20-F 1 d473536d20f.htm FORM 20-F Form 20-F
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 20-F

 

     ¨ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

     þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2012

OR

 

     ¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

OR

 

       ¨ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report                     

Commission file number 001-15122

 

 

CANON KABUSHIKI KAISHA

(Exact name of Registrant in Japanese as specified in its charter)

CANON INC.

(Exact name of Registrant in English as specified in its charter)

JAPAN

(Jurisdiction of incorporation or organization)

30-2, Shimomaruko 3-chome, Ohta-ku, Tokyo 146-8501, Japan (Address of principal executive offices)

Toshihide Aoki, +81-3-3758-2111, +81-3-5482-9680, 30-2, Shimomaruko 3-chome, Ohta-ku, Tokyo 146-8501, Japan

(Name, Telephone, Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act.

 

Title of each class        Name of each exchange on which registered

(1)  Common Stock (the “shares”)

     New York Stock Exchange*

(2)  American Depositary Shares (“ADSs”), each of which represents one share

     New York Stock Exchange

Securities registered or to be registered pursuant to Section 12(g) of the Act.

None

(Title of Class)

 

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

None

(Title of Class)

 

 

* Not for trading, but only for technical purposes in connection with the registration of ADSs.

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

As of December 31, 2012, 1,152,791,291 shares of common stock, including 23,359,224 ADSs, were outstanding.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  þ    No  ¨

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    Yes  ¨    No  þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  þ            Accelerated filer  ¨            Non-accelerated filer  ¨

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP  þ

    

International Financial Reporting Standards as issued

by the International Accounting Standards Board  ¨

   Other  ¨

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.    Item 17  ¨    Item 18  ¨

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  þ

 

 

 


Table of Contents

TABLE OF CONTENTS

 

         Page number  

CERTAIN DEFINED TERMS, CONVENTIONS AND PRESENTATION OF FINANCIAL INFORMATION

    1   
 
 
 

FORWARD-LOOKING INFORMATION

    1   
   PART I  
Item 1.    Identity of Directors, Senior Management and Advisers     2   
Item 2.    Offer Statistics and Expected Timetable     2   
Item 3.    Key Information     2   
A.    Selected financial data     2   
B.    Capitalization and indebtedness     3   
C.    Reasons for the offer and use of proceeds     3   
D.    Risk factors     3   
Item 4.    Information on the Company     12   
A.    History and development of the Company     12   
B.    Business overview     13   
   Products     13   
   Marketing and distribution     18   
   Service     18   
   Seasonality     19   
   Sources of supply     19   
   Net sales by segment and geographic area     19   
   Competition     20   
   Patents and licenses     21   
   Environmental regulations     22   
   Other regulations     26   
C.    Organizational structure     28   
D.    Property, plants and equipment     28   
Item 4A.    Unresolved Staff Comments     32   
Item 5.    Operating and Financial Review and Prospects     32   
A.    Operating results     32   
   Overview     32   
   Critical accounting policies and estimates     34   
   Consolidated results of operations     37   
  

Fiscal 2012 compared with fiscal 2011

    37   
  

Fiscal 2011 compared with fiscal 2010

    41   
  

Foreign operations and foreign currency transactions

    45   
B.    Liquidity and capital resources     45   
C.    Research and development, patents and licenses     47   
D.    Trend information     47   
E.    Off-balance sheet arrangements     52   
F.    Contractual obligations     52   
Item 6.    Directors, Senior Management and Employees     54   
A.    Directors and senior management     54   
B.    Compensation     61   
C.    Board practices     74   

 

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         Page number  
D.    Employees     74   
E.    Share ownership     75   
Item 7.    Major Shareholders and Related Party Transactions     76   
A.    Major shareholders     76   
B.    Related party transactions     76   
C.    Interests of experts and counsel     77   
Item 8.    Financial Information     77   
A.    Consolidated financial statements and other financial information     77   
   Consolidated financial statements     77   
   Legal proceedings     77   
   Dividend policy     77   
B.    Significant changes     78   
Item 9.    The Offer and Listing     78   
A.    Offer and listing details     78   
   Trading in domestic markets     78   
   Trading in foreign markets     79   
B.    Plan of distribution     79   
C.    Markets     79   
D.    Selling shareholders     80   
E.    Dilution     80   
F.    Expenses of the issue     80   
Item 10.    Additional Information     80   
A.    Share capital     80   
B.    Memorandum and articles of association     80   
C.    Material contracts     87   
D.    Exchange controls     87   
E.    Taxation     89   
F.    Dividends and paying agents     93   
G.    Statement by experts     93   
H.    Documents on display     93   
I.    Subsidiary information     93   
Item 11.    Quantitative and Qualitative Disclosures about Market Risk     93   
   Market risk exposures     93   
   Equity price risk     93   
   Foreign currency exchange rate and interest rate risk     94   
Item 12.    Description of Securities Other than Equity Securities     95   
A.    Debt securities     95   
B.    Warrants and rights     95   
C.    Other securities     95   
D.    American Depositary Shares     95   
   PART II  
Item 13.    Defaults, Dividend Arrearages and Delinquencies     96   
Item 14.    Material Modifications to the Rights of Security Holders and Use of Proceeds     96   

 

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         Page number  
Item 15.    Controls and Procedures     96   
Item 16A.    Audit Committee Financial Expert     97   
Item 16B.    Code of Ethics     97   
Item 16C.    Principal Accountant Fees and Services     97   
Item 16D.    Exemptions from the Listing Standards for Audit Committees     98   
Item 16E.    Purchases of Equity Securities by the Issuer and Affiliated Purchasers     99   
Item 16F.    Change in Registrant’s Certifying Accountant     100   
Item 16G.    Corporate Governance     100   
   PART III  
Item 17.    Financial Statements     102   
Item 18.    Financial Statements     102   
   Reports of Independent Registered Public Accounting Firm     103   
   Consolidated Balance Sheets     105   
   Consolidated Statements of Income     106   
   Consolidated Statements of Comprehensive Income     107   
   Consolidated Statements of Equity     108   
   Consolidated Statements of Cash Flows     110   
   Notes to Consolidated Financial Statements     111   
   Schedule II—Valuation and Qualifying Accounts     153   
Item 19.    Exhibits     154   

SIGNATURES

    155   

EXHIBIT INDEX

    156   

 

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CERTAIN DEFINED TERMS, CONVENTIONS AND PRESENTATION OF FINANCIAL INFORMATION

All information contained in this Annual Report is as of December 31, 2012 unless otherwise specified.

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.

On March 15, 2013, the noon buying rate for yen in New York City as reported by the Federal Reserve Bank of New York was ¥95.26 = U.S.$1.

The Company’s fiscal year end is December 31. In this Annual Report “fiscal 2012” refers to the Company’s fiscal year ended December 31, 2012, and other fiscal years of the Company are referred to in a corresponding manner.

FORWARD-LOOKING INFORMATION

This Annual Report contains forward-looking statements and information relating to Canon that are based on beliefs of its management as well as assumptions made by and information currently available to Canon Inc. When used in this Annual Report, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “project” and “should” and similar expressions, as they relate to Canon or its management, are intended to identify forward-looking statements. Such statements, which include, but are not limited to, statements contained in “Item 3. Key Information-Risk Factors”, “Item 5. Operating and Financial Review and Prospects” and “Item 11. Quantitative and Qualitative Disclosures about Market Risk”, reflect the current views and assumptions of the Company with respect to future events and are subject to risks and uncertainties. Many factors could cause the actual results, performance or achievements of Canon to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements, including, among others, changes in general economic and business conditions, changes in currency exchange rates and interest rates, introduction of competing products by other companies, lack of acceptance of new products or services by Canon’s targeted customers, inability to meet efficiency and cost reduction objectives, changes in business strategy and various other factors, both referenced and not referenced in this Annual Report. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected, intended, planned or projected. Canon Inc. does not intend or assume any obligation to update these forward-looking statements.

 

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PART I

Item 1. Identity of Directors, Senior Management and Advisers

Not applicable.

Item 2. Offer Statistics and Expected Timetable

Not applicable.

Item  3. Key Information

A. Selected financial data

The following information should be read in conjunction with and qualified in its entirety by reference to the Consolidated Financial Statements of Canon Inc. and subsidiaries, including the notes thereto, included in this Annual Report.

 

Selected financial data *1:

   2012      2011      2010      2009      2008  
     (Millions of yen, except average number of shares and per share data)  

Net sales

   ¥ 3,479,788       ¥ 3,557,433       ¥ 3,706,901       ¥ 3,209,201       ¥ 4,094,161   

Operating profit

     323,856         378,071         387,552         217,055         496,074   

Net income attributable to Canon Inc.

     224,564         248,630         246,603         131,647         309,148   

Advertising expenses

     83,134         81,232         94,794         78,009         112,810   

Research and development expenses

     296,464         307,800         315,817         304,600         374,025   

Depreciation of property, plant and equipment

     211,973         210,179         232,327         277,399         304,622   

Increase in property, plant and equipment

     270,457         226,869         158,976         216,128         361,988   

Long-term debt, excluding current installments

     2,117         3,368         4,131         4,912         8,423   

Common stock

     174,762         174,762         174,762         174,762         174,762   

Canon Inc. stockholders’ equity

     2,598,026         2,551,132         2,645,782         2,688,109         2,659,792   

Total assets

     3,955,503         3,930,727         3,983,820         3,847,557         3,969,934   

Average number of common shares in thousands

     1,173,648         1,215,832         1,234,817         1,234,482         1,255,626   

Per share data:

              

Net income attributable to Canon Inc. stockholders per share:

              

Basic

   ¥ 191.34       ¥ 204.49       ¥ 199.71       ¥ 106.64       ¥ 246.21   

Diluted

     191.34         204.48         199.70         106.64         246.20   

Cash dividends declared

     130.00         120.00         120.00         110.00         110.00   

Cash dividends declared (U.S.$) *2

   $ 1.498       $ 1.503       $ 1.447       $ 1.196       $ 1.073   

Notes:

 

  1. The above financial data is prepared in accordance with U.S. generally accepted accounting principles.
  2. Annual cash dividends declared (U.S.$) are translated from yen based on a weighted average of the noon buying rates for yen in New York City as reported by the Federal Reserve Bank of New York in effect on the date of each semiannual dividend payment or on the latest practicable date.

 

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The following table provides the noon buying rates for Japanese yen in New York City as reported by the Federal Reserve Bank of New York expressed in Japanese yen per U.S.$1 during the periods indicated and the high and low noon buying rates for Japanese yen per U.S.$1 during the months indicated. On March 15, 2013, the noon buying rate for yen in New York City as reported by the Federal Reserve Bank of New York was ¥95.26 = U.S.$1.

 

Yen exchange rates per U.S. dollar:

   Average      Term end      High      Low  

2008

     102.85         90.79         110.48         87.84   

2009

     93.67         93.08         100.71         86.12   

2010

     87.16         81.67         94.68         80.48   

2011

     79.43         76.98         85.26         75.72   

2012 - Year

     80.10         86.64         86.64         76.11   

         - 1(st) half

        79.81         83.78         76.11   

         - July

        78.10         79.95         78.10   

         - August

        78.30         79.50         78.17   

         - September

        77.92         78.96         77.41   

         - October

        79.94         80.04         78.00   

         - November

        82.54         82.54         79.42   

         - December

        86.64         86.64         81.86   

2013 - January

        91.28         91.28         86.92   

         - February

        92.36         93.64         91.38   

 

Note: The average exchange rates for the periods are the average of the exchange rates on the last day of each month during the period.

B. Capitalization and indebtedness

Not applicable.

C. Reasons for the offer and use of proceeds

Not applicable.

D. Risk factors

Canon is one of the world’s leading manufacturers of office multifunction devices (“MFDs”), plain paper copying machines, laser printers, inkjet printers, cameras and lithography equipment.

Primarily because of the nature of the business and geographic areas in which Canon operates and the highly competitive nature of the industries to which it belongs, Canon is subject to a variety of risks and uncertainties, including, but not limited to, the following:

Risks Related to Canon’s Industries

Canon has invested and will continue to invest actively in next-generation technologies. If the market for these technologies does not develop as Canon expects, or if its competitors produce these or competing technologies in a more timely or effective manner, there could be a material adverse effect on Canon’s operating results.

Canon has made and will continue to make investments in next-generation technology research and development initiatives. Canon’s competitors may achieve research and development breakthroughs in these technologies more quickly than Canon, or may achieve advances in competing technologies that render products

 

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under development by Canon uncompetitive. For several years, Canon has continued its investments in development and manufacturing in order to keep pace with technological evolution. If Canon’s business strategies diverge from market demands, Canon may not recover some or all of its investments, or may lose business opportunities, or both, which may have a material adverse effect on Canon’s operating results.

In addition, Canon has sought to develop production technology and equipment to accelerate the automation of its manufacturing processes and in-house production of key devices. If Canon cannot effectively implement these techniques, it may fail to realize cost advantages or product differentiation, and consequently lose business opportunities, which may adversely affect Canon’s operating results. While differentiation in technology and product development is an important part of Canon’s strategy, Canon must also accurately assess the demand for and commercial acceptance of new technologies and products that it develops. If Canon pursues technologies or develops products that are not well received by the market, its operating results could be adversely affected.

Entering new business areas through the development of next-generation technologies is a focal point of Canon’s corporate strategy. To the extent that Canon enters into such new business areas, Canon may not be able to establish a successful business model or may face severe competition with new competitors. If such events occur, Canon’s operating results may be adversely affected.

If Canon does not effectively manage transitions in its products and services, its operating results may decline.

Many of the business areas in which Canon competes are characterized by rapid technological advances in hardware performance, software functionality and product features; frequent introduction of new products; short product life cycles; and continued qualitative improvements to current products at stable price levels. If Canon does not make effective transitions from existing products and services to new offerings, its revenue and profits may decline. Among the risks associated with the introduction of new products and services are delays in development or manufacturing, low marketability due to unsuitable product quality during the introductory period, variations in manufacturing costs, delays of customer purchasing decisions in anticipation of further introductions, uncertainty in predicting customer demand for new offerings and difficulty in effectively managing inventory levels in line with anticipated demand. Moreover, if Canon is unable to respond quickly to unexpected technological innovations with respect to information systems and networks, Canon’s revenue may be significantly affected as a result of delays associated with the incorporation of such new information technologies into existing products and services as well as new offerings.

Canon’s revenue and gross margin also may suffer adverse effects because of the timing of product or service introductions by its competitors. This risk is exacerbated when a product has a short life cycle or when a competitor introduces a new product immediately prior to Canon’s introduction of a similar product. Furthermore, sales of Canon’s new products and services may replace sales of, or result in discounting of, some of its current products and services, potentially offsetting the benefits derived from the introduction of a successful new product or service. Canon must also ensure that its new products are not wholly or partially duplicative of existing products and operations. Given the competitive nature of Canon’s businesses, if any of these risks materialize, future demand for its products and services could be reduced, and its operating results could decline.

Changes in the print environment may affect Canon’s business

In the business machines market for such products as MFDs, copying machines and printers, customers are increasingly looking for ways to cut costs while protecting the environment. From this perspective, Managed Print Services (MPS), which aim to optimize printing efficiencies in the office, have become popular in recent years. This trend could lead to a decrease in business machine print volumes.

 

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In addition, the popularity of tablet PCs could also lead to a decrease in customer print opportunities. If Canon is unable to supply products and services that respond to these types of market trends, it could result in adverse effects on its operating results.

Canon’s digital camera business operates in a highly competitive environment.

“Mirrorless” cameras are interchangeable lens cameras which, because they do not incorporate a mirror mechanism, are more compact and lightweight than digital single-lens-reflex (“SLR”) cameras. The growth of the mirrorless camera market has the potential to adversely affect the market for digital SLR cameras, in which Canon boasts top market share. If the mirrorless camera market continues to grow and Canon fails to gain a leading share of that market or the digital SLR camera market shrinks relative to that market, our revenues and our overall presence in the camera market may be adversely affected.

Meanwhile, the smartphone market has been growing dramatically on a global scale. Smartphones allow users not only to take photos, but also to retouch them and to upload them to SNSs (“Social networking services”). If Canon’s compact digital cameras become less appealing compared to smartphones, Canon could suffer from an erosion of the compact digital camera market, with a resulting adverse effect on operating results.

Because the semiconductor lithography equipment and flat-panel-display (“FPD”) industry is highly cyclical, Canon may be adversely affected by any downturn in the industry.

The semiconductor lithography equipment and FPD industry is characterized by fluctuating business cycles, the timing, length and volatility of which are difficult to predict. Recurring periods of oversupply of semiconductor devices and FPD panels have at times led to significantly reduced demand for capital equipment, including the semiconductor lithography equipment and FPD lithography equipment that Canon produces. Despite this cyclicality, Canon must maintain significant levels of research and development expenditures to remain competitive. A future cyclical downturn in the lithography equipment industry and related fluctuations in the demand for capital equipment could cause cash flow from sales to fall below the level necessary to offset Canon’s expenditures, including those arising from research and development, and could consequently have a material adverse effect on Canon’s operating results and financial condition.

Risks Related to Canon’s Business

Economic trends in Canon’s major markets may adversely affect its operating results.

