
Unrealized
Holding
Losses
Cost
65
7
71
51
1,044
1,238
¥
¥
¥
243
5,141
2,047
6,525
¥ 13,956
Cost
$
1,327
683
885
10,740
$ 13,635
$
5,154
538
19,846
88,318
113,856
—
—
—
12
78
90
—
53
455
15,534
16,042
Gross
Unrealized
Holding
Gains
—
—
384
961
1,345
250
184
5,519
159,884
165,837
206,346
$ 320,202
—
165,837
4
—
—
—
—
4
5
—
—
204
209
Gross
Unrealized
Holding
Losses
—
—
—
38
38
241
—
115
731
1,087
—
1,087
Fair Value
61
7
71
63
1,122
1,324
238
5,194
2,502
21,855
29,789
Fair Value
1,327
683
1,269
11,663
14,942
5,163
722
25,250
247,471
278,606
206,346
484,952
61
CANON INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Maturities of debt securities and fund trust classified as
available-for-sale and held-to-maturity were as follows at
December 31, 2004:
Available-for-sale securities
Due within one year
Due after one year through five years
Due after five years
Held-to-maturity securities
Due after one year through five years
Millions of yen
Cost
301
1,607
1,049
2,957
Fair Value
341
2,191
1,047
3,579
Thousands of
U.S. dollars
Cost
2,895
15,452
10,086
28,433
Fair Value
3,279
21,068
10,067
34,414
$
$
Millions of yen
Cost
21,460
Fair Value
21,460
Thousands of
U.S. dollars
Cost
$ 206,346
Fair Value
206,346
¥
¥
¥
The gross realized gains for the year ended December 31,
2004 were ¥3,867 million ($37,183 thousand). The gross
realized gains for the years ended December 31, 2003 and
2002 and the gross realized losses for the years ended
December 31, 2004, 2003 and 2002 were not significant.
At December 31, 2004, substantially all of the available-
for-sale and held-to-maturity securities with unrealized losses
had been in a continuous unrealized loss position for less than
12 months.
Aggregate cost of non-marketable equity securities
accounted for under the cost method totaled ¥14,635 million
($140,721 thousand) and ¥18,253 million at December 31,
2004 and 2003, respectively. Investments with an aggregate
cost of ¥14,607 million ($140,452 thousand) were not
evaluated for impairment because (a) Canon did not estimate
the fair value of those investments as it was not practicable to
estimate the fair value of the investment and (b) Canon did
not identify any events or changes in circumstances that might
have had significant adverse effect on the fair value of those
investments.
Investments in affiliated companies accounted for by the
equity method amounted to ¥26,546 million ($255,250
thousand) and ¥24,806 million at December 31, 2004 and
2003, respectively. Canon’s share of the net earnings (losses)
in affiliated companies accounted for by the equity method,
included in other income (deductions), are earnings of ¥1,921
million ($18,471 thousand) for the year ended December 31,
2004 and losses of ¥1,124 million and ¥3,521 million for the
years ended December 31, 2003 and 2002, respectively.
(5) Trade Receivables
Trade receivables are summarized as follows:
December 31
Notes
Accounts
Less allowance for doubtful receivables
62
Millions of yen
2004
30,261
584,186
614,447
(11,657)
602,790
¥
¥
2003
28,880
524,549
553,429
(14,423)
539,006
Thousands of
U.S. dollars
$
2004
290,971
5,617,174
5,908,145
(112,087)
$ 5,796,058
(6) Inventories
Inventories comprised the following:
December 31
Finished goods
Work in process
Raw materials
(7) Property, Plant and Equipment
Property, plant and equipment are stated at cost less
accumulated depreciation and are summarized as follows:
December 31
Land
Buildings
Machinery and equipment
Construction in progress
Less accumulated depreciation
Millions of yen
2004
352,656
121,613
14,859
489,128
¥
¥
2003
305,414
124,410
14,420
444,244
Thousands of
U.S. dollars
2004
$ 3,390,923
1,169,356
142,875
$ 4,703,154
Millions of yen
2003
2004
177,953
182,330
766,398
824,969
990,638
1,053,121
29,627
74,599
2,135,019
1,964,616
(1,173,305) (1,118,183)
846,433
961,714
¥
¥
Thousands of
U.S. dollars
2004
$ 1,753,173
7,932,394
10,126,164
717,298
20,529,029
(11,281,779)
$ 9,247,250
(8) Finance Receivables and Operating Leases
Finance receivables represent financing leases which consist of
sales-type leases and direct-financing leases resulting from the
marketing of Canon’s and complementary third-party
products. These receivables typically have terms ranging from
1 to 6 years. The components of the finance receivables,
which are included in prepaid expenses and other current
assets, and other assets in the accompanying consolidated
balance sheets, are as follows:
December 31
Total minimum lease payments receivable
Unguaranteed residual values
Executory costs
Unearned income
Less allowance for doubtful receivables
Less amount due within one year
Millions of yen
2004
180,707
10,816
(2,533)
(20,880)
168,110
(6,068)
162,042
(61,187)
100,855
¥
¥
2003
197,684
10,295
(2,523)
(23,279)
182,177
(6,339)
175,838
(68,135)
107,703
Thousands of
U.S. dollars
2004
$ 1,737,567
104,000
(24,356)
(200,769)
1,616,442
(58,346)
1,558,096
(588,336)
969,760
$
63
CANON INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The cost of equipment leased to customers under
operating leases at December 31, 2004 and 2003 was
¥67,364 million ($647,731 thousand) and ¥78,712 million,
respectively. Accumulated depreciation on equipment under
operating leases at December 31, 2004 and 2003 was
¥52,493 million ($504,740 thousand) and ¥64,770 million,
respectively.
The following is a schedule by year of the future minimum
lease payments to be received under financing leases and non-
cancelable operating leases at December 31, 2004.
Year ending December 31
2005
2006
2007
2008
2009
Thereafter
Millions of yen
Thousands of U.S. dollars
Financing leases Operating leases
Financing leases Operating leases
¥
¥
70,921
55,771
33,718
15,571
4,523
203
180,707
2,447
1,296
670
253
82
8
4,756
$
681,933
536,260
324,212
149,721
43,490
1,951
$ 1,737,567
23,529
12,462
6,442
2,433
788
77
45,731
(9) Goodwill and Other Intangible Assets
Intangible assets acquired for the year ended December 31,
2004 totaled ¥25,234 million ($242,635 thousand), which are
subject to amortization and primarily consist of internal use
software of ¥19,523 million ($187,721 thousand) and license
fees of ¥5,072 million ($48,769 thousand). The weighted
average amortization period for internal use software and
license fees is approximately 4 years and 8 years, respectively.
