Canon have announced their 6th straight year of record earnings, posting a profit 384.1 billion yen ($3.3 billion; euro2.7 billion) for 2005 on the back of strong digital camera sales and cost-cutting. ABCNews also reports that Canon is set to expand its business into flat-panel TVs, in partnership with Toshiba, using a new technology called SEDs, or surface-conduction electron-emitter displays.

Website: ABCNews - Digital Camera Sales Lifts Canon’s Profit

Operating Results and Financial Conditions

2005 in Review

January 30, 2006 - Looking back at the global economy in 2005, the U.S. economy continued to display growth despite concern over the economic impact of escalating crude oil prices and the catastrophic damage caused by Hurricane Katrina, with healthy employment conditions and continued growth in consumer spending. In Europe, while the recovery in consumer spending appeared to falter, such factors as growth in the production sector amid strong exports indicate a trend toward moderate recovery. As for Asia, China continued to achieve a high rate of economic growth, mainly fueled by exports, while other Asian economies also enjoyed generally favorable performances. In Japan, the economy continued to recover gradually thanks to such factors as increased corporate investment supported by favorable corporate profits and improved consumer spending.

As for the markets in which the Canon Group operates, demand in the digital camera segment for single-lens-reflex (SLR) models continued to grow significantly during the term. Sales of digital compact cameras also remained strong to realize healthy overall growth for the segment. Demand for network digital multifunction devices (MFDs) remained solid as the office market, including small-scale enterprises, moved toward color and multifunctionality. Although sales of computer peripherals, including printers, grew for both multifunction and color models, the segment suffered amid a shift in further demand toward high-performance low-priced machines and severe price competition. Demand for steppers, used in the production of semiconductors, tapered off after the summer of 2004 as the chip manufacturing market entered a correction phase. The market for projection aligners, which are used in the production of liquid crystal displays (LCDs) panels, enjoyed stable growth, fueled by increased investment by LCD panel manufacturers amid the rapid expansion of the LCD television market. The average value of the yen for the year was ¥110.58 to the U.S. dollar and ¥137.04 to the euro, representing a year-on-year decrease of almost 2% against both currencies.

Amid these conditions, Canon’s consolidated net sales in 2005 increased by 8.3% from the year-ago period to ¥3,754.2 billion (U.S.$31,815 million), boosted by a favorable rise in sales of digital cameras and color network MFDs, along with an increase in sales of projection aligners. In 2005, the final year of Phase II of Canon’s Excellent Global Corporation Plan (2001-2005), net income increased by 11.9% year on year to ¥384.1 billion (U.S.$3,255 million), marking all-time highs for both net sales and net income, and the sixth consecutive year of sales and profit growth. Despite such negative factors as escalating prices of raw materials, severe price competition, and the impact of acquiring new subsidiaries into the Group, the gross profit ratio for the year remained at high, with a decrease of 0.9 points from the previous year, owing to cost reductions realized through ongoing production-reform and procurement-reform efforts. By curbing an increase of selling, general and administrative (SG&A) expense through comprehensive cost cutting, keeping spending growth below the growth rate for net sales, the SG&A expenses to net sales ratio improved 0.7 points.

Consequently, operating profit in 2005 totaled ¥583.0 billion (U.S.$4,941 million), a year-on-year increase of 7.2%. The operating profit ratio was 15.5%, a year-on-year decrease of 0.2 points, mainly due to a ¥17.1 billion expense deduction for the gain in the year-ago period realized from the return to the Japanese Government of the substitutional portion of the employees’ pension funds. Other income (deductions) improved by ¥20.6 billion (U.S.$175 million), mainly due to an increase in interest revenue, resulting from such factors as an increase in surplus funds accompanying the improved balance sheet and a rise in interest rates in the United States, along with a decrease in currency exchange losses. As a result, income before income taxes and minority interests in 2005 totaled ¥612.0 billion (U.S.$5,186 million), a year-on-year increase of 10.8%. The effective tax rate during the year was 34.8%, 0.3 points lower compared with the previous year, due to such factors as the introduction of corporation size-based enterprise tax in Japan. Consequently, as stated earlier, net income for the year totaled ¥384.1 billion (U.S.$3,255 million).

Basic net income per share for the year was ¥432.94 (U.S.$3.67), a year-on-year increase of ¥45.14 (U.S.$0.38).

Results by Product Segment
In the business machine segment, demand for network digital MFDs, which are grouped in the office imaging products sub-segment, indicates a shift to color models, as well as a trend toward higher-end features. Additionally, amid color network digital MFDs, the iR C3170/2570 series, equipped with a new high-speed image-processing chip, and the iR C3220/2620 series continued to sell well in both Japan and European markets, as did the new high-speed iR C6870/5870 series models. Among monochrome network digital MFDs, mid-level models such as the iR4570/3570/2870/2270 series contributed to expanded sales, along with the iR6570/5570, featuring energy-saving performance and high productivity, and the iR2020/2016 series, with enhanced networking features.