As a result of the economic downturn in recent periods, declines in consumption and restrained investment in Canon’s major markets, including Japan, the United States, Europe and Asia, have affected both individual consumer and corporate sales, and if economic conditions do not improve, these trends may continue. Canon’s operating results for products such as office and industrial equipment are affected by the financial results of its corporate customers, and deterioration of their financial results has caused and may continue to cause customers to limit capital investments. Demand for Canon’s consumer products, such as cameras and inkjet printers, is discretionary. Fluctuating inventory levels, rapid price declines owing to intensifying competition and the recent decline in the level of consumer spending and corporate investment driven by the economic downturn could adversely affect Canon’s operating results and financial position.

Canon derives a significant percentage of its revenues from Hewlett-Packard.

Canon depends on Hewlett-Packard for a significant part of its business. During fiscal 2012, 17.0% of Canon’s net sales were to Hewlett-Packard. As a result, Canon’s business and operating results may be affected by the policies, business and operating results of Hewlett-Packard. Any decision by Hewlett-Packard management to limit or reduce the scope of its relationship with Canon would adversely affect Canon’s business and operating results.

 

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A substantial portion of Canon’s business activity is conducted outside Japan, exposing Canon to the risks of international operations.

A substantial portion of Canon’s business activity is conducted outside Japan, including in developing and emerging markets in Asia. There are a number of risks inherent in doing business in such markets, including the following:

 

   

underdeveloped technological infrastructure, which can affect production or other activities or result in lower customer acceptance of Canon’s services;

   

political turmoil, territorial disputes or unfavorable economic factors;

   

difficulties in recruiting and retaining qualified personnel;

   

potentially adverse tax consequences, including transfer pricing issues and increases in corporate tax rates;

   

longer payment cycles; and

   

unexpected legal or regulatory changes.

Any inability to manage the risks inherent in Canon’s international activities could adversely affect its business and operating results. In order to reduce costs and produce Canon’s products competitively, Canon maintains several production facilities and more than ten sales bases in Asia, including China, Thailand and Vietnam, and is vigorously conducting significant production and sales activities in Asia. Under such circumstances, unexpected events may occur, including political or legal change, labor shortages or strikes, increased personnel costs or changes in economic conditions. In particular, a large revaluation of local currencies, or a sudden significant change in the tax system or other regulatory regimes could adversely affect Canon’s overall performance. Given the importance of Canon’s research and development, production and sales activities in Asia, Canon’s business may be more acutely exposed to such risks than to the global economy in general.

The outbreak, prevalence or spread of an epidemic disease, such as a new strain of influenza, in any region around the globe could also have a negative effect on Canon’s business operations, including its research and development, production and sales activities, along with the disruption of markets for Canon’s products.

In addition, unexpected changes in import taxes imposed by foreign governments could adversely affect Canon’s business and operating results.

Canon may unintentionally infringe international trade laws and regulations, and any such infringement may lead to an adverse effect on its business. The extent of the effect on Canon’s business will depend upon the nature of the infringement and the severity of fines or other sanctions potentially imposed upon Canon. A major infringement could result in a temporary or permanent suspension of Canon’s trading rights in one or more jurisdictions. In addition to any sanctions prescribed by law, adverse publicity regarding an alleged infringement of trade laws and regulations by Canon may also have a negative effect on the Canon brand and image.

Any of the above factors regarding international operations could have an adverse effect on Canon’s operating results.

Canon depends on specific outside suppliers for certain key components.

Canon relies on specific outside suppliers that meet Canon’s strict criteria for quality, efficiency and environmental friendliness for critical components and special materials used in its products. In some cases, Canon may be forced to discontinue production of some or all of its products if the specific outside suppliers that supply key components and special materials across Canon’s product lines experience unforeseen difficulties, or if such parts and special materials suffer from quality problems or are in short supply. Further, the prices of components and special materials purchased from specific outside suppliers may surge, triggered by the imbalance of supply and demand along with other factors. If such risks occur as an outcome of the dependency on such specific outside vendors, Canon’s operating results may be adversely affected.

 

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Although competition is increasing in the market for supplies and services following initial product placement, Canon maintains a high market share in such sales. As a result, Canon may be subject to antitrust-related lawsuits, investigations or proceedings, which may adversely affect its operating results or reputation.

A portion of Canon’s net sales consists of sales of supplies and the provision of services after the initial equipment placement. As these supplies and services have become more commoditized, the number of competitors in these markets has increased. Canon’s success in maintaining these post-placement sales will depend on its ability to compete successfully with these competitors, some of which may offer lower-priced products or services. Despite the increase in competitors, Canon currently maintains a high market share in the market for supplies. Accordingly, Canon may be subject to lawsuits, investigations or proceedings under relevant antitrust laws and regulations. Any such lawsuits, investigations or proceedings may lead to substantial costs and have an adverse effect on Canon’s operating results or reputation.

Increases in counterfeit Canon products may adversely affect Canon’s brand image and its operating results.

In recent years, counterfeiting of Canon products has increased worldwide. Counterfeit products may diminish Canon’s brand image, particularly if purchasers of such products mistakenly attribute the counterfeit products’ poor quality to Canon. Canon has been taking measures to halt the spread of counterfeit products. However, there can be no assurance that such measures will be successful, and the continued manufacture and sale of such products could adversely affect Canon’s brand image as well as its operating results.

Canon is subject to financial and reputational risks owing to product quality and liability issues.

Although Canon works to minimize risks that may arise from product quality and liability issues, such as those triggered by the individual functionality and also from the combination of hardware and software that make up Canon’s products, there can be no assurance that Canon will be able to eliminate or limit these issues and the resulting damages. If such factors adversely affect Canon’s operating activities, generate additional expenses such as those related to product recalls, service and compensation, or otherwise hurt its brand image, Canon’s operating results or reputation for quality may be adversely affected.

Per unit production costs are highest when a new product is introduced, and if such new products are not successful or if Canon fails to achieve cost reductions over time, Canon’s gross profits may be adversely affected.

The unit costs of Canon’s products have historically been highest when products are newly introduced into production. The introduction of new products has at times had a negative impact on gross profit, operating results and cash flow. Cost reductions and enhancements are typically achieved over time through:

 

   

engineering improvements;

   

economies of scale;

   

improvements in manufacturing processes;

   

improved serviceability of products; and

   

reduced inventories of parts and products.

Initial shipments of new products adversely affect Canon’s profit and cash flow, and if new products do not achieve sufficient sales volumes, Canon’s gross profit, operating results and cash flow may be adversely affected.

Cyclical patterns in sales of Canon’s products make planning and inventory management difficult and future financial results less predictable.

Canon generally experiences seasonal trends in the sales of its consumer-oriented products. Canon has little control over the various factors that produce these seasonal trends. Accordingly, it is difficult to predict short-term demand, placing pressure on Canon’s inventory management and logistics systems. If product supply

 

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from Canon exceeds actual demand, excess inventory will put downward pressure on selling prices and raise inefficiency in cash management, potentially reducing Canon’s revenue. Alternatively, if actual demand exceeds the supply of products, Canon’s ability to fulfill orders may be limited, which could adversely affect market share, net sales and increase the risk of unanticipated variations in its operating results.

Canon’s business is subject to changes in the sales environment.

A substantial portion of Canon’s market share is concentrated in a relatively small number of large distributors, particularly in Europe and the United States. Canon’s product sales to these distributors constitute a significant percentage of its overall sales. As a result, any disruptions in its relationships with these large distributors in specific sales territories could adversely affect Canon’s ability to meet its sales targets. Any increase in the concentration of sales to these large distributors could result in a reduction of Canon’s pricing power and adversely affect its profits. In addition, the rapid proliferation of Internet-based businesses may render conventional distribution channels obsolete. These and other changes in Canon’s sales environment could adversely affect Canon’s operating results.

Canon’s success depends in part on the value of its brand name, and if the value of the brand is diminished, Canon’s operating results and prospects will be adversely affected.

Canon’s success depends in part on the value of its brand name. Any negative publicity regarding the quality of Canon’s products could have an adverse impact on operations, especially negative publicity involving consumer products. There can be no assurance that such adverse publicity will not occur or that such claims will not be made in the future. Furthermore, Canon cannot predict the impact of such adverse publicity on its business and operating results. If Canon fails to maintain its overall compliance regime, especially legal or regulatory compliance, this also could result in damage to Canon’s credibility and brand value.

Canon’s cooperation and alliances with, strategic investments in, and acquisitions of, third parties may not produce successful results. The unexpected emergence of strong competitors through mergers and acquisitions may affect Canon’s business environment.

Canon is engaged in alliances, joint ventures, and strategic investments with other companies. Canon also makes strategic acquisitions of other companies. These activities can help to promote Canon’s technological development process and expand its customer base. However, weak business trends or disappointing performance by partners or targets may adversely affect the success of such activities. In addition, the success of such activities may be adversely affected by the inability of Canon and its partners or targets to successfully define and reach common objectives. Even if Canon and its partners or targets succeed in designing a structure that allows for the definition and achievement of common objectives, synergies may not be created between the businesses of Canon and its partners or targets. Integration of operations may take more time than expected. An unexpected cancellation of a major business alliance may disrupt Canon’s overall business plans and may also result in a delayed return on, or reduced recoverability of, the investment, adversely affecting Canon’s operating results and financial position.

In addition, the unexpected emergence of strong competitors through mergers and acquisitions or the formation of competitive business alliances may change the competitive environment of the business areas in which Canon participates, thereby affecting Canon’s future operating results.

Canon’s operating and financing activities expose it to foreign currency exchange and interest rate risks that may adversely affect its revenues and profitability.

Canon derives a significant portion of its revenue from its international operations. As a result, Canon’s operating results and financial position have been and may continue to be significantly affected by changes in the value of the yen versus foreign currencies. Sales of Canon’s products denominated in foreign currencies, as well

 

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as its margins have been and may continue to be adversely affected by the strength of the yen against foreign currencies. Conversely, a strengthening of foreign currencies against the yen will generally be favorable to Canon’s foreign currency sales. Canon’s consolidated financial statements are presented in yen. As such, the yen value of Canon’s assets and liabilities arising from foreign currency business transactions and the yen value of Canon’s foreign currency-denominated equity investments have fluctuated and may continue to fluctuate. Unpredictable fluctuations may have certain effects on Canon’s consolidated financial statements. Moreover, Canon’s consolidated financial statements have been and may continue to be affected by currency translations from the financial statements of Canon’s foreign subsidiaries and affiliates, which are denominated in various foreign currencies. Furthermore, if the values of certain foreign currencies, such as the U.S. dollar and the euro, weaken significantly against the yen, Canon’s operating results and financial position would be negatively affected. Although Canon strives to mitigate the effects of foreign currency fluctuations arising from its international business activities, Canon’s operating results and financial position could be adversely affected by a strong yen environment. Canon is also exposed to the risk of interest rate fluctuations, which may affect the value of Canon’s financial assets and liabilities.

Canon depends on efficient logistics services to distribute its products worldwide.

Canon depends on efficient logistics services to distribute its products worldwide. Problems with Canon’s computerized logistics systems, an outbreak of war or strife within Canon’s operating regions or regional labor disputes, such as a dockworkers’ strike, could lead to a disruption of Canon’s operations and result not only in increased logistical costs, but also in the loss of sales opportunities owing to delays in delivery. Moreover, because demand for Canon’s consumer products may fluctuate throughout the year, transportation means, such as cargo vessels or air freight, and warehouse space must be appropriately managed to take such fluctuations into account. Failure to do so could result in either a loss of sales opportunities or the incurrence of unnecessary costs.

In addition, the increasing levels of precision required of semiconductor lithography equipment and FPD lithography equipment and the resulting increase in the value and size of such equipment in recent years have resulted in a concurrent increase in the need for sensitive handling and transportation of these products. Because of their precise nature, even a minor shock during the handling and transportation process can potentially cause irreparable damage to such products. If unforeseen accidents during the handling and transportation process render a significant portion of Canon’s high-end precision products unmarketable, costs will increase, and Canon may lose sales opportunities and customer confidence.

Substantially higher crude oil prices and the supply-and-demand balance of transportation means could lead to increases in the cost of freight, which could adversely affect Canon’s operating results.

Furthermore, earthquakes or volcanic eruptions may cause a breakdown of transportation facilities, such as ports or airports, or otherwise interrupt critical logistics services, which may have an adverse effect on production or sales activities.

Other Risks

Canon’s facilities, information systems and information security systems are subject to damage as a result of disasters, outages or similar events.

Canon’s headquarters functions, information systems and research and development centers are located in or near Tokyo, Japan, where the possibility of damage from earthquakes is generally higher than in other parts of the world. In addition, Canon’s facilities or offices, including those for research and development, materials procurement, manufacturing, logistics, sales and services are located throughout the world and subject to the possibility of outage or similar disruption as a result of a variety of events, including natural disasters such as earthquake, flood, computer viruses, cyber attacks and terrorist attacks. Although Canon continues to establish appropriate backup structures for its facilities and information systems, there can be no assurance that Canon will

 

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be able to prevent or mitigate the effect of such events or developments such as the leakage of harmful substances, shutdowns of information systems, and leakage, falsification and loss of internal databases. Although Canon has implemented backup plans to permit the manufacture of its products at multiple production facilities, such plans do not cover all product models. In addition, such backup arrangements may not be adequate to maintain production quantity at sufficient levels. Such factors may adversely affect Canon’s operating activities, generate expenses relating to physical or personal damage, or hurt Canon’s brand image, and its operating results may consequently be adversely affected.

Canon’s business is subject to environmental laws and regulations.

Canon is subject to certain Japanese and foreign environmental laws and regulations in areas such as energy resource conservation, reduction of hazardous substances, product recycling, clean air, clean water and waste disposal.

In particular outlays required to address climate change could vary widely depending on circumstances of the Kyoto Protocol extension and corresponding measures.

In other cases, such as the “Directive Establishing a Framework for the Setting of EcoDesign Requirements for Energy-related Products across the European Union”, detailed implementation standards responsive to environmental requirements remain under review. Canon strives to comply with such standards to the extent possible in advance of official adoption. If, however, Canon’s current measures are deemed insufficient to satisfy such standards when adopted, Canon may be required to take further action and incur additional compliance costs.

Furthermore, Canon may incur rework or repair expenses if non-qualifying products are shipped in violation of the “European Union Directive on the Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment” (“RoHS Directive 2011/65/EU”) or if other legal regulations are not fully followed by parts suppliers. Such extra costs may exceed compensation from parts suppliers or coverage from insurance contracts and could have an adverse effect on Canon’s overall business and operating results.

Environmental cleanup and remediation costs relating to Canon’s properties and associated litigation could decrease Canon’s net cash flow, adversely affect its operating results and impair its financial condition.

Canon is subject to potential liability for the investigation and cleanup of environmental contamination at each of the properties that it owns or operates and at certain properties Canon formerly owned or operated. If Canon is held responsible for such costs in any future litigation or proceedings, such costs may not be covered by insurance and may be material.

In addition, Canon may face liability for alleged personal injury or property damage because of exposure to chemicals or other hazardous substances from its facilities. Canon may also face liability for personal injury, property damage or natural resource damage, and decontamination costs for alleged pollution from its facilities. A significant increase in the number, success and cost of these claims could adversely affect Canon’s business and operating results.

Canon may be subject to intellectual property litigation and infringement claims, which could cause it to incur significant expenses or prevent it from selling its products.

Because of the emphasis on product innovation in the markets for Canon’s products, many of which are subject to frequent technological innovations, patents and other intellectual property are an important competitive factor. Canon relies primarily on internally developed technology, and seeks to protect such technology through a combination of patents, trademarks and other intellectual property rights.

 

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Canon faces risks that:

 

   

competitors will be able to develop similar technology independently;

   

Canon’s pending patent applications may not be issued;

   

the steps Canon takes to prevent misappropriation or infringement of its intellectual property may be unsuccessful; and

   

intellectual property laws may not adequately protect Canon’s intellectual property, particularly in certain emerging markets.

To the extent that Canon is unaware of actual or potential infringements of, or adverse claims to, its rights in such technologies, any interference with Canon’s rights to use such technologies could adversely affect its operating results.

In addition, Canon may need to litigate in order to enforce its patents, copyrights or other intellectual property rights, to protect its trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement, which can be expensive and time-consuming. If any government agency or third party is adjudicated to have a valid claim against Canon, Canon could be required to:

 

   

refrain from selling the relevant product in certain markets;

   

pay monetary damages;

   

pursue development of non-infringing technologies, which may not be feasible; or

   

attempt to acquire licenses to the infringed technology and to make royalty payments, which may not be available on commercially reasonable terms, if at all.

Canon also licenses its patents to third parties in exchange for payment or cross-licensing. The terms and conditions of such licensing or changes in the renewal conditions of such licenses could affect Canon’s business.

Canon’s businesses, corporate image and operating results could be adversely affected by any of these developments.

Disputes involving payment of remuneration for employee inventions may adversely affect Canon’s brand image as well as its business.

Canon may face disputes involving payment of remuneration for employee inventions, the rights to which have been assigned to Canon. This risk is particularly relevant in countries such as Japan and Germany, where patent laws require companies to remunerate employees for the assignment of employee invention rights to the company. Canon maintains company rules and an evaluation system for employee inventions. Canon believes it has been making adequate payments to employees for the assignment of invention rights based on these rules. However, there can be no assurance that disputes will not arise with respect to the amount of these payments to employees. Such disputes may adversely affect Canon’s brand image as well as its business.

Canon must attract and retain highly qualified professionals.