The components of acquired intangible assets subject to
amortization included in other assets at December 31, 2004
and 2003 were as follows:
2004
2003
Gross Carrying
Amount
Accumulated
Amortization
Gross Carrying
Amount
Accumulated
Amortization
¥
¥
121,546
24,603
6,976
153,125
79,517
14,183
3,585
97,285
¥
¥
115,675
21,975
6,188
143,838
80,534
14,012
3,319
97,865
2004
Gross Carrying
Amount
Accumulated
Amortization
$ 1,168,712
236,567
67,077
$ 1,472,356
764,587
136,375
34,471
935,433
December 31
(Millions of yen)
Software
License fees
Other
Total
(Thousands of U.S. dollars)
Software
License fees
Other
Total
64
Aggregate amortization expense for the years ended
December 31, 2004, 2003 and 2002 was ¥18,295 million
($175,913 thousand), ¥12,438 million and ¥6,288 million,
respectively. Estimated amortization expense for the next five
years ending December 31 is ¥17,785 million ($171,010
thousand) in 2005, ¥14,528 million ($139,692 thousand) in
2006, ¥10,311 million ($99,144 thousand) in 2007, ¥6,804
million ($65,423 thousand) in 2008, and ¥3,751 million
($36,067 thousand) in 2009.
Intangible assets not subject to amortization other than
goodwill at December 31, 2004 and 2003 were not
significant.
The changes in the carrying amount of goodwill for the
years ended December 31, 2004 and 2003 were as follows:
Year ended December 31
Balance at beginning of year
Goodwill acquired during the year
Impairment losses
Recognition of acquired company’s tax benefits
Translation adjustments
Balance at end of year
Millions of yen
Thousands of
U.S. dollars
2004
22,067
3,156
(42)
(1,298)
350
24,233
¥
¥
2003
13,640
7,839
—
—
588
22,067
2004
212,183
30,346
(404)
(12,481)
3,366
233,010
$
$
During the year ended December 31, 2004, Canon
recognized ¥1,298 million ($12,481 thousand) of deferred tax
benefits relating to preexisting net operating tax losses of a
company acquired in 2003. In connection therewith, Canon
reduced the related goodwill by the same amount.
(10) Short-Term Loans and Long-Term Debt
Short-term loans consisting of bank borrowings at December
31, 2003 were ¥2,941 million. The weighted average interest
rate on short-term loans outstanding at December 31, 2003
was 2.10%.
Long-term debt consisted of the following:
December 31
Millions of yen
Thousands of
U.S. dollars
2004
2003
2004
Loans, principally from banks, maturing in installments through 2013;
bearing weighted average interest of 3.05% and 2.88% at December 31,
2004 and 2003, respectively, partially secured by mortgage of property,
plant and equipment
2.58% Japanese yen notes, due 2004
2.03% Japanese yen notes, due 2004
1.88% Japanese yen notes, due 2005
1.71% Japanese yen notes, due 2005
2.95% Japanese yen notes, due 2007
2.27% Japanese yen notes, due 2008
1.20% Japanese yen convertible debentures, due 2005
1.30% Japanese yen convertible debentures, due 2008
Capital lease obligations
Less amount due within one year
¥
¥
2,949
—
—
5,000
200
10,000
10,000
309
1,487
8,585
38,530
(9,879)
28,651
27,452
10,000
10,000
5,000
—
10,000
10,000
2,577
9,157
11,269
95,455
(36,195)
59,260
$
$
28,355
—
—
48,077
1,923
96,154
96,154
2,971
14,298
82,548
370,480
(94,990)
275,490
65
CANON INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The aggregate annual maturities of long-term debt
outstanding at December 31, 2004 were as follows:
Year ending December 31
Millions
of yen
Thousands of
U.S. dollars
2005
2006
2007
2008
2009
Thereafter
¥
¥
9,879
5,046
11,401
12,074
105
25
38,530
$
$
94,990
48,520
109,625
116,095
1,010
240
370,480
Certain property, plant and equipment with a net book
carrying value of ¥11,247 million ($108,144 thousand) at
December 31, 2004 was mortgaged to secure loans from
banks.
In November 2004, Canon entered into an agreement
whereby certain assets were deposited into an irrevocable trust
to meet the debt service requirements of the: 1.88% Japanese
yen notes; 2.95% Japanese yen notes; and 2.27% Japanese
yen notes in the aggregate amount of ¥25,000 million
($240,385 thousand). The assets contributed by Canon
consisted of certificates of deposit and debt securities with
carrying amounts of ¥5,072 million ($48,769 thousand) and
¥21,460 million ($206,346 thousand), respectively, at
December 31, 2004. Cash flows from such investments will be
used solely to satisfy the principal and interest obligations for
the debts. Accordingly, the certificates of deposit are included
in the consolidated balance sheet under the caption of prepaid
expenses and other current assets, and the debt securities are
included in the consolidated balance sheet under the caption
of investments.
Both short-term and long-term bank loans are made under
general agreements which provide that security and
guarantees for present and future indebtedness will be given
upon request of the bank, and that the bank shall have the
right to offset cash deposits against obligations that have
become due or, in the event of default, against all obligations
due to the bank. Long-term agreements with lenders other
than banks also generally provide that Canon must provide
additional security upon request of the lender.
The 1.20% Japanese yen convertible debentures due 2005
are convertible into approximately 206,000 shares of common
stock at a conversion price of ¥1,497.00 ($14.39) per share at
December 31, 2004.
The 1.30% Japanese yen convertible debentures due 2008
are convertible into approximately 993,000 shares of common
stock at a conversion price of ¥1,497.00 ($14.39) per share at
December 31, 2004. The debentures are redeemable at the
option of the Company between January 1, 2005 and
December 31, 2007 at declining premiums ranging from 3%
to 1%, and at par thereafter.
(11) Trade Payables
Trade payables are summarized as follows:
December 31
Notes
Accounts
Millions of yen
2004
51,081
414,315
465,396
¥
¥
2003
47,771
343,410
391,181
Thousands of
U.S. dollars
$
2004
491,164
3,983,798
$ 4,474,962
66
(12) Employee Retirement and Severance
Benefits
The Company and certain of its subsidiaries have contributory
and noncontributory defined benefit plans covering
substantially all employees after one year of service. Other
subsidiaries sponsor unfunded retirement and severance plans.
Benefits payable under the plans are based on employee
earnings and years of service.
The contributory plans in Japan mainly represent the
Employees’ Pension Fund plans (“EPFs”), composed of the
substitutional portions based on the pay-related part of the
old age pension benefits prescribed by the Welfare Pension
Insurance Law and the corporate portions based on
contributory defined benefit pension arrangements established
at the discretion of the Company and its subsidiaries. The
substitutional portions of the EPFs represent welfare pension
plans carried on behalf of the Japanese government. These
contributory and noncontributory plans are funded in
conformity with the funding requirements of applicable
Japanese governmental regulations.