Overall, sales of office imaging products in 2005 realized a year-on-year increase of 2.9%. In the field of computer peripherals, laser beam printers enjoyed a year-on-year increase in unit sales, with color models growing more than 30% and monochrome machines, particularly low-end models, also recording healthy growth. Sales in value terms also rose despite the effect of the shift in market demand toward lower priced models.

Inkjet printers recorded an increase in unit sales of more than 10%, with the PIXMA iP3000/4000 and, in markets outside of Japan, the PIXMA MP110/130 maintaining brisk sales. Additionally, newly introduced models, including the PIXMA iP4200, the PIXMA iP1600 in overseas markets, and high-speed all-in-one models such as the PIXMA MP500, contributed to a stronger product lineup, which also fueled sales growth in value terms. As a result, sales of computer peripherals for the year realized a year-on-year increase of 8.3%. Sales of business information products, however, decreased by 10.9% due to the intentional curtailing of personal computer sales in the Japanese market.

Collectively, sales of business machines during the year totaled ¥2,502.4 billion (U.S.$21,207 million), a year-on-year increase of 4.8%. Operating profit for the year totaled ¥542.0 billion (U.S.$4,593 million), a year-on-year increase of 4.0%, lifted by sales growth along with active efforts to reduce costs as a means of limiting the decline in the gross profit ratio amid severe price competition, as well as efforts to curtail expenses. The operating profit ratio remained at almost the same level as for the year-ago period.

Within the camera segment, the continued strong demand for digital SLR cameras has fueled robust growth, with the EOS DIGITAL REBEL XT, launched in the first half of 2005, and the EOS 5D, launched in the second half, recording particularly strong sales along with continued healthy sales of the EOS 20D, launched in the previous period. This, in turn, has led to expanded sales of interchangeable lenses for SLR cameras. Sales of compact-model digital cameras also continued to expand steadily, with healthy demand for the PowerShot SD400 and PowerShot A520, launched in the first half of 2005, as well as the PowerShot SD550 and PowerShot SD450 models, introduced in the second half. As a result, unit sales of digital cameras for the year increased by more than 20% from the year-ago period. In the field of digital video camcorders, newly introduced Mini DV, DVD, and HDV models, including the Optura 600, the DC20/10, and the XL H1 registered strong performances. Consequently, camera sales overall continued to enjoy growth, achieving total sales of ¥879.2 billion (U.S.$7,451 million), a year-on-year increase of 15.2%.

The operating profit ratio for the camera segment rose 2.7 points, boosted by such factors as substantially increased sales; cost reduction efforts, including the in-house production of key parts and procurement reform; and sales growth for digital SLR cameras and other high valued-added products. As a result, operating profit for the camera segment increased substantially by 32.8% to ¥173.7 billion (U.S.$1,472 million).

Outlook
Regarding the outlook for the global economy, although prospects remain uncertain due to such factors as rising oil prices in connection with unstable conditions in the Middle East and shortages accompanying economic growth in developing countries, the impact on business activities of additional interest rate hikes in the United States and Europe, and future exchange rate trends, the global economy is likely to continue its course toward growth.

In the businesses in which Canon is involved, demand in the digital-camera market is expected to continue growing, particularly in overseas markets. As for network digital MFDs and laser beam printers, while stable demand is projected for full-color models, severe price competition and shifting demand toward lower-priced models is expected to adversely affect sales. Within the semiconductor-production equipment market, demand for steppers indicates in a trend toward moderate recovery, supported by increased investments by chip manufacturers. In the market for projection aligners used in the production of LCD panels, demand for LCD production equipment is expected to decline due to restrained investment by LCD manufacturers.

In fiscal 2006 Canon anticipates consolidated net sales of ¥4,060.0 billion (U.S.$34,407 million), consolidated income before income taxes of ¥665.0 billion (U.S.$5,636 million), and consolidated net income of ¥415.0 billion (U.S.$3,517 million). The company also forecasts non-consolidated net sales of ¥2,660.0 billion (U.S.$22,542 million), non-consolidated ordinary profit of ¥475.0 billion (U.S.$4,025 million), and non-consolidated net income of ¥307.0 billion (U.S.$2,602 million), aiming for the seventh consecutive year of increased consolidated and non-consolidated sales and profit. These forecasts assume currency exchange rates of ¥115 to the U.S. dollar and ¥135 to the euro, representing an approximately 4% depreciation of the yen against the U.S. dollar, and a slight appreciation against the euro compared with 2005.