Canon’s future operating results depend in significant part upon the continued contributions of its employees. In addition, Canon’s future operating results depend in part on its ability to attract, train and retain qualified personnel in development, production, sales and management. The competition for human resources in the high-tech industries in which Canon operates has intensified in recent years. Moreover, owing to the accelerating pace of technological change, the importance of training new personnel in a timely manner to meet product research and development requirements will increase. Failure by Canon to recruit and train qualified personnel or the loss of key employees could delay development or slow production and could increase the risks of outflow of technologies and know-how. These factors may adversely affect Canon’s business and operating results.

Maintaining a high level of expertise in Canon’s manufacturing technology is critical to Canon’s business. However, it is difficult to secure the requisite expertise for specialized skill areas, such as lens processing, in a

 

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short time period. While Canon engages in advance planning to obtain the expertise needed for each skill area, Canon cannot guarantee that such expertise will be acquired in a timely manner and retained, and failure to do so may adversely affect Canon’s business and operating results.

Canon may be adversely affected by fluctuations in the stock and bond markets.

Canon’s assets include investments in publicly traded securities. As a result, Canon’s operating results and general financial position may be affected by price fluctuations in the stock and bond markets. The current volatility in financial markets and overall economic uncertainty increase the risk that the actual amounts realized in the future on Canon’s investments could differ significantly from the fair values currently assigned to them. In addition, if valuations of investment assets decrease because of conditions in stock or bond markets, for example, additional funding and accruals with respect to Canon’s pension and other obligations may be required, and such funding and accruals may adversely affect Canon’s operating results and consolidated financial condition.

Confidential information may be inadvertently disclosed, which could lead to damage claims or harm Canon’s reputation, and may have an adverse effect on Canon’s business.

In connection with certain projects, Canon may receive confidential or sensitive information (such as personal information) from its customers relating to these customers or to other affected individuals or parties. In addition, Canon uses computer systems and electronic data in managing information relating to its employees. Although Canon makes its best efforts to maintain the confidentiality of such information through procedures designed to prevent accidental release of confidential or sensitive information, such information may be inadvertently disclosed without Canon’s knowledge. If this occurs, Canon may be subject to claims for damages from the affected individuals or parties, suffer harm to its reputation or be subject to liabilities or penalties under applicable statutes.

Inadvertent disclosure of confidential information regarding new technology could also have a material adverse effect on Canon’s business.

Canon is subject to risks relating legal proceedings.

Canon is involved in various claims and legal actions arising in the ordinary course of its business. Results of actual and potential litigation are inherently uncertain. An unfavorable result in a legal proceeding could adversely affect Canon’s reputation, financial condition and operating results.

Item 4. Information on the Company

A. History and development of the Company

Canon Inc. is a joint stock corporation (kabushiki kaisha) formed under the Corporation Law of Japan. Its principal place of business is at 30-2, Shimomaruko 3-chome, Ohta-ku, Tokyo 146-8501, Japan. The telephone number is +81-3-3758-2111.

The Company was incorporated under the laws of Japan on August 10, 1937 to produce and sell Japan’s first focal plane shutter 35mm still camera, which was developed by its predecessor company, Precision Optical Research Laboratories, which was organized in 1933.

In the late 1950s, Canon entered the business machines field utilizing technology obtained through the development of photographic and optical products. With the successful introduction of electronic calculators in 1964, Canon continued to expand its operations to include plain paper copying machines, faxes, laser printers, bubble jet printers, computers, video camcorders and digital cameras.

 

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The following are important recent events in the development of Canon’s business.

 

   

On February 19, 2010, Canon acquired shares of OPTOPOL Technology S.A. (“OPTOPOL”) through a tender offer and made it into a subsidiary. By making OPTOPOL into a subsidiary, Canon aims to achieve the world’s No. 1 position within the overall ophthalmic diagnostic equipment segment.

   

On March 9, 2010, Canon acquired shares of Océ N.V. (“Océ”) through a public cash tender offer in addition to interest Canon held before the public cash tender offer and made it into a subsidiary. By making Océ into a subsidiary, Canon aims to further strengthen its business foundation in order to solidify its position as one of the global industry leaders. The combination capitalizes on an excellent complementary fit in product mix, channel mix, R&D, and business lines resulting in an outstanding customer offer spanning the entire industry.

In fiscal 2012, 2011, and 2010, Canon’s increases in property, plant and equipment were ¥270,457 million, ¥226,869 million and ¥158,976 million, respectively. In fiscal 2012, the increases in property, plant and equipment were mainly used to expand production capabilities in both domestic and overseas regions, and to bolster Canon’s production-technology-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 2013, Canon projects an increase in property, plant and equipment of approximately ¥265,000 million. This amount is expected to be spent for investments in new production plants and new facilities of Canon. Canon anticipates that the funds needed for this increase will be generated internally through operations.

B. Business overview

Canon is one of the world’s leading manufacturers of office multifunction devices (“MFDs”), plain paper copying machines, laser printers, inkjet printers, cameras and lithography equipment.

Canon sells its products principally under the Canon brand name and through sales subsidiaries. Each of these subsidiaries is responsible for marketing and distribution to retail dealers in an assigned territory. In fiscal 2012, 79.3% of consolidated net sales were generated outside Japan, with approximately 27.0%, 29.1% and 23.2% generated in the Americas, Europe and Asia and Oceania, respectively.

Canon’s strategy is to develop innovative, high value-added products incorporating advanced technologies.

Canon’s research and development activities range from basic research to product-oriented research directed at maintaining and increasing Canon’s technological leadership in the marketplace.

Canon manufactures the majority of its products in Japan, but in an effort to reduce currency exchange risk and production costs, Canon has increased its overseas production and the use of local components. Canon has manufacturing subsidiaries in a variety of countries, including the United States, Germany, France, the Netherlands, Taiwan, China, Malaysia, Thailand and Vietnam.

As a concerned member of the world community, Canon emphasizes recycling and has increased its use of clean energy sources and cleaner manufacturing processes. Canon has also launched programs to collect and recycle used Canon cartridges and to refurbish used Canon copying machines. In addition, Canon has removed virtually all environmentally unfriendly chemicals from its manufacturing processes.

Products

Canon operates its business in three segments: the “Office Business Unit,” the “Imaging System Business Unit” and the “Industry and Others Business Unit”.

 

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- Office Business Unit -

Canon manufactures, markets and services a wide range of MFDs, office copying machines and personal-use copying machines. Canon also delivers value added to customers through software, services and solutions. In the office market, together with Océ, which Canon consolidated in 2010, Canon is now in a much improved position compared to fiscal 2011 to serve customers in terms of sales coverage, product portfolio and service capabilities and address customer needs in the imaging and document space.

In fiscal 2012, Canon was able to maintain its revenue from sales of MFDs, services and solutions despite the strong yen and the deceleration of the global economy. The consolidation of Océ has brought many strategic assets to Canon, including expertise, resources and innovation.

The office market is subject to rapid change, and customer preferences have been shifting from monochrome to color products and from hardware to services and solutions. In fiscal 2012, Canon enhanced its portfolio with the launch of digital MFDs, the imageRUNNER ADVANCE C 5200 series, a color device, and the monochrome imageRUNNER ADVANCE 6200 and 8200 series. These models are the next-generation imageRUNNER ADVANCE series, a platform of multifunction office systems designed to transform a workflow from a series of individual processes to a continuous, integrated flow of shared information.

Canon offers office MFDs for a wide range of environments from offices to professional graphic arts. The print industry is increasingly turning to short-run, print-on-demand and variable data printing in recent years. In fiscal 2012, Canon introduced the Océ VarioPrint 110/125/135, monochrome digital presses jointly developed with Océ. This system combines Canon’s respective best-of-class strengths, redefining excellence in monochrome printing.

Canon is also marketing software, services and solutions, delivering added-value to its customers. Canon’s application development platform, the Multifunctional Embedded Application Platform (“MEAP”), allows the creation of customized applications for Canon MFDs enabling tight integration into customer’s IT infrastructure. The integration not only boosts productivity but also allows users to take advantage of the power of MFD cloud services. In fiscal 2012, Canon launched some new services as part of the Canon Business Imaging Online (“CBIO”) initiative. CBIO is a global cloud-based platform for implementing additional control solutions such as managing, configuring and monitoring devices remotely for Canon Managed Document Services engagements. It helps customers improve efficiency, reduce total cost of ownership, and enjoy more convenience through services such as form creation and print services. Canon has also introduced imageWare Desktop Version 3 to enhance the imageRUNNER ADVANCE ecosystem.

Canon’s expanded alliance with Hewlett-Packard contributed to its being awarded several large enterprise deals. Canon believes Canon and Hewlett-Packard continue to offer unmatched office workflow solutions that are highly responsive to customer needs in this market.

Canon made Océ a consolidated subsidiary in 2010 to strengthen its printing business. In fiscal 2012, Canon introduced the Océ VarioPrint 110/125/135, monochrome digital presses jointly developed with Océ. The cross selling of Canon’s mutual product portfolios continues to expand as Canon brings to its respective customer bases a richer set of combined offerings. The integration has brought broader channel coverage, complementary assets and capabilities, and incremental sales growth.

To enter the Poster print market, Canon launched a new wide format printer, the Océ ColorWave 650. During a major European fair, Canon introduced Océ InfiniStream, the industry´s fastest liquid toner technology.

Developed and fostered by Canon, laser printers are standard output peripherals for offices. Canon’s laser printers are relatively small and have high-quality capabilities attributable to Canon’s expertise with the relevant technologies. Canon’s adoption of a user-replaceable toner cartridge system containing optical components makes its printers easy to maintain. Most of Canon’s laser printer sales are on an Original Equipment Manufacturer (“OEM”) basis.

 

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On a global basis, the production and sales of laser printers dropped drastically in 2009 after Lehman Brothers bankruptcy. In 2010 and 2011, the production and sales returned to positive growth in response to the global economic recovery driven by low-end product expansion. However, the trend returned to negative growth again in 2012 due to the serious recession in Europe and the stagnation of economic growth in many of Canon’s markets, even in emerging countries like China. By such a change of general market trend, the production and sales of Canon’s laser printers declined year-on-year in 2012. The Office Business Unit also includes the related sales of paper and chemicals, service and replacement parts.

- Imaging System Business Unit -

Canon manufactures and markets digital cameras and digital video camcorders, as well as lenses and various related accessories.

The worldwide compact digital camera market declined by 10% year-on-year in fiscal 2012, primarily due to prolonged European debt crisis, slowdown of economic growth in emerging area, anti-Japan demonstration in China, and the rapid penetration of smartphones. Canon maintained its formidable position in the industry by bringing twenty new models to market in 2012. Three new models in particular have contributed to Canon’s sales: the PowerShot ELPH 110 HS, the PowerShot SX 40 HS, and the PowerShot A2300.

In 2012, Canon launched five new camera products (one mirrorless, one entry class, two advanced amateur and one professional). Canon particularly strengthened its product line up in the 35mm full-frame sensor category by introducing three new models: the EOS-1D X, EOS 5D Mark III and EOS 6D.

Canon’s flagship and professional model, the EOS-1D X delivers superior image quality owing to an 18.1 megapixel 35mm full -frame CMOS sensor, adjustable from ISO 100 to 51,200 within its standard range and, permitting shooting of up to twelve frames per second (fps). The EOS-1D X is popular for shooting all manner of sporting and other events around the world.

The EOS 5D Mark III delivers superb image quality, thanks to a new 22.3-megapixel full-frame Canon CMOS sensor, adjustable from ISO 100 to 25,600 within its standard range, a 61-point High Density Reticular Autofocus (AF) System and six fps continuous shooting speed.

The EOS 6D is the world’s lightest and smallest interchangeable lens digital camera equipped with a 35mm full -frame sensor as of November 30, 2012. The EOS 6D, designed for advanced amateurs, is also the first EOS equipped with wireless LAN and GPS capabilities.

Additionally, in the entry class products, the EOS Rebel T4i is equipped with features such as a Vari-angle Touch Screen LCD monitor, a function to facilitate video shooting and an improved fully automatic shooting function. Canon also offers the EOS Rebel T3i in this class.

The EOS M is Canon’s first mirrorless EOS, featuring a small and light body, stylish design and availability in various colors. In addition, owing to Mount Adapter EF-EOS M, the EOS M can use all of Canon’s EF lens.

The market for interchangeable lenses for digital cameras grew robustly as well. Canon has been introducing high-quality, high-performance lenses built on superior technology (e.g., a special “Sub-Wavelength” Coating, multilayer diffractive optical elements and image stabilizers), which Canon believes allowed it to maintain its advantage over the competition in this field, as well as in the digital SINGLE-LENS REFLEX (“SLR”) camera field. In October 2011, the cumulative production of EF lens series interchangeable lenses surpassed 70 million. Including three new products launched in March 2011, the interchangeable lens lineup currently exceeds 60 products. With high expectations for further growth in this market, Canon expects to continue boosting both revenue and market share.

 

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Canon maintains a leading position in the digital video camcorder market, having introduced a series of flash memory models in fiscal 2008 followed by high-end models in fiscal 2009, to successfully promote Canon’s brand reputation for high image quality. In fiscal 2010, Canon added general-purpose models, allowing Canon to cover the full range with flash memory models. In the field of professional camcorders, Canon introduced flash memory models, our “XF” series, in 2010 and 2011 for use in broadcast news, documentary and independent filmmaking. Furthermore, in November 2011, Canon announced its full-fledged entry into digital high-resolution motion picture production by launching “Cinema EOS System” which consists of new interchangeable lens digital cinema cameras featuring a newly developed Super 35mm-equivalent, approximately 8.29 megapixel Complementary Metal–Oxide–Semiconductor (“CMOS”) sensor, EF Lenses and new EF Cinema Lenses lineup. In 2012, “CINEMA EOS SYSTEM” has strengthened its line up with launching new digital cinema cameras capable of recording 4K-resolution video and entry level HD. Despite a continuing slowdown in the overall digital video camcorder market, there is a steady, positive trend in HD and flash memory sales and volume. Canon has been expanding its flash memory model lineups in order to expand sales and to take advantage of this growth of the HD and flash memory markets.

Canon began aggressively expanding its lineup of network cameras used for business surveillance video and monitoring applications in the second half of 2008 and has achieved a reputation for high-quality images due to the strength of its optical performance and video processing technology. This market is expected to expand further through improvements in high-quality imaging and image analysis, both of which are trends that will enable Canon to apply its traditional strengths. In fact Canon launched four new HD products in the second half of 2011 that contribute to societal safety and security.

As the inventor of inkjet printing technology, Canon believes that it continues to provide customers with the best performing inkjet printer models. Canon offers high-performance and high value-added inkjet printers to home, business and professional users. In response to intense competition in the consumer segment, Canon launched a new lineup of printers in fiscal 2012. All of these models feature print heads based on Canon’s Full-photolithography Inkjet Nozzle Engineering (“FINE”) technology, which boosts print speed and image quality up to 9600 x 2400 dpi, and the ChromaLife100+ system, which provides high-quality and long-lasting photographic images using a combination of genuine ink and paper. Canon PIXMA photo printers offer many advanced features, including low profile design, My Image Garden, the Intelligent Touch System, PIXMA Cloud Link and wireless printing, each of which makes printer operation more user friendly for diversified users. With an advanced printer lineup, Canon has increased its unit sales.

In February 2012, Canon started to ship the DreamLabo 5000, the first inkjet production photo printer which incorporates its new “FINE” high-density print head technology to significantly expand the potential of photo print quality. In the autumn of 2011, Canon also introduced professional photo inkjet printers: the PIXMA PRO-10 with a ten-color ink system of pigment-based inks, and the PIXMA PRO-100 with eight dye inks to produce colorful and vivid prints. With the addition of these products, Canon aims to further expand its business leveraging its strength in the photo printing market.

Regarding large-format inkjet printers, although the market slightly decreased in 2012 compared to the previous year, Canon significantly increased its unit sales, launching four new models for the graphic art market. Canon large-format inkjet printers are based on “FINE” head technology and employ its unique image processor, “L-COA,” developed for high-speed, high-resolution printing, and “LUCIA/LUCIA EX” pigment inks, developed for combining the glossiness of dye ink with vivid colors and weather resistance.

Canon markets a wide variety of scanners geared toward a broad spectrum of user needs, including image scanners in the CanoScan LiDE series using a Contact Image Sensor (“CIS”) and scanners with Charge-Coupled Devices (“CCD”) for high resolution. CIS is a close-contact method that allows for a significant reduction in scanner weight and size. Although the scanner market has continued to shrink and has shifted toward MFDs, Canon has maintained a high market share.

 

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Canon is the leader in the market for television lenses used by television stations for live sports, news broadcasts, concerts, dramatic productions and other applications. In 2011, Canon released the XJ95x8.6B high definition zoom lens for outdoor broadcasts. This lens achieves not only the world’s widest angle, but also 95x optical zoom magnification, which has bolstered Canon’s position as the broadcast television lens market leader.

Canon believes its television lenses are easily the most popular for broadcasting all manner of sporting and other events around the world, and continue to deliver thrilling true depictions of events to television viewers, while inspiring viewers and conveying to them a realistic picture of news stories around the world.

Canon’s calculator operations—from development to production to marketing—are centered in Hong Kong. Canon’s tradition of technological innovation began with its focus on personal information products, including calculators with built-in printers and electronic dictionaries. Canon continues to develop appealing personal information products that reflect demand trends.