In January 2003, the Emerging Issues Task Force reached a
final consensus on Issue No. 03-2 (“EITF 03-2”), “Accounting
for the Transfer to the Japanese Government of the
Substitutional Portion of Employee Pension Fund Liabilities,”
which addresses accounting for a transfer to the Japanese
government of a substitutional portion of an EPF. During the
year ended December 31, 2003, the Company and certain of
its domestic subsidiaries received approval from the
government for an exemption from the obligation to pay
benefits for future employee service related to the
substitutional portion. During the year ended December 31,
Year ended December 31
Service cost — benefits earned during the year
Interest cost on projected benefit obligation
Expected return on plan assets
Amortization of unrecognized net obligation at transition
Amortization of prior service cost
Recognized actuarial loss
Settlement loss resulting from plan termination
Settlement loss resulting from transfer of
substitutional portion of EPFs to the government
2004, the Company and certain of its domestic subsidiaries
received approval to separate the remaining substitutional
portion related to past service by their employees. During the
year ended December 31, 2004, the Company and certain of
its domestic subsidiaries also completed the transfer of the
substitutional portion of the benefit obligation and the related
government-specified portion of the plan assets which were
computed by the government, and were relieved of all related
obligations. Canon has accounted for the entire process at the
completion of the transfer to the government of the
substitutional portion of the benefit obligation and the related
plan assets as a single settlement transaction in accordance
with EITF 03-2. As a result, Canon recognized a settlement
loss of ¥69,651 million ($669,721 thousand) for the year
ended December 31, 2004, which is determined based on the
proportion of the projected benefit obligation settled to the
total projected benefit obligation immediately prior to the
separation. Canon also recognized a subsidy from the
government of ¥86,792 million ($834,538 thousand), which is
calculated as the difference between the obligation settled
and the assets transferred to the government. The net gain of
¥17,141 million ($164,817 thousand) is included in selling,
general and administrative expenses for the year ended
December 31, 2004.
Canon uses a measurement date of October 1 for the
majority of its plans.
Net periodic benefit cost for Canon’s employee retirement
and severance defined benefit plans for the years ended
December 31, 2004, 2003 and 2002 consisted of the
following components:
2004
26,571
19,108
(17,054)
344
(6,814)
12,505
2,784
69,651
107,095
¥
¥
Millions of yen
2003
29,024
20,806
(13,959)
344
(5,515)
15,807
—
—
46,507
2002
39,206
19,270
(14,523)
344
(3,246)
14,743
—
—
55,794
$
Thousands of
U.S. dollars
2004
255,490
183,731
(163,981)
3,308
(65,519)
120,241
26,769
669,721
$ 1,029,760
67
CANON INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Reconciliations of beginning and ending balances of the
benefit obligations and the fair value of the plan assets are as
follows:
December 31
Change in benefit obligations:
Benefit obligations at beginning of year
Service cost
Interest cost
Plan participants’ contributions
Amendments
Actuarial gain
Benefits paid
Settlement on plan termination
Transfer of substitutional portion of EPFs to the government
Foreign currency exchange rate changes
Other
Benefit obligations at end of year
Change in plan assets:
Fair value of plan assets at beginning of year
Actual return on plan assets
Employer contributions
Plan participants’ contributions
Benefit paid
Settlement on plan termination
Transfer of substitutional portion of EPFs to the government
Foreign currency exchange rate changes
Other
Fair value of plan assets at end of year
Funded status
Unrecognized actuarial loss
Unrecognized prior service cost
Unrecognized net transition obligation being recognized over 22 years
Net amount recognized
Amounts recognized in the consolidated balance sheets consist of:
Prepaid pension cost
Accrued pension and severance cost
Intangible assets
Accumulated other comprehensive income (loss)
Net amount recognized
The accumulated benefit obligation for all defined benefit
plans was as follows:
December 31
¥
¥
¥
¥
Millions of yen
Thousands of
U.S. dollars
2004
2003
2004
752,390
26,571
19,108
1,142
(2,781)
(5,728)
(14,143)
(6,482)
(191,784)
3,957
(38)
582,212
472,228
32,744
31,018
1,142
(14,143)
(2,274)
(104,992)
3,075
—
418,798
(163,414)
191,376
(102,427)
4,300
766,452
29,024
20,806
2,102
(52,749)
(3,398)
(12,484)
—
—
630
2,007
752,390
421,642
31,008
29,944
2,102
(12,484)
—
—
(20)
36
472,228
(280,162)
297,839
(107,360)
4,644
$ 7,234,519
255,490
183,731
10,981
(26,741)
(55,077)
(135,990)
(62,327)
(1,844,077)
38,048
(365)
5,598,192
4,540,654
314,846
298,250
10,981
(135,990)
(21,865)
(1,009,539)
29,567
—
4,026,904
(1,571,288)
1,840,154
(984,875)
41,346
(674,663)
30,212
(1,274,250)
548
568,827
(70,165)
(85,039)
3,142
(132,522)
57
59,158
2,515
(238,001)
86
150,361
$
$
(70,165)
(85,039)
$
(674,663)
Millions of yen
Thousands of
U.S. dollars
2004
2003
2004
Accumulated benefit obligation
¥
540,615
702,049
$ 5,198,221
68
The projected benefit obligations and the fair value of plan
assets for the pension plans with projected benefit obligations
in excess of plan assets, and the accumulated benefit
obligations and the fair value of plan assets for the pension
plans with accumulated benefit obligations in excess of plan
assets are as follows:
December 31
Plans with projected benefit obligations in excess of plan assets:
Projected benefit obligations
Fair value of plan assets
Plans with accumulated benefit obligations in excess of plan assets:
Accumulated benefit obligations
Fair value of plan assets
Millions of yen
Thousands of
U.S. dollars
2004
2003
2004
¥
577,022
411,918
512,216
386,921
752,390
472,228
697,711
466,970
$ 5,548,288
3,960,750
4,925,154
3,720,394
Assumptions
Weighted-average assumptions used to determine benefit
obligations are as follows:
December 31
Discount rate
Assumed rate of increase in
future compensation levels
2004
2003
2.7% 2.7%
3.0% 2.0%
Weighted-average assumptions used to determine net periodic
benefit cost are as follows:
Year ended December 31
2004
2003
2002
Discount rate
Assumed rate of increase in
future compensation levels
Expected long-term rate of
return on plan assets
2.7% 2.7% 2.7%
2.0% 2.0% 3.4%
3.6% 3.6% 3.5%
Canon determines the expected long-term rate of return
based on the expected long-term return of the various asset
categories in which it invests. Canon considers the current
expectations for future returns and the actual historical returns
of each plan asset category.
