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Canon (NYSE:CAJ) reported its best Q2 ever and is on pace for its 7th consecutive year of record setting performance. Y-o-y net sales were up 12.8%, gross profit +15.9%, operating profit +32.6%, and net income +28.8%. It's the same success story at Canon we've gotten used to -- all major product areas except one beat prior year sales levels, while Canon continues to increase profit margins.

Net sales for the quarter totaled 1.029 trillion yen ($8.81b) but despite being a 12.8% y-o-y increase, fell 0.7% short of Canon's own projection of 1.0367 trillion yen ($8.88b). Gross profit totaled 510.2 billion yen ($4.37b) narrowly beating its estimate by 0.7%. Operating profit was 168.3 billion yen ($1.44b), beating its estimate by 12.3% and net income totaled 105.9 billion yen ($906.7m), smashing its estimate by 14.2%.

Forex impact was certainly positive coming in at +33.8 billion ($289m) for sales and +17.9 ($153m) billion for operating profit.

In the first-half of 2006 Canon posted double digit percentage gains in sales and profit as follows: net sales +11.2%, gross profit +15.1%, operating profit +25.3%, and net income +22.2%.

The Wall Street Journal's Sayaka Yakushiji reports (paid sub req) that Canon raised its full-year net profit forecast by 8 billion yen ($68.5m) to 440 billion yen ($3.77b) but lowered its sales outlook by 10 billion yen ($85.6m) to 4.13 trillion yen ($35.36b). Its sales outlook was lowered due to expected weakness in demand for photolithography machines for LCD panels. This was the one area where Canon was unable to increase its sales level on a y-o-y basis. Canon increased its full-year dividend payout outlook by 10 yen to 100 yen ($0.856) per share.

Both the WSJ's Yakushiji and AP's Hiroko Tabuchi reported perhaps the most worrisome piece of news accompanying Canon's earnings release. It was a comment by Toshizo Tanaka, senior executive for finance and accounting at Canon who said at a press conference that 'The greatest concern for the company is a potential slowdown in the U.S. economy which may hurt sales there.'

Canon is facing stiffer competition on all fronts but is not shying away at all. In fact, Yakushiji of the WSJ reported that Canon upped its 2006 forecast for sales of digital cameras by 18% to 1.01 trillion yen ($8.65b). Canon's Tanaka adds, "The growth has been calculated with entrants of these firms (Sony and Matsushita) factored in."

Click here to link to Canon's Investor Relations web site.

Click here to link to Canon's presentation of its first-half (including Q2) results in .pdf format.

Canon's ordinary shares (Tokyo: 7751) closed down by 0.55% at 5,390 yen (ADR equivalent of $69.23) ahead of its after hours earnings release. In intra-day trading its ADRs are up 0.95% at $70.89. One has to assume that Japanese investors will react favorably tomorrow, sending Canon's ordinary shares higher.

Canon Inc (CAJ) 1-year chart [intra-day A.M.]:

Source: Canon Blows Away Own Q2 Profit Forecast, Ups Full-year Guidance & Dividend