- Industry and Others Business Unit -

In 2012, the market for semiconductor lithography equipment decreased approximately 30% from the previous year to about 240 units. Equipment investment by chip makers remained low especially in the memory segment primarily because supply continued to outweigh demand in the memory device market. However, image sensor, logic device and automotive device makers steadily increased their equipment investments, drawn by the growing market for smartphones, tablet PCs and hybrid cars. At the same time, some manufacturers-started to invest in i-line steppers for small diameter wafers used in power devices and LEDs, as well as for new markets such as 3D mountings for through silicon Via (“TSV”).

Canon has been rationalizing production systems to more flexibly respond to and match market changes, creating new systems with overall responsibility for each stepper model, and integrating manufacturing and sales functions so that customer needs can be more quickly reflected in development. Through these activities, a “design-in” business style has been taking hold and steady progress is being made in developing and marketing products with high added value. For example, Canon released a new i-line stepper FPA-3030i5+, suitable for the production of green devices such as LEDs and power devices, which currently occupies a high share of the automotive device and LED markets. Canon also released a new KrF stepper FPA-6300ES6a with greatly improved productivity compared to conventional equipment.

In 2012, the market for FPD lithography equipment decreased 40% from the previous year to around 70 units. Such FPD lithography equipment investments generally slowed due to a deterioration in panel makers’ earnings. Overall, the market for 8th generation large-sized panel production declined 60% from the previous year while the market for 5.5-6th generation small-to-mid sized panel production maintained high growth due to the brisk market for smartphones and tablet PCs. Although the market has been shrinking, the MPAsp-H700 series supporting 7th and 8th generation large-sized panels continue to offer high productivity and have contributed to customer production plans by allowing for quick equipment installation at existing production sites. This has helped Canon capture and maintain a commanding share of the FPD lithography equipment market for large-sized panel production. Furthermore, Canon’s sales and service support systems have earned high accolades in China.

Canon expects FPD lithography equipment investments by panel makers to recover in 2013, mainly led by Chinese makers. Canon aims to turn around the market share by revamping its product lineup by including products for small-to-mid-sized panels.

Medical equipment sold by Canon includes X-ray image sensors, X-ray imaging systems, retinal cameras, autorefractometers and image-processing equipment for computerized systems. Canon’s pioneering digital radiography system takes X-ray photography into the digital age.

 

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Other Canon products, such as electronic components, including magnetic heads and micro-motors, are sold primarily to equipment manufacturers. In addition, Canon provides industrial machines such as die bonder and magnetic disk film deposition equipment. Canon also offers business information products, which primarily consist of personal computers, servers and document scanners.

With the trend toward digitization, the demand for scanning documents into text or image data is expanding. Canon’s document scanners rapidly and efficiently digitize large volumes of printed information. Canon offers a wide range of scanner models, including color-capable compact sheet-fed types and a flatbed model suitable for scanning book format documents. Canon also offers a hybrid model that can create microfilm records. Canon’s diverse lineup seeks to meet increased demand by business customers for digitizing office documents, which enables such customers to share documents across Internet or intranet platforms or to capture forms with optical character recognition.

Marketing and distribution

Canon sells its products primarily through subsidiaries organized under regional marketing subsidiaries: Canon Marketing Japan Inc. in Japan; Canon U.S.A., Inc. in North and South America; Canon Europe Ltd. and Canon Europa N.V. in Europe, Russia, Africa and the Middle East; Canon (China) Co., Ltd. in Asia outside Japan; and Canon Australia Pty. Ltd. in Oceania. Each subsidiary is responsible for its own market research and for determining its sales channels, advertising and promotional activities. Each subsidiary provides tailor-made solutions to a diverse range of unique customers and aims to advance Canon’s reputation as a highly trusted brand.

In Japan, Canon sells its products primarily through Canon Marketing Japan Inc., mainly to dealers and retail outlets.

In the Americas, Canon sells its products primarily through Canon U.S.A., Inc., Canon Canada Inc. and Canon Latin America, Inc., mainly to dealers and retail outlets.

In Europe, Canon sells its products primarily through Canon Europa N.V., which sells mainly through subsidiaries or independent distributors to dealers and retail outlets in each locality. In addition, copying machines are sold directly to end-users by several subsidiaries such as Canon (UK) Ltd. in the United Kingdom and Canon France S.A.S. in France.

In Southeast Asia and Oceania, Canon sells its products through subsidiaries located in those areas. In addition, copying machines are sold directly to end-users in Australia by Canon Australia Pty. Ltd.

Canon also sells laser printers on an OEM basis to Hewlett-Packard Company. Hewlett-Packard resells these printers under the “HP LaserJet Printers” name. During fiscal 2012 and fiscal 2011, such sales constituted 17.0% and 19.3%, respectively, of Canon’s consolidated net sales.

Canon continues to enhance its distribution system by promoting the continuing education of its sales personnel and by improving inventory management and business planning through weekly analysis of sales data.

Service

In Japan and overseas, product service is provided in part by independent retail outlets and designated service centers that receive technical training assistance from Canon. Canon also services its products directly.

Most of Canon’s business machines carry warranties of varying terms, depending upon the model and country of sale. Cameras and camera accessories carry warranties that vary depending upon the model and country of sale.

 

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Canon services its copying machines and supplies replacement drums, parts, toner and paper. Most customers enter into a contract under which Canon provides maintenance services, replacement drums and parts in return for a stated amount of the contract plus a per copy charge. Copying machines not covered by a service contract may be serviced from time to time by Canon or local dealers for a fee.

Seasonality

Canon’s sales for the fourth quarter are typically higher than for the other three quarters, mainly due to strong demand for consumer products, such as cameras and inkjet printers, during the year-end holiday season.

In Japan, corporate demand for office products peaks in the first quarter, as many Japanese companies end their fiscal years in March. Sales also tend to increase at the start of the new school year in each region.

Sources of supply

Canon purchases materials such as glass, aluminum, plastic, steel and chemicals for use in various product components and in the manufacturing process. Canon procures raw materials from all over the world and selects suppliers based on a number of criteria, including environmental friendliness, quality, cost, supply stability and financial condition.

Prices of some raw materials fluctuate according to market trends. Although Canon is currently focusing on globalizing supplies and improving raw material resource management strategies, and believes that it will be able to continue procuring sufficient quantities of raw materials to meet its needs, there can be no assurance that supply shortages will not occur or that raw materials, such as crude oil, will be available at competitive prices, or at all in the future.

NET SALES BY SEGMENT

The following table presents our net sales by segment for each of the periods shown.

 

     Years ended December 31  
             2012             change             2011             change             2010          
     (Millions of yen, except percentage data)  

Office

   ¥ 1,757,575        -8.4   ¥ 1,917,943        -3.5   ¥ 1,987,269   

Imaging System

     1,405,971        7.2        1,312,044        -5.7        1,391,327   

Industry and Others

     407,840        -3.1        420,863        -2.8        432,958   

Eliminations

     (91,598            (93,417            (104,653
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   ¥ 3,479,788        -2.2   ¥ 3,557,433        -4.0   ¥ 3,706,901   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET SALES BY GEOGRAPHIC AREA

The following table presents our net sales by geographic area for each of the periods shown.

 

     Years ended December 31  
             2012              change             2011              change             2010          
     (Millions of yen, except percentage data)  

Japan

   ¥ 720,286         3.7   ¥ 694,450         -0.2   ¥ 695,749   

Americas

     939,873         -2.3        961,955         -6.0        1,023,299   

Europe

     1,014,038         -8.9        1,113,065         -5.1        1,172,474   

Asia and Oceania

     805,591         2.2        787,963         -3.4        815,379   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   ¥ 3,479,788         -2.2   ¥ 3,557,433         -4.0   ¥ 3,706,901   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

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Competition

Canon encounters intense global competition in all areas of its business. Canon’s competitors range from some of the world’s major multinational corporations to smaller, highly specialized companies. Canon competes in a number of different business areas, whereas many of its competitors focus on one or more individual areas. Consequently, Canon may face significant competition from entities that apply greater financial, technological, sales and marketing or other resources than Canon to their activities in a particular market segment.

The principal elements of competition that Canon faces in each of its markets are technology, quality, reliability, performance, price and customer service and support. Canon believes that its ability to compete effectively depends in large part on conducting successful research and development activities that enable it to create new or improved products and release them on a timely basis and at commercially attractive prices.

The competitive environments in which each product group operates are described below:

- Office Business Unit -

The markets for this segment are highly competitive. Canon’s primary competitors are Xerox Corporation/Fuji Xerox Co., Ltd.; Ricoh Company, Ltd.; Konica Minolta Holdings, Inc.; Hewlett-Packard Company; Samsung Electronics Co., Ltd.; and Lexmark International, Inc. Canon believes that it is one of the leading global manufacturers of office MFDs, copying machines and laser printers. In addition to the general elements of competition described above, Canon’s ability to compete successfully in these markets also depends significantly on whether it can provide effective, broad-based “business solutions” to its customers and respond to interrelated customer needs. In particular, the ability to provide equipment and software that connect effectively to networks (ranging in scope from local area networks to the Internet) is often a key to Canon’s competitive strength. In the United States, Europe and Japan, Canon is one of the market leaders in all areas of the business machine market. In China, the current market leaders for business machines are Toshiba TEC Corporation, Sharp Corporation and Konica Minolta Holdings, Inc. Canon hopes to join this group by introducing products tailored to the Chinese market and by strengthening sales and service channels. In the color printing market, Ricoh, Xerox and Konica Minolta have been very aggressive, especially in Europe and the United States, and competition in this market has become fierce.

- Imaging System Business Unit -

In addition to the traditional camera manufacturers, other electrical manufacturers started aggressively launching interchangeable lens digital cameras and related products in fiscal 2011. Nevertheless, Canon has continued to invest aggressively in competitive new products and intends to maintain its leadership position in this market.

Canon’s primary competitors in the interchangeable lens digital camera market are Nikon Corporation, Sony Corporation and Panasonic Corporation. Another major competitor is Sigma Corporation, which produces lenses for use with Canon’s digital SLR products.

The compact digital camera market is extremely competitive, and a large number of Canon’s competitors are relying on electronic manufacturing service (“EMS”) manufacturers to do their development and production work.

Except for Japan, where competition is so fierce that expansion of market size is generally possible only by greatly reducing sales prices, average prices in the industry did not decline much in fiscal 2012 from levels seen in the previous year. Nevertheless, prices have been rapidly declining as measured by the standard of specification price value, and the commoditization of products has been progressing. Market contraction and exchange rate fluctuation risks caused by the financial crisis which started in 2008 are having a major impact, resulting in severe conditions in the digital camera market. Despite these difficulties, Canon will seek to take advantage of its status as the number one brand in the industry, along with its economies of scale, in order to maintain profitability.

 

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Canon’s primary competitors in the compact digital camera market are Sony Corporation; Nikon Corporation; Panasonic Corporation; Fujifilm Co., Ltd.; Samsung Electronics Co., Ltd.; and Casio Computer Co., Ltd. Canon’s primary competitors in the digital video camcorder market are Sony Corporation; Panasonic Corporation; and JVC KENWOOD Corporation. Canon’s primary competitors in the inkjet printer market are Hewlett-Packard Company and Seiko Epson Corporation.

- Industry and Others Business Unit -

There continues to be very stiff competition in the markets for lithography equipment used in the production of semiconductor devices and FPDs. In order to produce lithography equipment that can provide ultra-fine processing, there needs to be an integration of advanced optical, control and system technologies, along with continuous investment in technology development. The main competitors in these markets are Nikon Corporation, in the markets for semiconductor and FPD lithography equipment, and ASML Holding N.V., in the market for semiconductor lithography equipment only.

Canon has helped its customers to improve their productivity by continuously improving the cost performance of semiconductor lithography equipment using the i-line and KrF laser light sources. In particular, the equipment using i-line has captured a large share of the global market. Canon has also been meeting the needs of image sensor manufacturers by quickly adapting to various unique specifications.

Canon’s FPD lithography equipment for FPD panels with a common platform offering excellent productivity and reliability have captured large shares of the industry-leading South Korean market and the promising Chinese market.

Patents and licenses

Canon holds a large number of patents, design rights and trademarks in Japan and abroad to protect proprietary technologies stemming from its research and development activities. Canon utilizes these intellectual property rights as important strategic management tools. For example, Canon leverages its intellectual property rights to expand its product lines and business operations and to form alliances and exchange technologies with other companies.

Canon has granted licenses with respect to its patents to various Japanese and foreign companies, most often with respect to electrophotography, laser printers, multifunction printers, facsimile machines and cameras.

Companies to which Canon has granted licenses include:

 

Oki Electric Industry Co., Ltd.

   LED printers, multifunction printers and facsimile machines

Panasonic Corporation

   Electrophotography

Ricoh Company, Ltd.

   Electrophotography

Sanyo Electric Co., Ltd

   Electronic cameras

Samsung Electronics Co., Ltd.

   Laser printers, multifunction printers and facsimile machines

Kyocera Document Solutions Inc.

   Electrophotography

Sharp Corporation

   Electrophotography

Brother Industries, Ltd.

   Electrophotography and facsimile machines

Canon has also been granted licenses with respect to patents held by other companies.

 

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Companies that have granted licenses to Canon include:

 

Jerome H. Lemelson Patent Incentives, Inc.

  

Computer systems, image recording apparatus and communication apparatus

Energy Conversion Devices, Inc.

  

Solar battery

Honeywell International Inc.

  

Camera and video products

Gilbert P. Hyatt U.S. Philips Corporation

  

Microcomputer

Applied Nanotech Holdings, Inc.

  

Field Emission Display (“FED”) technology

St. Clair Intellectual Property Consultants, Inc.

  

Selection of digital camera image format

Canon has also entered into cross-licensing agreements with other major industry participants.

Companies with which Canon has entered into cross-licensing agreements include:

 

International Business Machines Corporation

  

Information handling systems

Hewlett-Packard Company

  

Bubble jet printers

Xerox Corporation

  

Business machines

Panasonic Corporation

  

Video tape recorders and video cameras

Eastman Kodak Company

  

Electrophotography and image processing technology

Ricoh Company, Ltd.

  

Electrophotography products, facsimile machines and word processors

Seiko Epson Corporation

  

Information-related instruments

Canon has placed a high priority on the management of its intellectual property. Some products that are material to Canon’s operating results incorporate patented technology. Patented technology is critical to the continued success of Canon’s products, which typically incorporate technology from dozens of different patents. However, Canon does not believe that its business, as a whole, is dependent on, or that its profitability would be materially affected by the revocation, termination, expiration or infringement upon any particular patent, copyright, license or intellectual property rights or group thereof.

Environmental regulations

Canon is subject to a wide variety of laws, regulations and industry standards relating to energy and resource conservation, recycling, global warming, pollution prevention, pollution remediation and environmental health and safety. Some of the environmental laws that affect Canon’s businesses are summarized below.

 

1. Kyoto Protocol to the United Nations Framework Convention on Climate Change

Fiscal 2012 was the final year of the first commitment period (2008-2012) under the Kyoto Protocol. The Japanese government has called upon the manufacturing, transport, services and household sectors to take further action for energy conservation.

The revised Energy Saving Law in Japan (Law Concerning the Rational Use of Energy) and the revised Act on Promotion of Global Warming Countermeasures came into full effect in April 2010. These laws require business operators to report their energy consumption and mid and long-term energy conservation plans in an effort to encourage energy efficiency. The Japanese government is also implementing multifaceted measures to reduce emissions, including the granting of a “domestic credit” to any large company that helps small and medium enterprises to conserve energy. This credit is expected to provide substantial incentives, as it will be deemed an emission reduction for participating companies. Trial implementation of an emissions trading scheme was launched in October 2008.

Despite the economic downturn, Canon has been working to achieve its voluntary action plan target (which is consistent with the plan of the Japan Electrics and Electronics Industrial Associations) and has been strengthening its group structure to comply with revised environmental laws. Eventually, Canon expects to

 

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achieve its target. Canon has been participating in the trial emissions trading scheme and managed through dedicated efforts to achieve the year 2010 target. However, due to the shutdown of nuclear power plants in Japan caused by the severe failure of the Fukushima Dai-ichi nuclear power plant, which was damaged by the great east Japan earthquake and subsequent tsunami disaster in 2011, Canon has still been asked to achieve further electricity savings and energy conservation. These activities including a response to this request could increase Canon’s management costs and have adverse effects on its operating results and financial condition.

 

2. Post-Kyoto Initiatives

A framework of Post-Kyoto Protocol (beyond 2012) has been discussed at the Conference of the Parties (“COP”) to the United Nations Framework Convention on Climate Change (UNFCCC). In December 2011, COP17 was held in Durban and member states have agreed to join a second commitment period for the Kyoto Protocol that will expire in 2020, and to fulfill national commitments for the implementation of individual or joint quantified emission reduction plans to achieve the 2020 targets under the Cancun Agreements in 2010. Member states have also launched a new negotiating process of “Future Framework beyond 2020” to reach an agreement that all member states will have the same legal regime to address climate change by 2015. In December 2012, COP18 was held in Doha to discuss the agenda of COP17 in detail. However, negotiations were unsuccessful and most of the agenda was carried over to the forthcoming COP19.

The Japanese government has declared its intention not to participate in the second commitment period of the Kyoto Protocol. Instead, the Japanese government has announced its plan to submit a new emission reduction target for 2020 to COP after establishing a new domestic Climate Change remediation plan, in place of the current 25% greenhouse gas emission reduction target under the Cancun Agreement.