Plan assets
The weighted-average asset allocations of Canon’s benefit
plans at December 31, 2004 and 2003 and target asset
allocation by asset category are as follows:
December 31
Asset category:
Equity securities
Debt securities
Cash
Life insurance company
general accounts
Other
2004
2003 allocation
Target
43.0% 32.1% 41.2%
37.2% 27.4% 36.7%
1.7% 19.6% 0.3%
14.5% 19.0% 18.4%
3.6% 1.9% 3.4%
100.0% 100.0% 100.0%
Canon’s investment policies are designed to ensure adequate
plan assets are available to provide future payments of
pension benefits to eligible participants. Taking into account
the expected long-term rate of return on plan assets, Canon
formulates a “model” portfolio comprised of the optimal
combination of equity securities and debt securities. Plan
assets are invested in individual equity and debt securities
using the guidelines of the “model” portfolio in order to
produce a total return that will match the expected return on
a mid-term to long-term basis. Canon evaluates the gap
between expected return and actual return of invested plan
assets on an annual basis to determine if such differences
necessitate a revision in the formulation of the “model”
portfolio. Canon revises the “model” portfolio when and to
the extent considered necessary to achieve the expected long-
term rate of return on plan assets.
The plan’s equity securities include common stock of the
Company and certain of its subsidiaries in the amounts of
¥946 million ($9,096 thousand) and ¥796 million at December
31, 2004 and 2003, respectively.
69
CANON INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Contributions
Canon expects to contribute ¥36,183 million ($347,913
thousand) to its defined benefit plans for the year ending
December 31, 2005.
Estimated future benefit payments
The following benefit payments, which reflect expected future
service, as appropriate, are expected to be paid:
Year ending December 31
2005
2006
2007
2008
2009
2010 — 2014
Millions of yen
8,074
¥
9,235
10,552
12,118
13,410
86,720
$
Thousands of
U.S. dollars
77,635
88,798
101,462
116,519
128,942
833,846
(13) Income Taxes
Domestic and foreign components of income before income
taxes and minority interests, and the current and deferred
income tax expense (benefit) attributable to such income are
summarized as follows:
Year ended December 31
2004: Income before income taxes and minority interests
Income taxes:
Current
Deferred
2003: Income before income taxes and minority interests
Income taxes:
Current
Deferred
2002: Income before income taxes and minority interests
Income taxes:
Current
Deferred
2004: Income before income taxes and minority interests
Income taxes:
Current
Deferred
Japanese
447,864
162,679
(1,065)
161,614
Millions of yen
Foreign
104,252
22,275
10,125
32,400
Total
552,116
184,954
9,060
194,014
337,093
111,077
448,170
132,204
(5,828)
126,376
33,484
2,793
36,277
165,688
(3,035)
162,653
237,677
92,340
330,017
109,102
(7,212)
101,890
27,389
5,424
32,813
136,491
(1,788)
134,703
Thousands of U.S. dollars
Japanese
4,306,385
Foreign
1,002,423
Total
5,308,808
1,564,222
(10,241)
1,553,981
214,183
97,356
311,539
1,778,405
87,115
1,865,520
¥
¥
¥
¥
¥
¥
¥
¥
¥
$
$
$
70
The Company and its domestic subsidiaries are subject to a
number of income taxes, which, in the aggregate, indicate a
statutory income tax rate of approximately 42% for the years
ended December 31, 2004, 2003 and 2002.
Amendments to the Japanese tax regulations were
enacted on March 24, 2003. As a result of these
amendments, the statutory income tax rate will be reduced
from approximately 42% to 40% effective from the year
beginning January 1, 2005. Consequently, the statutory tax
rate utilized for deferred tax assets and liabilities expected to
Year ended December 31
Japanese statutory income tax rate
Increase (reduction) in income taxes resulting from:
Expenses not deductible for tax purposes
Tax benefits not recognized on operating losses of subsidiaries
Income of foreign subsidiaries taxed at lower than Japanese statutory tax rate
Tax credit for research and development expenses
Effect of enacted changes in tax laws and rates
Other
Effective income tax rate
be settled or realized subsequent to January 1, 2005 is
approximately 40%. The adjustments of deferred tax assets
and liabilities for this change in the tax rate amounted to
¥3,613 million and have been reflected in income taxes on the
consolidated statements of income for the year ended
December 31, 2003.
A reconciliation of the Japanese statutory income tax rate
and the effective income tax rate as a percentage of income
before income taxes and minority interests is as follows:
2004
42.0%
0.4
0.1
(2.1)
(4.0)
—
(1.3)
35.1%
2003
42.0%
0.2
0.1
(2.5)
(4.0)
0.8
(0.3)
36.3%
2002
42.0%
0.5
0.2
(2.5)
(1.6)
—
2.2
40.8%
Net deferred income tax assets and liabilities are reflected
on the accompanying consolidated balance sheets under the
following captions:
December 31
Prepaid expenses and other current assets
Other assets
Other current liabilities
Other noncurrent liabilities
Millions of yen
2004
47,679
84,686
(2,873)
(30,049)
99,443
2003
44,198
124,706
(2,575)
(19,302)
147,027
¥
¥
$
Thousands of
U.S. dollars
2004
458,452
814,288
(27,625)
(288,932)
$
956,183
71
CANON INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The tax effects of temporary differences that give rise to
the deferred tax assets and deferred tax liabilities at December
31, 2004 and 2003 are presented below:
December 31
Deferred tax assets:
Inventories
Accrued business tax
Accrued pension and severance cost
Minimum pension liability adjustments
Research and development — costs capitalized for tax purposes
Property, plant and equipment
Accrued expenses
Net operating losses carried forward
Other
Total gross deferred tax assets
Less valuation allowance
Net deferred tax assets
Deferred tax liabilities:
Undistributed earnings of foreign subsidiaries
Net unrealized gains on securities
Tax deductible reserve
Financing lease revenue
Other
Total gross deferred tax liabilities
Net deferred tax assets
Millions of yen
Thousands of
U.S. dollars
2004
2003
2004
¥
¥
11,364
10,149
34,680
22,778
22,499
17,406
17,976
1,799
24,258
162,909
(3,495)
159,414
(5,638)
(6,833)
(11,975)
(30,196)
(5,329)
(59,971)
99,443
13,540
8,684
45,149
56,526
20,766
17,074
15,964
6,279
21,330
205,312
(8,401)
196,911
(6,424)
(6,191)
(9,828)
(25,049)
(2,392)
(49,884)
147,027
$
$
109,269
97,587
333,462
219,019
216,337
167,365
172,846
17,298
233,250
1,566,433
(33,606)
1,532,827
(54,212)
(65,702)
(115,144)
(290,346)
(51,240)
(576,644)
956,183
The net changes in the total valuation allowance for the
years ended December 31, 2004, 2003, and 2002 were
decreases of ¥4,906 million ($47,173 thousand), ¥1,282
million and ¥3,192 million, respectively.