Canon continues to pursue CO2 emission reductions through energy-efficient product design, improvement of logistics and factory operations with due consideration for the above mentioned international developments and the domestic Climate Change remediation plan. However, these efforts could increase Canon’s management costs and have adverse effects on its operating results and financial condition.

 

3. Tokyo Metropolitan Government Environmental Protection Ordinance

The Tokyo Metropolitan Government has mandated that the owners of certain large CO2 emitters, including office buildings, reduce CO2 emissions from April 2010. The target for the first compliance period (April 2010 to March 2015) has been set at 8% or 6% (according to the type of building) below base emissions, which can be determined based on the amount of emissions from the building in recent years. In order for the owners of large buildings to fulfill the requirement, they must reduce CO2 emissions from their respective buildings and, if such reduction is insufficient, obtain certain Tokyo Metropolitan Government-sanctioned credits. Canon expects to fulfill the requirement during the first compliance period.

Canon continues to pursue CO2 emission reductions through energy-efficient office operations. However, such efforts could increase Canon’s management costs and have adverse effects on its operating results and financial condition.

 

4. Soil Pollution Prevention Law of Japan

A 2010 amendment to the Soil Pollution Prevention Law of Japan tightens certain requirements to survey soil to measure certain pollution levels. If soil pollution exceeds specified limits, a prefecture governor may designate the land as “Measure required area” when effects to human health due to soil pollution (and with exposure to pollutant) are foreseen, and the prefecture governor orders removal of pollutants. When exposures to pollutants are blocked and effects to human health are not foreseen, the area is declared a “designated area for notification of changes of the land character.” The prefecture governor may publicly announce such designation and make the investigation report available upon request. The substances designated as pollutants consist of twenty-five chemical groups, including lead, arsenic and trichloroethylene. If an investigation shows that there is

 

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a likelihood that soil contamination may affect human health, the prefecture governor may issue an order to the landowner to take designated remedial actions and may restrict the changes of the land character. Canon has commenced a detailed survey and measurement of soil and groundwater to check for pollution at all of Canon’s operational sites in Japan. Additional costs may arise if these investigations reveal that remedial measures are necessary. These factors could adversely affect Canon’s operating results and financial condition of the sites.

See “Risk Factors—Other Risks—Environmental cleanup and remediation costs relating to Canon’s properties and associated litigation could decrease Canon’s net cash flow, adversely affect its operating results and impair its financial condition.”

 

5. Law for Promotion of Effective Utilization of Resources

The Law for Promotion of Effective Utilization of Resources, administered by the Japanese Ministry of Economy, Trade and Industry, was enacted in 2001. This law requires manufacturers of “specified reuse-promoted products,” including copying machines, to promote the use of recyclable resources and recovered products (designing and manufacturing products that may be easily reused or recycled). Failure to comply with the law could adversely affect Canon’s operating results.

 

6. European Union Directive on the Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment (“the RoHS Directive”) and Directive on Waste Electrical and Electronic Equipment (“the WEEE Directive”)

These two directives were originally published in the Official Journal of the European Union in 2003, and member states were required to enact laws necessary to comply with these directives by 2004.

According to the RoHS Directive from July 1, 2006, companies have been required to ensure that electrical and electronic equipment sold in the European Union does not contain lead, cadmium, hexavalent chromium, mercury, polybrominated biphenyls or polybrominated diphenyl ethers if placed on the market after that date. Pursuant to the RoHS Directive, Canon adapted its products so that they do not contain the prohibited hazardous substances. The RoHS recast Directive was published on July 1, 2011. As a result, manufacturers, like Canon, will be required to prepare new declarations of conformity and compliance documentation from January 2013, in addition to meeting current restrictions on substances. Furthermore, the scope of products covered will be expanded to medical and measurement equipment from July 2014.

The WEEE Directive requires that companies selling electrical and electronic equipment bearing their trade names in the European Union must arrange and pay for collection, treatment, recycling, recovery and disposal of their equipment. Canon has become a member company of collective compliance schemes in each member state of the European Union and has achieved the required recycling levels for electrical and electronic equipment waste. The WEEE recast Directive was published on July 24, 2012 and will be applied from February 2014. Due to a change in official interpretation, the scope of products covered may be expanded. Also, the scope of local regulations similar to WEEE tends to be more expansive in such jurisdictions.

If tighter restrictions are enforced in 2013 and beyond, Canon’s compliance costs could increase, including with costs related to the actions for newly-covered products and the development and adoption of substitute materials or processes. Such increased costs may have an adverse effect on Canon’s operating results.

 

7. European Framework for the Management of Chemical Substances (“REACH Regulation”)

The REACH Regulation was published in the Official Journal of the European Union, and was implemented in 2007. This regulation covers almost all chemicals (products in gaseous, liquid, paste or powder form) and articles (products in solid state) manufactured in or imported into the European Union.

All chemicals manufactured in or imported into the European Union that exceed specific content thresholds must be registered. Registration requires disclosure of information about usage and chemical characteristics. The

 

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registration of new chemicals commenced in June 2008. For chemical substances in use before “existing chemicals,” “pre-registration” was accepted from June to December 2008. Substances that were not pre-registered cannot be used until formally registered. Pre-registered substances are subject to compliance with formal registration procedures according to their quantity and hazardous properties. Canon uses some chemicals which are subject to pre-registration requirements and has completed the necessary pre-registrations.

If certain substances are contained in an article, the substances must be communicated to the recipient or consumer of the article. This requirement has been in place since October 2008. Moreover, starting in 2011, certain cases required notifying the European Chemical Agency of more specific information.

Furthermore, the addition of restrictions on the use of certain substances has been proposed, and if adopted, manufacturers such as Canon will need to take measures to address such new restrictions.

Canon has been implementing these requirements under the REACH Regulation, which could increase Canon’s management costs and have adverse effects on its operating results and financial condition.

 

8. The European Framework for the Setting of Requirements for Energy-Related Products (“ErP Directive”)

The ErP Directive applies in Europe to all energy-using products, although implementing measures for specific product categories have yet to be adopted. Until these implementing measures are adopted, it is difficult to predict the potential effects of the ErP Directive. However, implementing measures with respect to off-mode and standby mode and external power supplies were adopted and applied since 2010. Currently, a horizontal implementing measure covering home and office electric and electronic equipment which can be connected to a network is also under consideration, and is expected to be published in the middle of 2013. For imaging equipment, the industry has made a public commitment to attain certain targets on environmentally conscious designs from 2012 by an industrial voluntary agreement and began implementation in 2011. Furthermore, implementing measures for AV equipment including projectors will be finalized after finalizing regulations for networked products described above (2013). Canon is continuing its preparations to comply with the ErP Directive. However, the requirements are expected to be challenging and achieving compliance will likely increase Canon’s costs, especially by required design changes.

 

9. State Legislation in the United States Concerning Recycling of Waste Electric and Electronic Products

Electrical and electronic equipment recycling laws have been enacted or proposed in more than twenty American states. Although most of such laws cover only displays or television sets, printers and other products are covered by some states, such as Illinois, Michigan and Hawaii, among others. These laws require manufacturers to bear the costs of collecting and recycling electrical and electronic equipment based on sales volume or market share by brand of covered products. Canon expects that compliance with such state requirements might increase its costs, such as recycling fees and product guarantees.

 

10. Chinese Administrative Measures on the Control of Pollution Caused by Electronic Information Products

The Chinese Ministry of Information Industry published Administrative Measures on the Control of Pollution Caused by Electronic Information Products in February 2006. These measures are modeled on the European Union RoHS Directive described above and regulate six substances: lead, mercury, hexavalent chromium, cadmium, polybrominated biphenyls and polybrominated diphenyl ethers in electronic information products. The measures establish two stages of implementation. Stage 1 is in effect and covers nearly all Canon products.

To comply with Stage 1 requirements, a China-specific label must be placed on any covered product if any of the six regulated substances are contained therein, and use of the six regulated substances must be disclosed in each product manual. In addition, each product’s environmental protection use period (“EPUP”) must be stated within its recycling mark and include the production date. Packaging material markings must be displayed on the boxes of the covered products.

 

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Stage 2 requires that the contents of six regulated substances in specific electronic information products (as specified by the Chinese Government in the “list for emphasized management”) be restricted by limitations similar to the European Union RoHS Directive. A China-specific compulsory product certification system will be introduced for such products. Standards to implement these measures and the “emphasized management list” are under discussion, including with regard to printers.

If these requirements are applied to Canon’s products, this could increase Canon’s costs and have an adverse effect on its operating results and financial condition.

 

11. Chinese Regulation for the Management of the Recycling and Disposal of Waste Electrical and Electronic Products

The Regulation for the Management of the Recycling and Disposal of Waste Electrical and Electronic Products was issued by the Chinese government in 2009 and implemented on January 1, 2011. This regulation concerns the management of recycling and disposal activities with regard to waste electrical and electronic products in the interest of promoting comprehensive utilization of resources and the development of a circular economy. Producers and importers will be required to pay a fee to a government fund. The first list of products falling under the waste electrical and electronic products catalogue has been issued and includes four types of household appliances as well as personal computers. The Regulation of those payment fees described above was enforced on July 1, 2012.

If these requirements are applied to Canon’s products, this could increase Canon’s costs and have an adverse effect on its operating results and financial condition.

 

12. Other Environmental Regulations

In addition to the laws described above, various environmental laws and regulations may have been promulgated or enacted by European Union member states, states of the United States, emerging countries such as China, India, Russia, Vietnam and others. Compliance with any such additional regulations may increase Canon’s costs and may adversely affect Canon’s operating results and financial condition.

Other regulations

Disclosure under Section 13(r) of the Securities Exchange Act of 1934

Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012 (“ITRA”) added Section 13(r) to the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Section 13(r) requires an issuer to disclose in its annual or quarterly reports, as applicable, whether it or any of its affiliates knowingly engaged in certain activities, transactions or dealings relating to Iran or with designated natural persons or entities involved in terrorism or the proliferation of weapons of mass destruction. Disclosure is required even where the activities, transactions or dealings are conducted outside the U.S. by non-U.S. affiliates in compliance with applicable law, and whether or not the activities are sanctionable under U.S. law.

During the year ended December 31, 2012, the following Canon affiliates had the transactions with Iran-related organizations. These transactions were conducted in compliance with applicable law in the respective countries.

 

   

Canon Marketing Japan (“CMJ”), our 57% owned Japanese subsidiary as of December 31, 2012, has a maintenance contract for one copier machine with the Iranian embassy in Tokyo, Japan. This machine was sold by Canon System & Support (“CSS”), a wholly-owned Japanese subsidiary of CMJ, during the year 2005. Relating to this contract, CSS sold one staple cartridge and performed one spot repair during the year 2012. The current contract renews annually. Total gross sales for the contract and activities above during the year 2012 was approximately ¥338 thousand for CMJ and ¥16 thousand for CSS. The net profit was substantially less than that.

 

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Canon Marketing (Philippines) Inc., a wholly-owned Filipino subsidiary of Canon Singapore Pte. Ltd. (“CSPL”) which is wholly-owned by Canon Inc., performed a spot repair on one copier machine of the Iranian School operated by the Iranian embassy in Makati, Philippines during the year 2012. Total gross sales for this activity was in foreign currency of approximately ¥52 thousand. The net profit was substantially less than that.

 

   

Canon Marketing Malaysia Sdn bhd, a wholly-owned Malaysian subsidiary of CSPL, performed maintenance services on two copier machines of Iran Air in Kuala Lumpur, Malaysia. The current contract will expire in January 2017. Total gross sales for this activity during the year 2012 was in foreign currency of approximately ¥220 thousand. The net profit was substantially less than that.

 

   

Canon Marketing (Thailand) Co. Ltd, a wholly-owned Thai subsidiary of CSPL, has a service contract for three copier machines with the Iranian embassy in Bangkok, Thailand. The current contract will expire in October 2014. Total gross sales under this contract during the year 2012 was in foreign currency of approximately ¥70 thousand. The net profit was substantially less than that.

 

   

Canon India Pvt Ltd, a wholly-owned Indian subsidiary of CSPL, had sales of one copier machine and has service contracts for six copier machines with the consulate general of Iran in New Delhi and Mumbai, India. The current contract will expire in September 2017. Total gross sales under this contract during the year 2012 was in foreign currency of approximately ¥407 thousand. The net profit was substantially less than that.

 

   

Canon Australia Pty. Ltd., a wholly-owned Australian subsidiary, has a service and lease contract for two copier machines with Iranian embassy in Canberra, Australia. The current contract will expire in November 2016. Total gross sales under this contract during the year 2012 was in foreign currency of approximately ¥380 thousand. The net profit was substantially less than that.

 

   

Canon Europe N.V. (“CENV”), a wholly-owned Dutch subsidiary of Canon Finance Netherlands B.V., which is wholly-owned by Canon Inc., had indirect sales transactions through an independent distributor in Dubai, United Arab Emirates (“U.A.E.”) for broadcast products such as TV camera lenses and related products of Islamic Republic of Iran Broadcasting. Total gross sales under this contract during the year 2012 was in foreign currency of approximately ¥48,475 thousand. The net profit was substantially less than that.

 

   

Canon Deutschland GmbH, a wholly-owned German subsidiary of CENV, has a service contract for three copier machines with the consulate general of Iran in Munich, Germany. This contract started from August 2008 and will expire in July 2013. Total gross sales under this contract during the year 2012 was in foreign currency of approximately ¥96 thousand. The net profit was substantially less than that.

 

   

Canon (Austria) GmbH, a wholly-owned Austrian subsidiary of CENV, has a rental contract for one copier machine with Iranian embassy in Vienna, Austria. This machine was relocated to Hamburg, Germany based on the embassy’s request. This contract started from June 2012 and will expire in June 2017. Total gross sales for this contract during the year 2012 was in foreign currency of approximately ¥373 thousand. The net profit was substantially less than that.

 

   

Canon (Schweiz) AG, a wholly-owned Swiss subsidiary of CENV, has rental and maintenance contract for one copier machine of Naftiran Intertrade Company (“NICO”) in Pully, Switzerland. This contract started from January 2010 and will expire in December 2013. Total gross sales under this contract during the year 2012 was in foreign currency of approximately ¥817 thousand. The net profit was substantially less than that.

 

   

Canon Oy AB, a wholly-owned Finnish subsidiary of CENV, has a service maintenance contract for one copier machine of the Iranian embassy in Helsinki, Finland. The current contract started from November 2009 and will expire in November 2013. Total gross sales under this contract during the year 2012 was approximately ¥35 thousand. The net profit was substantially less than that.

 

   

Canon Svenska AB, a wholly-owned Swedish subsidiary of CENV, performed a spot repair on two copier machines of Iran Air in Stockholm, Sweden. The gross sales for this activity was in foreign currency of approximately ¥52 thousand. The net profit was substantially less than that.

 

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Canon Danmark A/S, a wholly-owned Danish subsidiary of CENV, had sales of one copier machine and service maintenance contracts for five copier machines of the Iranian embassy in Copenhagen, Denmark. The oldest contracts of these started from July 2007 and some have non-cancellable clauses until February 2017. The gross sales under these contracts during the year 2012 was in foreign currency of approximately ¥385 thousand. The net profit was substantially less than that.

 

   

Canon Middle East FZ-LLC, a wholly-owned subsidiary of CENV in Dubai, U.A.E., has a service contract for a copier and two fax machines with Iranian Hospital in Dubai, U.A.E. in 2012, which we believe to be operated by Iranian Red Crescent. The current contract will expire in July 2014. Total gross sales was in foreign currency of approximately ¥441 thousand. The net profit was substantially less than that.

As of the date of this report, Canon is not aware of any other activity, transaction or dealing by us or any of our affiliates during the year ended December 31, 2012 that requires disclosure in this report under Section 13(r) of the Exchange Act. Canon does not intend to conduct any further business activities with Iranian counterparties required to be disclosed under the ITRA, except for sales of consumables, repair, and maintenance services for products Canon previously sold to such entities.

C. Organizational structure

Canon Inc. and its subsidiaries and affiliates form a group of which Canon Inc. is the parent company. As of December 31, 2012, Canon had 275 consolidated subsidiaries and 9 affiliated companies accounted for by the equity method.

The following table lists the significant subsidiaries owned by Canon Inc., all of which are consolidated as of December 31, 2012.

 

Name of company

  

Head office location

   Proportion of
ownership interest
owned
     Proportion of
voting power
held
 

Canon Marketing Japan Inc.

   Tokyo, Japan      50.1%         57.0%   

Canon U.S.A., Inc.

   New York, U.S.A.      100.0%         100.0%   

Canon Europa N.V.

   Amstelveen, The Netherlands      100.0%         100.0%   

D. Property, plants and equipment

Canon’s manufacturing is conducted primarily at 28 plants in Japan and 17 plants in other countries. Canon owns all of the buildings and the land on which its plants are located, with the exception of certain immaterial leases of land and floor space of certain of its subsidiaries. The names and locations of Canon’s plants and other facilities, their approximate floor space and the principal activities and products manufactured therein as of December 31, 2012 are as follows:

 

Name and location

   Floor space
(including
leased space)
    

Principal activities and products manufactured

Domestic    (Thousands of
square feet)
      

Headquarters, Tokyo

     2,556      

R&D, corporate administration and other functions

Canon Global Management Institute, Tokyo

     164      

Training and administration

Kawasaki Office, Kanagawa

     1,238      

R&D and manufacturing of production equipment and semiconductor devices; R&D of laser printers and toner cartridges

 

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Name and location

   Floor space
(including
leased space)
    

Principal activities and products manufactured

Domestic    (Thousands of
square feet)
      

Kosugi Office, Kanagawa

     395      

Development of software for office imaging products

Fuji-Susono Research Park, Shizuoka

     1,037      

R&D in electrophotographic technologies

Ayase Plant, Kanagawa

     393      

R&D and manufacturing of semiconductor devices

Hiratsuka Plant, Kanagawa

     1,139      

R&D of display products

Tamagawa Office, Kanagawa

     155      

Quality engineering

Oita Plant, Oita

     205      

Manufacturing of semiconductor devices

Yako Office, Kanagawa

     904      

Development of inkjet printers, inkjet chemical products

Utsunomiya Plant, Tochigi

     2,752      

Manufacturing of lenses for cameras and other applications, R&D in optical technologies, development and sales of broadcasting equipment, R&D, manufacturing, sales and servicing of semiconductor production equipment

Toride Plant, Ibaraki

     3,203      

R&D in electrophotographic technologies, mass-production trials and support; manufacturing of office imaging products, chemical products; training of manufacturing

Ami Plant, Ibaraki

     1,131      

Manufacturing of FPD production equipment

Canon Electronics Inc., Tokyo, Saitama and Gunma

     1,311      

Components, magnetic heads, document scanners and laser printers

Canon Finetech Inc., Saitama, Ibaraki and Fukui

     915      

Business-use printers, business machines peripherals and chemical products

Canon Precision Inc., Aomori

     1,509      

Toner cartridges, sensors and micromotors

Canon Optron Inc., Ibaraki

     143      

Optical crystals (for lithography equipments, cameras, telescopes) and vapor deposition materials

Canon Chemicals Inc., Ibaraki

     2,098      

Toner cartridges and rubber functional components

Canon Components, Inc., Saitama

     612      

Contact image sensors, inkjet cartridges and medical equipment

Oita Canon Inc., Oita

     1,238      

Digital cameras, lenses and digital video camcorders

Nagahama Canon Inc., Shiga

     1,093      

Laser printers, toner cartridges and A-Si drums

 

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Name and location

   Floor space
(including
leased space)
    

Principal activities and products manufactured

Domestic    (Thousands of
square feet)
      

Oita Canon Materials Inc., Oita

     2,977      

Chemical products for copying machines and printers, and inkjet cartridges

Ueno Canon Materials Inc., Mie

     654      

Chemical products for copying machines and printers

Fukushima Canon Inc., Fukushima

     966      

Inkjet printers and inkjet cartridges

Canon Semiconductor Equipment Inc., Ibaraki

     420      

Development and production of semiconductor production-related equipment

Canon Ecology Industry Inc., Ibaraki

     679      

Recycling of toner cartridges, repair and recycling of business machines

Nisca Corporation, Yamanashi

     390      

Copying machine peripherals, scanner units and optical equipment

Miyazaki Daishin Canon Inc., Miyazaki

     168      

Digital cameras

Canon Mold Co., Ltd., Ibaraki

     219      

Molds

Canon ANELVA Corporation, Kanagawa and Yamanashi

     766      

Production equipment for electron devices, flat panel display and semiconductors

Canon Machinery Inc., Shiga

     627      

Automated production equipment and semiconductor production-related equipment

Canon Tokki Corporation, Niigata, Kanagawa and Tokyo

     208      

Vacuum technology-related equipment

Nagasaki Canon Inc., Nagasaki

     477      

Digital cameras

Hita Canon Materials Inc., Oita

     370      

Rubber functional components

 

Name and location

   Floor space
(including
leased space)
    

Principal activities and products manufactured

Overseas    (Thousands of
square feet)
      

Europe

     

Canon Giessen GmbH, Giessen, Germany

     339      

Remanufacturing of copying machines and semiconductor production equipment

Canon Bretagne S.A.S., Liffre, France

     506      

Manufacturing and recycling of toner cartridges

Océ-Technologies B.V., Venlo, the Netherlands

     2,537      

R&D, manufacturing copying machines, corporate administration, and other functions

Océ-Printing Systems GmbH, Poing, Germany

     1,248      

R&D, manufacturing copying machines, corporate administration, and other functions

 

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Name and location

   Floor space
(including
leased space)
    

Principal activities and products manufactured

Overseas    (Thousands of
square feet)
      
Americas      

Canon Virginia, Inc., Virginia, U.S.

     1,676      

Toner cartridges, molds and remanufacturing of copying machines

Industrial Resource Technologies, Inc., Virginia, U.S.

     185      

Recycling of toner cartridges

Asia      

Canon Inc., Taiwan, Taiwan

     1,528      

Lenses and digital cameras

Canon Opto (Malaysia) Sdn. Bhd., Selangor, Malaysia

     584      

Digital cameras, lenses and optical lens parts

Canon Dalian Business Machines, Inc., Dalian, China

     1,740      

Production and recycling of toner cartridges, production of laser printers

Canon Zhuhai, Inc., Zhuhai, China

     752      

Digital cameras, digital video camcorders and contact image sensors

Canon Prachinburi (Thailand) Ltd., Prachinburi, Thailand

     808      

Copying machines

Canon Hi-Tech Thailand Ltd., Ayutthaya and Nakohon Ratchasima, Thailand

     3,124      

Inkjet printers, MFDs, scanners, molds and plastic injection molded parts

Canon Zhongshan Business Machines Co., Ltd., Zhogshan, China

     1,331      

Laser printers

Canon Vietnam Co., Ltd., Hanoi, Vietnam

     3,302      

Inkjet printers, laser printers, MFDs, scanners and contact image sensors

Canon (Suzhou) Inc., Suzhou, China

     1,516      

Copying machines

Canon Finetech Nisca (Shenzhen) Inc., Shenzhen, China

     684      

Copying machines and laser printer peripherals

Canon Electronics Vietnam Co., Ltd., Hung Yen Province, Vietnam

     308      

Components

Canon considers its manufacturing and other facilities to be well maintained and believes that its plant capacity is adequate for its current requirements. None of the buildings or land are subject to any major encumbrances.

Main facilities under construction for establishment/expansion

 

Name and location

  

Principal activities and products manufactured

Domestic     

Canon Chemicals Inc., Ibaraki

  

New production base* (Office business unit)

*To be leased to Canon Chemicals Inc., a wholly—owned subsidiary, by the Company

Overseas

  

Canon Zhuhai, Inc., Zhuhai, China

   New production base (Imaging system business unit)

Canon Business Machines Philippines

   New production base (Office business unit)

 

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Item 4A. Unresolved Staff Comments

None.

Item 5. Operating and Financial Review and Prospects

A. Operating Results

The following discussion and analysis provides information that management believes to be relevant to understanding Canon’s consolidated financial condition and results of operations.

Overview

Canon is one of the world’s leading manufacturers of plain paper copying machines, office multifunction devices (“MFDs”), laser printers, cameras, inkjet printers, semiconductor lithography equipment and flat-panel-display (“FPD”) lithography equipment. 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 segments: the Office Business Unit, the Imaging System Business Unit, and the Industry and Others Business Unit.

Economic environment

Looking back at the global economy in 2012, in the United States there were signs of improvement in employment conditions and housing issues as the economy continued to grow moderately. In Europe, the economic downturn in Southern European countries spread to Germany and other major countries, having a serious impact on the overall European economy. Economic growth in emerging markets such as China and India slowed down somewhat due to lagging exports and the effects of tight monetary policies. In Japan, despite the reconstruction demand seen at the beginning of the year from the previous year’s earthquake in Japan and flooding in Thailand, the economy entered a phase of recession during the latter half of the year due to the slowdown in the global economy and reduced domestic demand. As for the global economy overall, the effects of the European financial crisis were felt worldwide, leading to a widespread slowdown.

Market environment

As for the markets in which Canon operates amid these conditions, while demand for office color MFDs showed growth in Japan and other regions, demand for laser printers remained sluggish mainly in European markets. Demand for interchangeable-lens digital cameras continued to display strong growth across global markets while demand for compact digital cameras shrunk not only in developed countries, but also in China and some emerging nations. Overall demand for inkjet printers also waned due to the weak economy. In the industry and others segment, demand for semiconductor lithography equipment remained restrained due to weak capital investment for memory devices while lithography equipment used in the production of FPD encountered sluggish demand for large-size FPD panels despite the healthy market for mid- and small-size FPD panels used mainly in smartphones and tablet PCs.

The average value of the yen during the year was ¥79.96 against the U.S. dollar, a slight depreciation compared with the previous year, and ¥102.80 against the euro, a year-on-year appreciation of approximately ¥8.

Summary of operations

Owing to the economic slowdown mainly in Europe and the high valuation of the yen against the euro, combined with the cooling off of demand in China during the latter half of the year, the Canon Group faced

 

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increasingly challenging conditions across all of its businesses. Amid this harsh environment, although Canon continued Group-wide efforts to expand sales, mainly for competitively priced products such as interchangeable-lens digital cameras and office equipment, net sales for the year declined 2.2% to ¥3,479.8 billion. The gross profit ratio declined by 1.4 points year on year to 47.4% due to the significant impact of the strong yen and product mix. Thanks to Group-wide efforts to thoroughly reduce spending such as research and development (“R&D”) expenses, operating expenses decreased by 2.4% to ¥1,326.1 billion. Operating profit decreased 14.3% to ¥323.9 billion. Other income (deductions) achieved a turnaround of ¥22.2 billion owing to an improvement in foreign currency exchange gain, resulting in income before income taxes of ¥342.6 billion, a decrease of 8.5% year on year. Net income attributable to Canon Inc. decreased by 9.7% to ¥224.6 billion from the previous year.

Key performance indicators

The following are the key performance indicators (“KPIs”) that Canon uses in managing its business. The changes from year to year in these KPIs are set forth in the table shown below.

KEY PERFORMANCE INDICATORS

 

    2012     2011     2010     2009     2008  

Net sales (Millions of yen)

  ¥ 3,479,788      ¥ 3,557,433      ¥ 3,706,901      ¥ 3,209,201      ¥ 4,094,161   

Gross profit to net sales ratio

    47.4     48.8     48.1     44.5     47.3

R&D expense to net sales ratio

    8.5     8.7     8.5     9.5     9.1

Operating profit to net sales ratio

    9.3     10.6     10.5     6.8     12.1

Inventory turnover measured in days

    57 days        46 days        35 days        39 days        47 days   

Debt to total assets ratio

    0.1     0.3     0.3     0.3     0.4

Canon Inc. stockholders’ equity to total
assets ratio

    65.7     64.9     66.4     69.9     67.0

 

Note: Inventory turnover measured in days; Inventory divided by net sales for the previous six months, multiplied by 182.5.

-Revenues-

As Canon pursues the goal to become a truly excellent global company, one indicator upon which Canon’s management places strong emphasis is revenue. The following are some of the KPIs related to revenue that management considers to be important.

Net sales is one such KPI. Canon derives net sales primarily from the sale of products and, to a much lesser extent, provision of services associated with its products. Sales vary depending on such factors as product demand, the number and size of transactions within the reporting period, market acceptance for new products, and changes in sales prices. Other factors involved are market share and market environment. In addition, management considers the evaluation of net sales by segment to be important for the purpose of assessing Canon’s sales performance in various segments, taking into account recent market trends.

Gross profit ratio (ratio of gross profit to net sales) is another KPI for Canon. Through its reforms of product development, Canon has been striving to shorten product development lead times in order to launch new, competitively priced products at a faster pace. Furthermore, Canon has further achieved cost reductions through enhancement of efficiency in its production. Canon believes that these achievements have contributed to improving Canon’s gross profit ratio, and will continue pursuing the curtailment of product development lead times and reductions in production costs.

Operating profit ratio (ratio of operating profit to net sales) and R&D expense to net sales ratio are considered to be KPIs by Canon. Canon is focusing on two areas for improvement. Canon is striving to control

 

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and reduce its selling, general and administrative expenses as its first key point. Secondly, Canon’s R&D policy is designed to maintain a certain level of spending in core technology to sustain Canon’s leading position in its current business areas and to seek possibilities in other markets. Canon believes such investments will create 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 KPIs with regard to cash flow management that Canon’s management believes to be important.

Inventory turnover measured in days is a KPI because it measures the adequacy of supply chain management. Inventories have inherent risks of becoming obsolete, physically damaged or otherwise decreasing significantly in value, which may adversely affect Canon’s operating results. To mitigate these risks, management believes that it is crucial to continue reducing work-in-process inventories by decreasing production lead times in order to promptly recover related product expenses, while balancing risks of supply chain disruptions by optimizing finished goods inventories in order to avoid losing potential sales opportunities.

Canon’s management seeks to meet its liquidity and capital requirements primarily with cash flow from operations. Management also seeks debt-free operations. For a manufacturing company like Canon, it generally takes considerable time to realize profit from a business as the process of R&D, manufacturing and sales has to be followed for success. Therefore, management believes that it is important to have sufficient financial strength so that the Company does not have to rely on external funds. Canon has continued to reduce its dependency on external funds for capital investments in favor of generating the necessary funds from its own operations.

Canon Inc. stockholders’ equity to total assets ratio is another KPI for Canon. Canon believes that its stockholders’ equity to total assets ratio measures its long-term sustainability. Canon also believes that achieving a high or rising stockholders’ equity ratio indicates that Canon has maintained a strong financial position or further improved its ability to fund debt obligations and other unexpected expenses. In the long-term, Canon will be able to maintain a high level of stable investments for its future operations and development. As Canon puts strong emphasis on its R&D activities, management believes that it is important to maintain a stable financial base and, accordingly, a high level of its stockholders’ equity to total assets ratio.

Critical accounting policies and estimates

The consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and based on the selection and application of significant accounting policies which require management to make significant estimates and assumptions. These estimates and assumptions include future market conditions, net sales growth rate, gross margin and discount rate. Though Canon believes that the estimates and assumptions are reasonable, actual future results may differ from these estimates and assumptions. Canon believes that the following are 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 office and imaging system 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 or services have been rendered, the sales price is fixed or determinable, and collectibility is probable.

Revenue from sales of office products, such as office MFDs and laser printers, and imaging system products, such as digital cameras and inkjet printers, is recognized upon shipment or delivery, depending upon when title and risk of loss transfer to the customer.

 

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Revenue from sales of optical equipment, such as semiconductor lithography equipment and FPD lithography equipment that are 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 separately priced product maintenance contracts on equipment sold to customers and is measured at the stated amount of the contract and recognized as services are provided.

Canon also offers separately priced product maintenance contracts for most office products, for which the customer typically pays a stated base service fee plus a variable amount based on usage. Revenue from these service maintenance contracts is measured at the stated amount of the contract and recognized as services are provided and variable amounts are earned.

Revenue from the sale of equipment under sales-type leases is 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 leases or direct-financing leases are accounted for as operating leases and the related revenue is recognized ratably over the lease term. When equipment leases are bundled with product maintenance contracts, revenue is first allocated considering the relative fair value of the lease and non-lease deliverables based upon the estimated relative fair values of each element. Lease deliverables generally include equipment, financing and executory costs, while non-lease deliverables generally consist of product maintenance contracts and supplies.

For all other arrangements with multiple elements, Canon allocates revenue to each element based on its relative selling price if such element meets the criteria for treatment as a separate unit of accounting. Otherwise, revenue is deferred until the undelivered elements are fulfilled and accounted for as a single unit of accounting.

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 to 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.

Estimated product warranty costs are recorded at the time revenue is recognized and are included in selling, general and administrative expenses. Estimates for accrued product warranty costs 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. These factors include the length of time receivables are past due, the credit quality of customers, macroeconomic conditions 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 by the average method for domestic inventories and principally 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

 

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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.

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. If the carrying amount of the asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. Determining the fair value of the asset involves the use of estimates and assumptions.

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.

Goodwill and other intangible assets

Goodwill and other intangible assets with indefinite useful lives are not amortized, but are instead tested for impairment annually in the fourth quarter of each year, or more frequently if indicators of potential impairment exist. Canon performs its impairment test of goodwill using the two-step approach at the reporting unit level, which is one level below the operating segment level. All goodwill is assigned to the reporting unit or units that benefit from the synergies arising from each business combination. If the carrying amount assigned to the reporting unit exceeds the fair value of the reporting unit, Canon performs the second step to measure an impairment charge in the amount by which the carrying amount of a reporting unit’s goodwill exceeds its implied fair value. Determining the fair value of the reporting unit involves the use of estimates and assumptions. Intangible assets with finite useful lives consist primarily of software, license fees, patented technologies and customer relationships. 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. Patented technologies are amortized using the straight-line method principally over the estimated useful life of 3 years. Customer relationships are amortized principally using the declining-balance method over the estimated useful life of 5 years.

Income tax uncertainties

Canon considers many factors when evaluating and estimating income tax uncertainties. These factors include an evaluation of the technical merits of the tax positions as well as the amounts and probabilities of the outcomes that could be realized upon settlement. The actual resolutions of those uncertainties will inevitably differ from those estimates, and such differences may be material to the financial statements.

Valuation of 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 these factors may require possible recognition of significant valuation allowances to reduce the net carrying value of these deferred tax asset balances. When Canon determines that certain deferred tax assets may not be recoverable, the amounts, which may not be realized, are charged to income tax expense and will adversely affect net income.