Based upon the level of historical taxable income and
projections for future taxable income over the periods which
the net deductible temporary differences are expected to
reverse, management believes it is more likely than not that
Canon will realize the benefits of these deferred tax assets, net
of the existing valuation allowance at December 31, 2004.
At December 31, 2004, Canon had net operating losses
which can be carried forward for income tax purposes of
¥5,065 million ($48,702 thousand) to reduce future taxable
income. Periods available to reduce future taxable income vary
in each tax jurisdiction and range from one year to ten years
as follows:
Millions of yen
Thousands of
U.S. dollars
¥
¥
182
4,805
78
5,065
$
$
1,750
46,202
750
48,702
Within one year
After one year through five years
After five years through ten years
Total
72
Income taxes have not been accrued on undistributed
earnings of domestic subsidiaries as the tax law provides a
means by which the investment in a domestic subsidiary
can be recovered tax free.
Canon has not recognized deferred tax liabilities of
¥25,316 million ($243,423 thousand) for the portion of
undistributed earnings of foreign subsidiaries that arose for
the year ended December 31, 2004 and prior years because
Canon currently does not expect those unremitted earnings
to reverse and become taxable to the Company in the
foreseeable future. Deferred tax liabilities will be recognized
when Canon expects that it will recover those undistributed
earnings in a taxable manner, such as through receipt of
dividends or sale of the investments. At December 31,
2004, such undistributed earnings of these subsidiaries
were ¥471,301 million ($4,531,740 thousand).
(14) Common Stock
For the years ended December 31, 2004, 2003 and 2002, the
Company issued 6,638,606 shares, 2,202,401 shares and
2,853,912 shares of common stock, respectively. The issuance
of 243,360 shares during the year ended December 31, 2002
was in connection with the acquisition of the outstanding
minority ownership interest of 37% of Canon Components,
Inc. The remaining issuance of the shares of the Company was
in connection with conversion of convertible debt. Conversion
into common stock of convertible debt issued subsequent to
October 1, 1982 has been accounted for by crediting one-half
or more of the conversion price to the common stock account
and the remainder to the additional paid-in capital account.
(15) Legal Reserve and Retained Earnings
The Japanese Commercial Code provides that an amount
equal to at least 10% of cash dividends and other distributions
from retained earnings paid by the Company and its Japanese
subsidiaries be appropriated as a legal reserve. No further
appropriations are required when the total amount of the
additional paid-in capital and the legal reserve equals 25% of
their respective stated capital. The Japanese Commercial Code
also provides that to the extent that the sum of the additional
paid-in capital and the legal reserve exceeds 25% of the
stated capital, the amount of the excess (if any) is available for
appropriations by the resolution of the shareholders. Certain
foreign subsidiaries are also required to appropriate their
earnings to legal reserves under the laws of the respective
countries.
Cash dividends and appropriations to the legal reserve
charged to retained earnings for the years ended December
31, 2004, 2003 and 2002 represent dividends paid out during
those years and the related appropriations to the legal reserve.
Retained earnings at December 31, 2004 do not reflect
current year-end dividends aggregating ¥35,474 million
($341,096 thousand) which will be payable in March 2005
upon stockholder approval.
The amount available for dividends under the Japanese
Commercial Code is based on the amount recorded in the
Company’s nonconsolidated books of account in accordance
with financial accounting standards of Japan. Such amount
was ¥1,141,596 million ($10,976,885 thousand) at December
31, 2004.
Retained earnings at December 31, 2004 included Canon’s
equity in undistributed earnings of affiliated companies
accounted for by the equity method in the amount of ¥7,420
million ($71,346 thousand).
73
CANON INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(16) Other Comprehensive Income (Loss)
Change in accumulated other comprehensive income (loss) is
as follows:
Year ended December 31
Foreign currency translation adjustments:
Balance at beginning of year
Adjustments for the year
Balance at end of year
Net unrealized gains and losses on securities:
Balance at beginning of year
Adjustments for the year
Balance at end of year
Net gains and losses on derivative instruments:
Balance at beginning of year
Adjustments for the year
Balance at end of year
Minimum pension liability adjustments:
Balance at beginning of year
Adjustments for the year
Balance at end of year
Millions of yen
Thousands of
U.S. dollars
2004
2003
2002
2004
(52,660)
(15,864)
(68,524)
$
(805,779)
38,942
(766,837)
¥
(83,801)
4,050
(79,751)
6,784
686
7,470
(297)
(396)
(693)
(68,524)
(15,277)
(83,801)
(1,168)
7,952
6,784
(334)
37
(297)
564
(1,732)
(1,168)
(2,423)
2,089
(334)
(65,961)
37,623
(28,338)
(96,441)
30,480
(65,961)
(80,649)
(15,792)
(96,441)
65,231
6,596
71,827
(2,855)
(3,808)
(6,663)
(634,241)
361,760
(272,481)
Total accumulated other comprehensive income (loss):
Balance at beginning of year
Adjustments for the year
Balance at end of year
(143,275)
41,963
(101,312)
(166,467)
23,192
(143,275)
(135,168)
(31,299)
(166,467)
¥
(1,377,644)
403,490
(974,154)
$
74
Tax effects allocated to each component of other
comprehensive income (loss) and reclassification
adjustments are as follows:
Year ended December 31
2004:
Foreign currency translation adjustments
Net unrealized gains and losses on securities:
Amount arising during the year
Reclassification adjustments for gains and losses realized in net income
Net change during the year
Net gains and losses on derivative instruments:
Amount arising during the year
Reclassification adjustments for gains and losses realized in net income
Net change during the year
Minimum pension liability adjustments
Other comprehensive income (loss)
2003:
Foreign currency translation adjustments:
Amount arising during the year
Reclassification adjustments for gains and losses realized in net income
Net change during the year
Net unrealized gains and losses on securities:
Amount arising during the year
Reclassification adjustments for gains and losses realized in net income
Net change during the year
Net gains and losses on derivative instruments:
Amount arising during the year
Reclassification adjustments for gains and losses realized in net income
Net change during the year
Minimum pension liability adjustments
Other comprehensive income (loss)
Millions of yen
Before-tax
amount
Tax (expense)
or benefit
Net-of-tax
amount
¥
4,400
(350)
4,050
5,022
(3,698)
1,324
(1,673)
929
(744)
78,179
83,159
(19,115)
369
(18,746)
12,129
515
12,644
(726)
790
64
70,218
64,180
(2,202)
1,564
(638)
708
(360)
348
(40,556)
(41,196)
3,469
—
3,469
(4,477)
(215)
(4,692)
305
(332)
(27)
(39,738)
(40,988)
¥
¥
¥
2,820
(2,134)
686
(965)
569
(396)
37,623
41,963
(15,646)
369
(15,277)
7,652
300
7,952
(421)
458
37
30,480
23,192
75
CANON INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Year ended December 31
2002:
Foreign currency translation adjustments:
Amount arising during the year
Reclassification adjustments for gains and losses realized in net income
Net change during the year
Net unrealized gains and losses on securities:
Amount arising during the year
Reclassification adjustments for gains and losses realized in net income
Net change during the year
Net gains and losses on derivative instruments:
Amount arising during the year
Reclassification adjustments for gains and losses realized in net income
Net change during the year
Minimum pension liability adjustments
Other comprehensive income (loss)
2004:
Foreign currency translation adjustments
Net unrealized gains and losses on securities:
Amount arising during the year
Reclassification adjustments for gains and losses realized in net income
Net change during the year
Net gains and losses on derivative instruments:
Amount arising during the year
Reclassification adjustments for gains and losses realized in net income
Net change during the year
Minimum pension liability adjustments
Other comprehensive income (loss)
Millions of yen
Before-tax
amount
Tax (expense)
or benefit
Net-of-tax
amount
¥
¥
(13,521)
44
(13,477)
(2,331)
(589)
(2,920)
(1,052)
4,654
3,602
(26,472)
(39,267)
(2,908)
521
(2,387)
872
316
1,188
442
(1,955)
(1,513)
10,680
7,968
(16,429)
565
(15,864)
(1,459)
(273)
(1,732)
(610)
2,699
2,089
(15,792)
(31,299)
Thousands of U.S. dollars
Before-tax
amount
Tax (expense)
or benefit
Net-of-tax
amount
$
42,307
(3,365)
38,942
48,288
(35,557)
12,731
(16,087)
8,933
(7,154)
751,721
799,605
(21,173)
15,038
(6,135)
6,808
(3,462)
3,346
(389,961)
(396,115)
27,115
(20,519)
6,596
(9,279)
5,471
(3,808)
361,760
403,490
$
76
(17) Net Income per Share
A reconciliation of the numerators and denominators of basic
and diluted net income per share computations is as follows:
Year ended December 31
¥
¥
Net income
Effect of dilutive securities:
1% Japanese yen convertible debentures,
due 2002
1.20% Japanese yen convertible
debentures, due 2005
1.30% Japanese yen convertible
debentures, due 2008
Diluted net income
Average common shares outstanding
Effect of dilutive securities:
1% Japanese yen convertible debentures,
due 2002
1.20% Japanese yen convertible
debentures, due 2005
1.30% Japanese yen convertible
debentures, due 2008
Millions of yen
Thosands of
U.S. dollars
2004
343,344
2003
275,730
2002
190,737
2004
3,301,385
$
—
24
—
36
26
48
—
231
72
343,440
86
275,852
91
190,902
692
3,302,308
$
Number of shares
885,365,124 878,648,844 876,716,443
—
— 1,952,315
462,823
2,664,354
3,446,071
2,125,278
6,382,560
6,624,428
Diluted common shares outstanding
887,953,225 887,695,758 888,739,257
Net income per share:
Basic
Diluted
Yen
U.S. dollars
¥
387.80
386.78
313.81
310.75
217.56
214.80
$
3.73
3.72
77
CANON INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(18) Derivatives and Hedging Activities
Risk management policy
Canon operates internationally, exposing it to the risk of
changes in foreign currency exchange rates and interest rates.
Derivative financial instruments are comprised principally of
foreign exchange contracts and interest rate swaps utilized by
the Company and certain of its subsidiaries to reduce these
risks. Canon assesses foreign currency exchange rate risk and
interest rate risk by continually monitoring changes in these
exposures and by evaluating hedging opportunities. Canon
does not hold or issue derivative financial instruments for
trading purposes. Canon is also exposed to credit-related
losses in the event of non-performance by counterparties to
derivative financial instruments, but it is not expected that any
counterparties will fail to meet their obligations, because most
of the counterparties are internationally recognized financial
institutions and contracts are diversified across a number of
major financial institutions.
Foreign currency exchange rate risk management
Canon’s international operations expose Canon to the risk of
changes in foreign currency exchange rates. Canon uses
foreign exchange contracts to manage certain foreign
currency exchange exposures principally from the exchange of
U.S. dollar and euro into Japanese yen. These contracts are
primarily used to hedge the foreign currency exposure of
forecasted intercompany sales and intercompany trade
receivables which are denominated in foreign currencies. In
accordance with Canon’s policy, a specific portion of foreign
currency exposure resulting from forecasted intercompany
sales are hedged using foreign exchange contracts which
principally mature within three months.
Interest rate risk management
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
interest rate swaps when it is determined to be appropriate
based on market conditions. The interest rate swaps change
variable-rate debt obligations to the fixed-rate debt obligations
by primarily entering into pay-fixed, receive-variable interest
rate swaps.
December 31
To sell foreign currencies
To buy foreign currencies
Receive-fixed interest rate swaps
Pay-fixed interest rate swaps
78
Fair value hedge
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 financial 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 the years ended
December 31, 2004, 2003 and 2002 as the critical terms of
the interest rate swaps match the terms of the hedged debt
obligations.
Cash flow hedge
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
obligation, 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 are expected to be recognized in earnings over the
next twelve months. Canon excludes the time value
component from the assessment of hedge effectiveness.
The amount of the hedging ineffectiveness was not
material for the years ended December 31, 2004, 2003 and
2002. The amount of net gains or losses excluded from the
assessment of hedge effectiveness (time value component)
which was recorded in other income (deductions) was net
losses of ¥2,096 million ($20,154 thousand), ¥490 million and
¥668 million for the years ended December 31, 2004, 2003
and 2002, respectively.
Derivatives not designated as hedges
Canon has entered into certain foreign currency exchange
contracts to manage its foreign currency exposures. These
foreign currency exchange contracts have not been designated
as hedges. Accordingly, the changes in fair value of the
contracts are recorded in earnings immediately.
Contract amounts of foreign exchange contracts and
interest rate swaps at December 31, 2004 and 2003 are set
forth below:
Millions of yen
¥
2004
584,208
34,201
—
—
2003
447,543
22,384
1,337
21,227
Thousands of
U.S. dollars
2004
$ 5,617,385
328,856
—
—
(19) Commitments and Contingent Liabilities
Commitments
At December 31, 2004, commitments outstanding for the
purchase of property, plant and equipment approximated
¥39,286 million ($377,750 thousand), and commitments
outstanding for the purchase of parts and raw materials
approximated ¥55,666 million ($535,250 thousand).
On September 14, 2004, the Company and Toshiba
Corporation (“Toshiba”) entered into an agreement to jointly
establish SED Inc. for the development, production and
marketing of next-generation flat-screen SED (Surface-
conduction Electron-emitter Display) panels. The Company
and Toshiba initially contributed approximately ¥500 million
($4,808 thousand) in cash, each. Under the agreement, the
Company is further committed to contribute 50% of the
financing requirements for SED Inc. through the establishment
of a prototype production line.