 

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Employee retirement and severance benefit plans

Canon has significant employee retirement and severance benefit obligations that 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. 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 2012, Canon estimated a weighted-average discount rate of 1.9% for Japanese plans and 4.6% for foreign plans and a weighted-average expected long-term rate of return on plan assets of 3.1% for Japanese plans and 5.4% for foreign plans. In estimating the 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. For fiscal 2012, a decrease of 50 basis points in the discount rate increases the projected benefit obligation by approximately ¥83,396 million. The net effect of changes in the discount rate, as well as the net effect of other changes in actuarial assumptions and experience, is deferred until subsequent periods.

Decreases in expected returns on plan assets may increase net periodic benefit cost by decreasing the expected return amounts, while differences between expected value and actual fair value of those assets could affect pension expense in the following years, and vice versa. For fiscal 2012, a change of 50 basis points in the expected long-term rate of return on plan assets would cause a change of approximately ¥3,725 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 expense. Canon defers recognition of the difference between this expected return on plan assets and the actual return on plan assets. The net deferral affects future pension expense.

Canon recognizes the funded status (i.e., the difference between the fair value of plan assets and the projected benefit obligations) of its pension plans in its consolidated balance sheets, with a corresponding adjustment to accumulated other comprehensive income (loss), net of tax.

Consolidated results of operations

Fiscal 2012 compared with fiscal 2011

Summarized results of operations for fiscal 2012 and fiscal 2011 are as follows:

 

     2012        Change       2011  
     (Millions of yen, except per share
amounts and percentage data)
 

Net sales

   ¥ 3,479,788         -2.2   ¥ 3,557,433   

Operating profit

     323,856         -14.3        378,071   

Income before income taxes

     342,557         -8.5        374,524   

Net income attributable to Canon Inc.

     224,564         -9.7        248,630   

Net income attributable to Canon Inc. stockholders per share:

       

Basic

     191.34         -6.4        204.49   

Diluted

     191.34         -6.4        204.48   

Note: See notes to Item 3A “Selected Financial Data”.

 

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Sales

Canon’s consolidated net sales in fiscal 2012 totaled ¥3,479,788 million, representing a 2.2% decrease from the previous fiscal year. This decrease of net sales was due primarily to economic slowdown mainly in Europe and the high valuation of the yen against the euro combined with the cooling off of demand in China during the latter half of the year. Canon Group faced increasingly challenging conditions across all of its businesses.

Overseas operations are significant to Canon’s operating results and generated 79.3% of total net sales in fiscal 2012. Such sales are denominated in the applicable local currency and are subject to fluctuations in the value of the yen to those currencies. Despite efforts to reduce the impact of currency fluctuations on operating results, including localization of manufacturing in some regions along with procuring parts and materials from overseas suppliers, Canon believes such fluctuations have had and will continue to have a significant effect on its results of operations.

The average value of the yen in fiscal 2012 was ¥79.96 to the U.S. dollar, and ¥102.80 to the euro, representing a slight depreciation to the U.S. dollar, and an appreciation of approximately ¥8 against the euro, compared with the previous year. The effects of foreign exchange rate fluctuations negatively affected net sales by approximately ¥54,300 million in fiscal 2012. This impact consisted of approximately ¥69,200 million of unfavorable impact for euro denominated sales and favorable impact of ¥9,500 million for the U.S. dollar denominated sales and ¥5,400 million for other foreign currency denominated sales.

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. Many of these raw materials are subject to fluctuations in world market prices accompanied by fluctuations in foreign exchange rates that may affect Canon’s cost of sales. Other components of cost of sales include depreciation expenses, maintenance expenses, light and fuel expenses, and rent expenses. The ratio of cost of sales to net sales for fiscal 2012 and 2011 was 52.6% and 51.2%, respectively.

Gross profit

Canon’s gross profit in fiscal 2012 decreased by 5.0% to ¥1,649,966 million from fiscal 2011. The gross profit ratio declined by 1.4 points year on year to 47.4%. The deteriorated gross profit ratio was mainly the result of such factors as the sharp appreciation of the yen to the euro and falling product prices accompanied by the rise in prices of materials.

Operating expenses

The major components of operating expenses are payroll, R&D, advertising expenses and other marketing expenses. Owing to Group-wide efforts to thoroughly reduce spending, total operating expenses decreased by 2.4% to ¥1,326,110 million in fiscal 2012.

Operating profit

Operating profit in fiscal 2012 decreased 14.3% to a total of ¥323,856 million from fiscal 2011. The ratio of operating profit to net sales decreased 1.3% to 9.3% from fiscal 2011.

Other income (deductions)

Other income (deductions) for fiscal 2012 achieved a turnaround of ¥22,248 million, owing primarily to an improvement in foreign currency exchange gain.

 

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Income before income taxes

Income before income taxes in fiscal 2012 was ¥342,557 million, a decrease of 8.5% from fiscal 2011, and constituted 9.8% of net sales.

Income taxes

Provision for income taxes in fiscal 2012 decreased by ¥10,303 million from fiscal 2011. The effective tax rate during fiscal 2012 remained consistent with fiscal 2011. The effective tax rate for fiscal 2012 was 32.1%, which was lower than the statutory tax rate in Japan. This was mainly due to the increase in tax credit for R&D expenses.

Net income attributable to Canon Inc.

As a result, net income attributable to Canon Inc. in fiscal 2012 decreased by 9.7% to ¥224,564 million, which represents 6.5% of net sales.

Segment information

Canon divides its businesses into three segments: the Office Business Unit, the Imaging System Business Unit and the Industry and Others Business Unit.

 

   

The Office Business Unit mainly includes office MFDs, office copying machines, personal-use copying machines, laser MFDs, laser printers, digital production printing systems, high speed continuous feed printers, wide-format printers and document solution.

   

The Imaging System Business Unit* mainly includes interchangeable-lens digital cameras, compact digital cameras, digital camcorders, digital cinema cameras, interchangeable lenses, inkjet printers, large-format inkjet printers, commercial photo printers, image scanners, broadcast equipment and calculators.

   

The Industry and Others Business Unit mainly includes semiconductor lithography equipment, FPD lithography equipment, digital radiography systems,/ ophthalmic equipment, vacuum thin-film deposition equipment, organic LED panel manufacturing equipment, micromotors, computers, handy terminals and document scanners.

 

* The “Consumer Business Unit” has been renamed the “Imaging System Business Unit” to be more consistent with its strategy to expand the business. This change in segment description has no impact on any financial information of this segment.

Sales by segment

Please refer to the table of sales by segment in Note 22 of the Notes to Consolidated Financial Statements.

Canon’s sales by segment are summarized as follows:

 

     2012       Change       2011  
     (Millions of yen, except percentage data)  

Office

   ¥ 1,757,575        -8.4   ¥ 1,917,943   

Imaging System

     1,405,971        +7.2        1,312,044   

Industry and Others

     407,840        -3.1        420,863   

Eliminations

     (91,598            (93,417
  

 

 

   

 

 

   

 

 

 

Total

   ¥ 3,479,788        -2.2   ¥ 3,557,433   
  

 

 

   

 

 

   

 

 

 

 

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Sales of the Office Business Unit constituting 50.5% of consolidated net sales. Sales volume of both monochrome and color MFDs increased, favored by the continued strong demand for color MFDs, such as imageRUNNER ADVANCE C5000/C2000-series models. As for laser printers, sales volumes declined mainly in Europe due to deterioration in business sentiment. Consequently, combined with the appreciation of the yen, sales for the segment totaled ¥1,757,575 million, a decline of 8.4% in fiscal 2012.

Sales of the Imaging System Business Unit constituting 40.4% of consolidated net sales. Sales of interchangeable-lens digital cameras increased thanks to the competitively priced EOS Rebel series along with the EOS 5D Mark III and EOS 60D advanced-amateur models. As for compact digital cameras, despite the significant deterioration of market conditions, sales volume remained at the same level as the previous year thanks to robust sales of the PowerShot ELPH 110 HS and PowerShot A2300. With respect to inkjet printers, sales volume surpassed that for the year-ago period owing to the early restoration of production following the flooding in Thailand. Furthermore, the company successfully entered new markets with the launch of its CINEMA EOS SYSTEM lineup of professional cinematography products, targeting Hollywood and the broader motion picture and television production market, along with the new DreamLabo 5000, targeting the commercial photo printing market. As a result, amid the effects of the strong yen, sales for the segment increased by 7.2% year on year to ¥1,405,971 million in fiscal 2012.

Sales of the Industry and Others Business Unit constituted 11.7% of consolidated net sales in fiscal 2012. Among semiconductor lithography equipment, while sales of i-line steppers remained at the same level as the previous year owing to demand for image sensors and LED elements, sales volume overall decreased due to restrained capital expenditure for memory devices. As for FPD lithography equipment, unit sales dropped substantially in the face of shrinking demand for equipment used in the production of large-size panels, an area in which Canon is particularly strong. Consequently, combined with the appreciation of the yen, sales for the segment totaled ¥407,840 million, a decrease of 3.1% year on year in fiscal 2012.

Intersegment sales of ¥91,598 million, representing 2.6% of total sales, are eliminated from the total sales of the three segments, and are described as “Eliminations”.

Sales by geographic area

Please refer to the table of sales by geographic area in Note 22 of the Notes to Consolidated Financial Statements.

A summary of net sales by geographic area in fiscal 2012 and fiscal 2011 is provided below:

 

     2012        Change       2011  
     (Millions of yen, except percentage data)  

Japan

   ¥ 720,286         +3.7   ¥ 694,450   

Americas

     939,873         -2.3        961,955   

Europe

     1,014,038         -8.9        1,113,065   

Asia and Oceania

     805,591         +2.2        787,963   
  

 

 

    

 

 

   

 

 

 

Total

   ¥ 3,479,788         -2.2   ¥ 3,557,433   
  

 

 

    

 

 

   

 

 

 

 

Note: This summary of net sales by geographic area is determined by the location where the product is shipped to the customers.

A geographical analysis indicates that net sales in fiscal 2012 increased in Japan and Asia and Oceania while decreased in Americas and Europe.

In Japan, sales increased by 3.7% in fiscal 2012 supported by the moderate economic recovery.

 

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In the Americas, despite the admirable sales performance of interchangeable-lens digital cameras and solid growth in MFDs, laser printer market weakness caused sales to decline by 2.3% in fiscal 2012.

In Europe, although interchangeable-lens digital cameras showed solid growth, weak demand for laser printers along with the sharp appreciation of the yen against the euro caused sales to decrease by 8.9% in fiscal 2012.

In Asia and Oceania, although the speed of economic expansion in China slowed down slightly in the latter half of the year, owing to the solid demand for interchangeable-lens digital cameras in emerging economies, net sales increased by 2.2% in fiscal 2012.

Operating profit by segment

Please refer to the table of segment information in Note 22 of the Notes to Consolidated Financial Statements.

Operating profit for the Office Business Unit in fiscal 2012 decreased by ¥55,687 million to ¥203,578 million. This decrease resulted from the decrease in sales and appreciation of the yen against the euro.

Operating profit for the Imaging System Business Unit in fiscal 2012 decreased by ¥976 million to ¥210,318 million. This decrease resulted primarily from the appreciation of the yen against the euro.

Operating profit for the Industry and Others Business Unit in fiscal 2012 declined by ¥18,390 million, largely owing to the decrease in sales.

Fiscal 2011 compared with fiscal 2010

Summarized results of operations for fiscal 2011 and fiscal 2010 are as follows:

 

     2011        Change       2010  
     (Millions of yen, except per share
amounts and percentage data)
 

Net sales

   ¥ 3,557,433         -4.0   ¥ 3,706,901   

Operating profit

     378,071         -2.4        387,552   

Income before income taxes

     374,524         -4.7        392,863   

Net income attributable to Canon Inc.

     248,630         0.8        246,603   

Net income attributable to Canon Inc. stockholders per share:

       

Basic

     204.49         2.4        199.71   

Diluted

     204.48         2.4        199.70   

Note: See notes to Item 3A “Selected Financial Data”.

Sales

Canon’s consolidated net sales in fiscal 2011 totaled ¥3,557,433 million, representing a 4.0% decrease from the previous fiscal year. This decrease of sales was owing to the historically high valuation of the yen combined with the effects of the earthquake and floods. All of Canon’s businesses faced extremely demanding conditions throughout the year.

Overseas operations are significant to Canon’s operating results and generated 80.5% of total net sales in fiscal 2011. Such sales are denominated in the applicable local currency and are subject to fluctuations in the value of the yen to those currencies. Despite efforts to reduce the impact of currency fluctuations on operating results, including localization of manufacturing in some regions along with procuring parts and materials from overseas suppliers, Canon believes such fluctuations have had and will continue to have a significant effect on its results of operations.

 

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The average value of the yen in fiscal 2011 was ¥79.55 to the U.S. dollar, and ¥110.72 to the euro, representing a significant appreciation of about ¥8 or 9% to the U.S. dollar, and an appreciation of approximately ¥4 or 4% against the euro, compared with the previous year. The effects of foreign exchange rate fluctuations negatively affected net sales by approximately ¥161,900 million in 2011. This unfavorable impact consisted of approximately ¥111,600 million for U.S. dollar denominated sales, ¥40,600 million for euro denominated sales and ¥9,700 million for other foreign currency denominated sales.

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. Many of these raw materials are subject to fluctuations in world market prices accompanied by fluctuations in 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 along with rent expenses. The ratio of cost of sales to net sales for fiscal 2011 and 2010 was 51.2% and 51.9%, respectively.

Gross profit

Canon’s gross profit in fiscal 2011 decreased by 2.6% to ¥1,736,763 million from fiscal 2010. The gross profit ratio, however, rose by 0.7 points year on year to 48.8%. Despite the significant negative impact of the strong yen and the effects of the earthquake and floods, this gross profit ratio improvement was achieved due to the further acceleration of production innovation activities.

Operating expenses

The major components of operating expenses are payroll, R&D, advertising expenses and other marketing expenses. Owing to thorough spending cuts across the Canon Group implemented after the earthquake to control expenses more efficiently, total operating expenses decreased by 2.6% to ¥1,358,692 million in fiscal 2011.

Operating profit

Operating profit in fiscal 2011 decreased 2.4% to a total of ¥378,071 million from fiscal 2010. The ratio of operating profit to net sales increased 0.1% to 10.6% from fiscal 2010.

Other income (deductions)

Other income (deductions) for fiscal 2011 decreased ¥8,858 million to ¥ (3,547) million, mainly due to foreign currency exchange losses and earnings and losses on investments in affiliated companies.

Income before income taxes

Income before income taxes in fiscal 2011 was ¥374,524 million, a decrease of 4.7% from fiscal 2010, and constituted 10.5% of net sales.

Income taxes

Provision for income taxes in fiscal 2011 decreased by ¥19,745 million from fiscal 2010. The effective tax rate during fiscal 2011 dropped by 3.5% compared with fiscal 2010.

Net income attributable to Canon Inc.

As a result, net income attributable to Canon Inc. in fiscal 2011 increased by 0.8% to ¥248,630 million, which represents 7.0% of net sales.

 

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Segment information

Canon divides its businesses into three segments: the Office Business Unit, the Consumer Business Unit and the Industry and Others Business Unit.

 

   

The Office Business Unit mainly includes office network digital multifunction devices (MFDs), color network digital MFDs, personal-use network digital MFDs, office copying machines, full-color copying machines, personal-use copying machines, laser printers, large format inkjet printers and digital production printers.

   

The Consumer Business Unit mainly includes digital SLR cameras, compact digital cameras, interchangeable lenses, digital video camcorders, inkjet multifunction printers, single function inkjet printers, image scanners, broadcast equipment and calculators.

   

The Industry and Others Business Unit mainly includes semiconductor lithography equipment, LCD lithography equipment, medical image recording equipment, ophthalmic products, magnetic heads, micromotors, computers, handy terminals and document scanners.

Sales by segment

Please refer to the table of sales by segment in Note 22 of the Notes to Consolidated Financial Statements.

Canon’s sales by segment are summarized as follows:

 

     2011       Change       2010  
     (Millions of yen, except percentage data)  

Office

   ¥ 1,917,943        -3.5   ¥ 1,987,269   

Consumer

     1,312,044        -5.7        1,391,327   

Industry and Others

     420,863        -2.8        432,958   

Eliminations

     (93,417            (104,653
  

 

 

   

 

 

   

 

 

 

Total

   ¥ 3,557,433        -4.0   ¥ 3,706,901   
  

 

 

   

 

 

   

 

 

 

Sales of the Office Business Unit constituting 53.9% of consolidated net sales. Sales volume of color and monochrome network digital MFDs continued to increase. As for laser printers, while booming demand in emerging economies fueled steady unit sales growth of primarily monochrome models in the first half of the year, demand slowed in the second half, mainly in European markets. However, the appreciation of the yen also significantly impacted sales for the segment, resulting a decrease in sales by 3.5% to ¥1,917,943 million in fiscal 2011.

Sales of the Consumer Business Unit constituting 36.9% of consolidated net sales. Although Canon was affected by supply shortages caused by the quake and flooding, efforts to ramp up production and boost sales in response to robust demand resulted in significant increases in year-on-year sales volumes for such digital SLR cameras as the competitively priced EOS Digital Rebel T3i/T2i/T3, along with the EOS 5D Mark II and the new EOS 60D advanced-amateur models. As for compact digital cameras, while such models as the PowerShot ELPH 100 HS/300 HS, PowerShot SX230 HS and PowerShot ELPH 310 HS recorded healthy sales, unit sales for the year declined due to sluggish markets in developed countries and the impact on production following the earthquake and floods. With respect to inkjet printers, although the floods in Thailand had a negative impact on production, unit sales increased year on year, largely owing to growth in emerging markets. As a result, sales for the segment, which were also negatively affected by the strong yen, dropped 5.7% in fiscal 2011 to ¥1,312,044 million.