Canon occupies sales offices and other facilities under
lease arrangements accounted for as operating leases.
Deposits made under such arrangements aggregated ¥14,307
million ($137,567 thousand) and ¥15,092 million at December
31, 2004 and 2003, respectively, and are reflected under
noncurrent receivables on the accompanying consolidated
balance sheets. Rental expenses under the operating lease
arrangements amounted to ¥41,381 million ($397,894
thousand), ¥42,131 million and ¥44,195 million for the years
ended December 31, 2004, 2003 and 2002, respectively.
Future minimum lease payments required under
noncancellable operating leases that have initial or remaining
lease terms in excess of one year at December 31, 2004 are as
follows:
Year ending December 31
2005
2006
2007
2008
2009
Thereafter
Total future minimum lease payments
Millions of yen
Thousands of
U.S. dollars
¥
¥
12,714
9,205
6,653
5,555
5,116
10,289
49,532
$
$
122,250
88,510
63,971
53,413
49,192
98,933
476,269
Guarantees
Canon provides guarantees for bank loans of its employees,
affiliates and other companies. The guarantees for the
employees are principally made for their housing loans. The
guarantees of loans of its affiliates and other companies are
made to ensure that those companies operate with less risk of
finance.
For each guarantee provided, Canon would have to
perform under a guarantee, if the borrower defaults on a
payment within the contract periods of 1 year to 30 years, in
the case of employees with housing loans, and of 1 year to 10
years, in the case of affiliates and other companies. The
maximum amount of undiscounted payments Canon would
have had to make in the event of default is ¥43,634 million
($419,558 thousand) at December 31, 2004. The carrying
amounts of the liabilities recognized for Canon’s obligations as
a guarantor under those guarantees at December 31, 2004
were not significant.
Canon also issues contractual product warranties under
which it generally guarantees the performance of products
delivered and services rendered for a certain period or term.
Changes in accrued product warranty cost for the year ended
December 31, 2004 and 2003 are summarized as follows:
Year ended December 31
Balance at beginning of year
Addition
Utilization
Other
Balance at end of year
Millions of yen
2004
10,512
13,319
(9,400)
(167)
14,264
2003
7,516
10,919
(7,834)
(89)
10,512
¥
¥
$
Thousands of
U.S. dollars
2004
101,077
128,067
(90,385)
(1,605)
$
137,154
79
CANON INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Legal proceedings
In February 2003, a lawsuit was filed by St. Clair Intellectual
Property Consultants, Inc. (“St. Clair”) against the Company
and one of its subsidiaries in the United States District Court of
Delaware, which accused the Company of infringement of
patents related to certain technology. In connection with this
case, in October 2004, a jury preliminarily found damages
against the Company of approximately ¥3,600 million
($34,615 thousand) based on a percentage of certain product
sales in the United States through 2003. Subsequent to this
jury finding, St. Clair also made a motion to the court for
damages relating to certain 2004 sales, using the same royalty
rate awarded by the jury which could result in additional
damages. There are additional defenses that are yet to be
litigated in a follow-up trial solely to the judge; thus, a final
decision by the court, as to both infringement and the total
amount of damages, has not yet been reached.
In November 2003, a law suit was filed by a former
employee against the Company at Tokyo District Court in
Japan. The lawsuit alleges that the former employee is entitled
to ¥45,872 million ($441,077 thousand) as compensation for
an invention related to certain technology used by the
Company, and has sued for a partial payment of ¥1,000
million ($9,615 thousand) and interest thereon. The case is still
pending and its final outcome is not yet determinable.
Canon is also involved in various other claims and legal
actions arising in the ordinary course of business.
In the opinion of management, the ultimate disposition of
the above mentioned matters will not have a material adverse
effect on Canon’s consolidated financial position, results of
operations, or cash flows.
20) Disclosures about the Fair Value of Financial
Instruments and Concentrations of Credit Risk
Fair value of financial instruments
The estimated fair values of Canon’s financial instruments at
December 31, 2004 and 2003 are set forth below. The
following summary excludes cash and cash equivalents, trade
receivables, finance receivables, noncurrent receivables, short-
term loans, trade payables, accrued expenses for which fair
value approximate their carrying amounts. The summary also
excludes marketable securities and investments which are
disclosed in Note 4.
December 31
Long-term debt, including current installments
Derivatives:
Foreign exchange contracts:
Assets
Liabilities
Interest rate swaps:
Liabilities
Millions of yen
2004
2003
Thousand of U.S. dollars
2004
Carrying
Amount
¥ (38,530)
Estimated
Fair Value
(44,620)
Carrying
Amount
(95,455)
Estimated
Fair Value
(123,700)
$
Carrying
Amount
(370,480)
Estimated
Fair Value
(429,038)
4,875
(11,020)
4,875
(11,020)
3,760
(7,697)
3,760
(7,697)
46,875
(105,962)
46,875
(105,962)
—
—
(55)
(55)
—
—
The following methods and assumptions are used to
estimate the fair value in the above table.
Long-term debt
The fair values of Canon’s long-term debt instruments are
based on the quoted price in the most active market or the
present value of future cash flows associated with each
instrument discounted using Canon’s current borrowing rate
for similar debt instruments of comparable maturity.
Derivative financial instruments
The fair values of derivative financial instruments, consisting
principally of foreign exchange contracts and interest rate
swaps, all of which are used for purposes other than trading,
are estimated by obtaining quotes from brokers.
80
Limitations
Fair value estimates are made at a specific point in time, based
on relevant market information and information about the
financial instruments. These estimates are subjective in nature
and involve uncertainties and matters of significant judgment
and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.
Concentrations of credit risk
At December 31, 2004 and 2003, one customer accounted
for approximately 13% and 16% of consolidated trade
receivables, respectively. Although Canon does not expect that
the customer will fail to meet their obligations, Canon is
potentially exposed to concentrations of credit risk if the
customer failed to perform according to the terms of the
contracts.
21) Supplemental Cash Flow Information
For the years ended December 31, 2004, 2003 and 2002,
aggregate common stock and additional paid-in capital arising
from conversion of convertible debt amounted to ¥9,938
million ($95,557 thousand), ¥3,297 million and ¥3,908
million, respectively.
In March 2004, the Company acquired all of the
outstanding common shares of Igari Mold Co. Ltd., a precision
plastic mold manufacturer, in an exchange offering for
577,920 shares of the Company’s common stock. The
aggregate value of the shares exchanged was approximately
¥2,805 million ($26,971 thousand). In connection with this
transaction, the Company recognized goodwill, classified as
other assets in the accompanying consolidated financial
statements, of ¥1,585 million ($15,240 thousand).
As a result of the acquisition of the outstanding minority
ownership interest of Canon Components Inc. and the
issuance of common stock in connection with the acquisition
during the year ended December 31, 2002, goodwill classified
as other assets increased by ¥795 million, and minority
interests decreased by ¥257 million.
81
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
Canon Inc.
We have audited the accompanying consolidated balance sheet of Canon Inc. and subsidiaries (the “Company”) as of
December 31, 2004, and the related consolidated statements of income, stockholders’ equity, and cash flows for the
year then ended, all expressed in Japanese yen. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial statements based on our audit. The
consolidated balance sheet of Canon Inc. and subsidiaries as of December 31, 2003 and the related consolidated
statements of income, stockholders’ equity, and cash flows for each of the two years in the period ended December
31, 2003 were audited by other auditors whose report dated January 28, 2004 expressed a qualified opinion on those
statements with respect to the omission of segment information required to be disclosed in financial statements under
U.S. generally accepted accounting principles. Such disclosure is not required by certain foreign issuers in Securities
Exchange Act filings with the United States Securities and Exchange Commission.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose
of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly,
we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
The segment information required to be disclosed in financial statements under U.S. generally accepted accounting
principles is not presented in the accompanying consolidated financial statements. Certain foreign issuers are presently
exempted from such disclosure requirement in Securities Exchange Act filings with the United States Securities and
Exchange Commission.
In our opinion, except for the omission of segment information as discussed in the preceding paragraph, the 2004
financial statements referred to above present fairly, in all material respects, the consolidated financial position of
Canon Inc. and subsidiaries at December 31, 2004, and the consolidated results of their operations and their cash
flows for the year then ended in conformity with U.S. generally accepted accounting principles.
We have also recomputed the translation of the consolidated financial statements as of and for the year ended
December 31, 2004 into United States dollars. In our opinion, the consolidated financial statements expressed in yen
have been translated into United States dollars on the basis described in Note 2.
January 27, 2005
82
CORPORATE PROFILE
Canon Inc. (NYSE: CAJ) and the Canon Group develop, produce, and market
a wide range of products used in the home, the office, and industry, including
business machines, cameras, and optical products. The Canon Group provides
employment for over 108,000 people worldwide.
Under its corporate philosophy of kyosei, or living and working together
for the common good, the Group as a whole aims to create new technologies
and entire new genres of products, and, through their commercialization,
make new contributions to people and communications around the world.
The Canon Group pursues a variety of environmental and philanthropic
activities and focuses on fulfilling its duties to investors and society by stressing
good corporate governance throughout its activities.
In fiscal 2004, under our management strategy, Phase II of the Excellent
Global Corporation Plan, we reported the highest level of sales and net income
in our history, the fifth consecutive year of gains in both sales and income.
CORPORATE PHILOSOPHY: Kyosei
The corporate philosophy of Canon is kyosei. A concise definition of this word
would be “Living and working together for the common good,” but our
definition is broader: “All people, regardless of race, religion, or culture,
harmoniously living and working together into the future.” Unfortunately, the
presence of imbalance in our world—in areas such as trade, income levels, and
the environment—hinders the achievement of kyosei. Addressing these
imbalances is an ongoing mission, and Canon is doing its part by actively
pursuing kyosei. True global companies must foster good relations, not only
with their customers and the communities in which they operate, but also with
nations and the environment. They must also bear the responsibility for the
impact of their activities on society. For this reason, Canon’s goal is to contribute
to the prosperity of the world and the happiness of humanity, which will lead
to continuing growth and bring the world closer to achieving kyosei.
CORPORATE GOAL
Fiscal 2005 is the concluding year for Phase II of the Excellent Global Corporation
Plan, which the Company began to implement in fiscal 2001. The theme of the
next medium-term plan, Phase III, which will begin in fiscal 2006, will be “Toward
Healthy Growth,” maintaining a high margin structure.
CONTENTS
1 FINANCIAL HIGHLIGHTS
2 TO OUR SHAREHOLDERS
4 CORPORATE MANAGEMENT
Our Management Strategy
Our Corporate Governance Structure
Significant Differences in Corporate
Governance Practices between
Canon and U.S. Companies Listed
on the NYSE
10 CORPORATE FUNCTIONS
RESEARCH & DEVELOPMENT
PRODUCTION
SALES & MARKETING
CORPORATE SOCIAL RESPONSIBILITY
Canon’s Approach to CSR
Encouraging Employee Initiatives
Contributing to Society
Environment-Conscious Management
21 PRODUCT GROUP SUMMARY
22 CANON PRODUCT GROUPS
OFFICE IMAGING PRODUCTS
COMPUTER PERIPHERALS
CAMERAS
OPTICAL AND OTHER PRODUCTS
30 MAJOR CONSOLIDATED SUBSIDIARIES
31 FINANCIAL SECTION
83 TRANSFER AND REGISTRARS OFFICE
SHAREHOLDERS’ INFORMATION
Cover Photo:
Equipped with our original image-processing engine, iR
Controller, the imageRUNNER C3220(iR C3220 in some areas)
actively manages printing, copying, scanning, and e-mail
efficiently, while processing color as well as monochrome
images with equal ease. The Multifunctional Embedded
Application Platform (MEAP) also allows users to customize
their own applications.
TRANSFER AND REGISTRARS OFFICE
SHAREHOLDERS’ INFORMATION
Canon Inc.
30-2, Shimomaruko 3-chome, Ohta-ku, Tokyo 146-8501, Japan
Stock exchange listings:
Tokyo, Osaka, Nagoya, Fukuoka, Sapporo, New York and
Frankfurt stock exchanges
Transfer Office for Common Stock in Japan
Mizuho Trust & Banking Co., Ltd.
2-1, Yaesu 1-chome, Chuo-ku, Tokyo 103-8670, Japan
Depositary and Agent with Respect to American Depositary
Receipts for Common Shares
JPMORGAN Chase Bank
4 New York Plaza, New York, N.Y. 10004, U.S.A.
Depositaries and Agents with Respect to Global Bearer
Certificates for Common Shares
Clearstream Banking AG
Neue Börsenstraße 1, 60487 Frankfurt am Main, Germany
Deutsche Bank AG
Taunusanlage 12, 60325 Frankfurt am Main, Germany
American Depositary Receipts (ADRs) are traded on the New York
Stock Exchange.
Shareholders’ annual general meeting:
March 30, 2005, in Tokyo
Other information:
For publications or information, please contact the Corporate
Communications Center, Canon Inc., Tokyo, or access
Canon’s Website at
www.canon.com/
This publication was printed on 70% recycled paper by an
ISO 14001-accredited printer. The inks used, containing
neither VOCs (volatile organic compounds) nor mineral oils,
excel in decomposition and de-inking.
PUB. BEP014 0405SZ 17.9 Printed in Japan
83
CANON
ANNUAL REPORT
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Fiscal Year Ended December 31, 2004
CANON INC. 30-2, Shimomaruko 3-chome, Ohta-ku, Tokyo 146-8501, Japan