Sales of the Industry and Others Business Unit decreased by 2.8% in fiscal 2011, to ¥420,863 million. Within this segment, i-line steppers recorded healthy sales thanks to active investment in semiconductor lithography equipment for the manufacture of digital semiconductor devices, which are used in smartphones and

 

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environmentally friendly products. Unit sales of LCD lithography equipment, on the other hand, dropped substantially in the face of shrinking demand for equipment used in the production of large-size panels. Sales of the Industry and Others Business Unit constituted 11.8% of consolidated net sales in fiscal 2011.

Intersegment sales of ¥93,417 million, representing 2.6% of total sales, are eliminated from the total sales of the three segments, and are described as “Eliminations”.

Sales by geographic area

Please refer to the table of sales by geographic area in Note 22 of the Notes to Consolidated Financial Statements.

A summary of net sales by geographic area in fiscal 2011 and fiscal 2010 is provided below:

 

     2011        Change       2010  
     (Millions of yen, except percentage data)  

Japan

   ¥ 694,450         -0.2   ¥ 695,749   

Americas

     961,955         -6.0        1,023,299   

Europe

     1,113,065         -5.1        1,172,474   

Asia and Oceania

     787,963         -3.4        815,379   
  

 

 

    

 

 

   

 

 

 

Total

   ¥ 3,557,433         -4.0   ¥ 3,706,901   
  

 

 

    

 

 

   

 

 

 

 

Note: This summary of net sales by geographic area is determined by the location where the product is shipped to the customers.

A geographical analysis indicates that net sales in fiscal 2011 decreased in all geographic areas.

In Japan, sales decreased by 0.2% in fiscal 2011.

In the Americas, net sales decreased by 6.0% on yen basis in fiscal 2011, due to foreign currency exchange losses. Net sales in local currency basis increased by 2.5%.

In Europe, net sales decreased by 5.1% on yen basis in fiscal 2011, mainly due to sluggish demand for laser printers.

Sales in Asia and Oceania decreased by 3.4% on a yen basis in fiscal 2011, largely due to shrinking demand for LCD lithography equipment and foreign currency exchange losses.

Operating profit by segment

Please refer to the table of segment information in Note 22 of the Notes to Consolidated Financial Statements.

Operating profit for the Office Business Unit in fiscal 2011 decreased by ¥34,057 million to ¥259,265 million. This decrease resulted primarily from the decrease in sales.

Operating profit for the Consumer Business Unit in fiscal 2011 decreased by ¥26,771 million to ¥211,294 million. This decrease resulted primarily from the decrease in sales.

Operating profit for the Industry and Others Business Unit in fiscal 2011 recorded a profit of ¥24,300 million a turnaround from fiscal 2010, largely owing to the improvement of the gross profit ratio.

 

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Foreign operations and foreign currency transactions

Canon’s marketing activities are performed by subsidiaries in various regions in local currencies, while the cost of sales is generally in yen. Given Canon’s current operating structure, appreciation of the yen has a negative impact on net sales and the gross profit ratio. To reduce the financial risks from changes in foreign exchange rates, Canon utilizes derivative financial instruments, which consist principally of forward currency exchange contracts.

The operating profit on foreign operation sales is usually lower than that from domestic operations because foreign operations consist mainly of marketing activities. Marketing activities are generally less profitable than production activities, which are mainly conducted by the Company and its domestic subsidiaries. Please refer to the table of geographic information in Note 22 of the Notes to Consolidated Financial Statements.

B. Liquidity and capital resources

Cash and cash equivalents in fiscal 2012 decreased by ¥106,549 million to ¥666,678 million, compared with ¥773,227 million in fiscal 2011 and ¥840,579 million in fiscal 2010. Canon’s cash and cash equivalents are typically denominated both in Japanese yen and in U.S. dollar, with the remainder denominated in foreign currencies.

Net cash provided by operating activities in fiscal 2012 decreased by ¥85,485 million from the previous year to ¥384,077 million. Cash flow from operating activities consisted of the following key components: the major component of Canon’s cash inflow is cash received from customers, and the major components of Canon’s cash outflow are payments for parts and materials, selling, general and administrative expenses, R&D expenses and income taxes.

For fiscal 2012, cash inflow from cash received from customers decreased due to the decrease of sales. There were no significant changes in Canon’s collection rates. Cash outflow for payments for parts and materials increased, as a result of our efforts to optimize inventory levels in order to avoid losing potential sales opportunities while simultaneously increasing flexibility in response to unexpected risks and events. This has led to an increase in inventory turnover days. Cash outflow for payments for selling, general and administrative expenses decreased owing to thorough spending cuts across the Canon Group implemented after the earthquake in fiscal 2011 to control expenses more efficiently. Cash outflow for income taxes decreased due to decrease of taxable income.

Net cash used in investing activities in fiscal 2012 was ¥212,740 million, decreasing by ¥43,803 million from ¥ 256,543 million in fiscal 2011, due to the net effect of increased capital investment focused on boosting production and reducing the amount of time deposits included in short-term investments. The purchases of fixed assets, which totaled ¥316,211 million in fiscal 2012, were focused on items relevant to raising production capacity and reducing production cost.

Canon defines “free cash flow” by deducting the cash flows from investing activities from the cash flows from operating activities. For fiscal 2012, free cash flow totaled ¥171,337 million as compared with ¥213,019 million for fiscal 2011. Canon’s management recognizes that constant and intensive investment in facilities and R&D is required to maintain and strengthen the competitiveness of its products. Canon’s management seeks to meet its capital requirements with cash flow principally earned from its operations. Therefore, its capital resources are primarily sourced from internally generated funds. Accordingly, Canon has included the information with regard to free cash flow as its management frequently monitors this indicator, and believes that such indicator is beneficial to the understanding of investors. Furthermore, Canon’s management believes that this indicator is significant in understanding Canon’s current liquidity and the alternatives of use in financing activities because it takes into consideration its operating and investing activities. Canon refers to this indicator together with relevant U.S. GAAP financial measures shown in its consolidated statements of cash flows and consolidated balance sheets for cash availability analysis.

 

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Net cash used in financing activities totaled ¥319,739 million in fiscal 2012, mainly resulting from repurchase of treasury stock of ¥149,968 million, and the dividend payout of ¥142,362 million. The Company paid dividends in fiscal 2012 of ¥120.00 per share.

To the extent Canon relies on external funding for its liquidity and capital requirements, it generally has access to various funding sources, including the issuance of additional share capital, long-term debt or short-term loans. While Canon has been able to obtain funding from its traditional financing sources and from the capital markets, and believes it will continue to be able to do so in the future, there can be no assurance that adverse economic or other conditions will not affect Canon’s liquidity or long-term funding in the future.

Short-term loans (including the current portion of long-term debt) amounted to ¥1,866 million at December 31, 2012 compared with ¥8,343 million at December 31, 2011. Long-term debt (excluding the current portion) amounted to ¥2,117 million at December 31, 2012 compared with ¥3,368 million at December 31, 2011.

Canon’s long-term debt mainly consists of lease obligations.

In order to facilitate access to global capital markets, Canon obtains credit ratings from two rating agencies: Moody’s Investors Services, Inc. (“Moody’s”) and Standard and Poor’s Ratings Services (“S&P”). In addition, Canon maintains a rating from Rating and Investment Information, Inc. (“R&I”), a rating agency in Japan, for access to the Japanese capital market.

As of March 15, 2013, Canon’s debt ratings are: Moody’s: Aa1 (long-term); S&P: AA (long-term), A-1+ (short-term); 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.

Increase in property, plant and equipment on an accrual basis in fiscal 2012 amounted to ¥270,457 million compared with ¥226,869 million in fiscal 2011 and ¥158,976 million in fiscal 2010. For fiscal 2013, Canon projects its increase in property, plant and equipment will be approximately ¥265,000 million.

Employer contributions to Canon’s worldwide defined benefit pension plans were ¥30,421 million in fiscal 2012, ¥30,510 million in fiscal 2011 and ¥21,435 million in fiscal 2010. In addition, employer contributions to Canon’s worldwide defined contribution pension plans were ¥13,021 million in fiscal 2012, ¥12,511 million in fiscal 2011, and ¥11,780 million in fiscal 2010.

Working capital in fiscal 2012 decreased by ¥21,636 million, to ¥1,237,821 million, compared with ¥1,259,457 million in fiscal 2011 and ¥1,233,488 million in fiscal 2010. 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 purchases of fixed assets and investments. The working capital ratio (ratio of current assets to current liabilities) for fiscal 2012 was 2.47 compared to 2.41 for fiscal 2011 and to 2.38 for fiscal 2010.

Return on assets (net income attributable to Canon Inc. divided by the average of total assets) was 5.7% in fiscal 2012, compared to 6.3% in fiscal 2011 and 6.3% in fiscal 2010.

Return on Canon Inc. stockholders’ equity (net income attributable to Canon Inc. divided by the average of total Canon Inc. stockholders’ equity) was 8.7% in fiscal 2012 compared with 9.6% in fiscal 2011 and 9.2% in fiscal 2010.

The debt to total assets ratio was 0.1%, 0.3% and 0.3% as of December 31, 2012, 2011 and 2010, respectively. Canon had short-term loans and long-term debt of ¥3,983 million as of December 31, 2012, ¥11,711 million as of December 31, 2011 and ¥11,331 million as of December 31, 2010.

 

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C. Research and development, patents and licenses

Year 2012 marks the second year of the Excellent Global Corporation Plan, its 5-year (2011-2015) management plan. The slogan of the fourth phase (“Phase IV”) is “Aiming for the Summit-Speed & Sound Growth” and there are three core strategies related to R&D:

 

   

Achieve the overwhelming No.1 position in all core businesses and expand related and peripheral businesses;

   

Develop new business through globalized diversification and establish the Three Regional Headquarters management system; and

   

Build the foundations of an environmentally advanced corporation.

Canon has been striving to implement the three R&D related strategies as follows:

 

   

Achieve the overwhelming No.1 position in all core businesses and expand related and peripheral businesses: Continue to introduce competitive products through innovation and aim at gaining profit through solutions and services.

   

Develop new business through globalized diversification and establish the Three Regional Headquarters management system: Reinforce the businesses of commercial printing sector, medical imaging sector, industrial equipment sector and security and safety sector to develop into Canon’s new pillars. Seek talents in Japan, US, and Europe to foster promising technologies and enhance R&D capabilities in global-scale dimensions by enabling product development in specialized area of each region, with actively utilizing M&A.

   

Build the foundations of an environmentally advanced corporation: Focus on energy- and resource-conserving technologies to create products with the highest environmental performance.

Canon has developed and strengthened relationships with universities and other research institutes, such as Kyoto University, Tokyo Institute of Technology, Osaka University, Stanford University, the University of Arizona, the New Energy and Industrial Technology Development Organization and the National Institute of Advanced Industrial Science and Technology to assist with fundamental research and to develop cutting-edge technologies. Additionally, Canon has entered into respective collaborative research agreements with Massachusetts General Hospital (MGH) and Brigham and Women’s Hospital (BWH) to develop and commercialize unique medical devices.

Canon has fully introduced 3D-CAD systems across the Canon Group, boosting R&D efficiency to curtail product development times and costs. Moreover, Canon enhanced and evolved its simulation, measurement, and analysis technologies by establishing leading-edge facilities, including one of Japan’s highest-performance cluster computers. As such, Canon has succeeded in further reducing the need for prototypes, dramatically lowering costs and shortening product development lead times.

Canon’s consolidated R&D expenses were ¥296,464 million in fiscal 2012, ¥307,800 million in fiscal 2011 and ¥315,817 million in fiscal 2010. The ratios of R&D expenses to the consolidated total net sales for fiscal 2012, 2011 and 2010 were 8.5%, 8.7% and 8.5%, respectively.

Canon believes that new products protected by patents will not easily allow competitors to compete with them, and will give them an advantage in establishing standards in the market and industry. According to the United States patent annual list, released by IFI CLAIMS® Patent Services, Canon obtained the third greatest number of private sector patents in fiscal 2012.

D. Trend information

Looking at prospects for the global economy, Canon expects the U.S. economy to realize an accelerated recovery and emerging economies such as China to maintain solid growth. Canon believes, however, that European economies are likely to remain sluggish due to the debt crisis. The global economy as a whole is likely,

 

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Canon thinks, to show moderate growth, while the Japanese economy will likely head into solid recovery driven by the economic reconstruction policy and weakening of the yen against other currencies.

Fiscal 2013 represents the third year of Phase IV (2011–2015) of the Excellent Global Corporation Plan, a year in which Canon will implement various measures and in line with a basic policy Canon has established to implement sharp reforms and achieve sound business growth in the face of the current turbulent business environment.

In order to achieve its targets, Canon has set and will actively pursue the following five priority goals.

 

   

Reinforcing Business by Creating Outstanding Hit Products

Canon aims to develop next-generation products and create business models that take into account the dramatic changes taking place in the market such as the popularization of smartphones and cloud computing. Canon will further reinforce business profitability, realizing timely launches of new products that are of sound development quality leveraging the technology of prototype-less development, and filtering down the selection of products through a process of selection and concentration.

 

   

Securely Launching New Businesses and Achieving Sound Expansion

Canon plans to work to fundamentally strengthen its business, targeting the rapidly growing market for network camera systems. Canon plans to also work to further strengthen its “CINEMA EOS SYSTEM” and boost the profitability of its MR System “MREAL.” Additionally, Canon will take full advantage of M&A opportunities to further broaden the range of its business.

 

   

Thoroughly Strengthening Sales in Accordance with Respective Market Characteristics

In the office products domain, Canon plans to leverage its integration with sales subsidiaries of Océ N.V. to thoroughly strengthen direct sales and the solution and service business, while in the consumer products domain, Canon plans to strengthen sales in emerging markets and launch products suited to the country’s or region’s market characteristics in order to achieve sales expansion that is higher than economic growth.

 

   

Relentlessly Pursuing Cost Reductions and Accelerating Optimization of Global Production

Canon plans to accelerate the application of automated and robot-based production. Canon plans to also expand its application of in-house production, which has focused mainly on key components, to include general parts and molds, and production equipment. Additionally, Canon plans to promote a globally optimized production structure through agile production strategies always suited to the characteristics of each global base.

 

   

Concentrating on Cultivation of Technological Themes that Lead the Way to the Future

Canon plans to accelerate innovation by further filtering down key themes and concentrating resources to obtain a steady stream of basic patents.

Office Business Unit

In 2012, Canon was able to maintain its revenue from sales of MFDs, services and solutions despite a strong yen and the deceleration of the global economy. The consolidation of Océ N.V has brought many strategic assets to Canon, including expertise, resources and innovation.

The importance of connectivity, systems integration, business-workflow and web services continues to grow in the office imaging space and such added value is increasingly offered together with MFDs, printers and other hardware products as customer solutions. Canon seeks to maintain its leading position in these core markets.

 

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In 2012, Canon expanded its offering with the launch of the imageRUNNER ADVANCE 4000, 6200, 8200 and imageRUNNER ADVANCE C5200 series and Océ VarioPrint 110/125/135, which are monochrome digital presses jointly developed with Océ N.V. As for Production Printing Product (PPP), Canon strengthened its innovation capabilities in business services to accelerate the development of higher added value services as well as continued to invest in new products in order to expand its business in existing and new markets. To enter the Poster print market, Canon launched a new wide format printer, the ColorWave 650. Canon also introduced InfiniStream, which enables the vision of high-volume just-in-time production of customized folding cartons, with the industry’s fastest liquid toner technology. As for solutions Canon introduced imageWARE Desktop Version 3, a software program that enhances the imageRUNNER ADVANCE ecosystem by enabling seamless document management. Canon also launched new service offerings for the Canon Business Imaging Online, Canon’s unique cloud-based platform, while joining forces with major players in the technology industry. To maintain and enhance its competitive edge and to meet increasingly sophisticated customer demands, Canon plans to continue reinforcing its hardware and software product lineups and solutions capability.

Although there is heightened uncertainty about the future of the laser printer market with the ongoing economic downturn in Europe and the deceleration of growth in emerging markets, Canon’s laser printer business continues to occupy a large share and strong position in the market. In the monochrome laser printer market, the transition to a low price segment is expected to expand sales in the micro office/home office market and in emerging markets. Canon expects an expansion in the color laser printer market to be driven by increasing demand for color printing. Moreover, Canon plans to aggressively launch new products in the MFDs market and to drive Canon’s business growth.

However, Canon is experiencing fierce competition with competitors focused on the laser printer market and an eventual decline in sales prices is becoming a major threat. Growth of the tablet PC and smartphone market, which affects users’ printing behavior and may also lead to a decrease in demand for printing, is becoming a new threat.

In response, Canon aims to promote technological developments in order to introduce in a timely manner competitive products across the office business unit, and to pursue business efficiency through continuous cost reduction and optimization of its supply chain.

Imaging System Business Unit

The demand for high-resolution digital photos remained high, and as a result the interchangeable lens digital camera market continued to show robust growth in 2012. By market category, growth remained strong in developed countries, and was particularly robust in Asia outside Japan and other emerging markets, which contributed to overall global growth in the imaging system business unit. By product category, the digital single-lens-reflex (“SLR”) camera market showed steady growth, while mirrorless cameras represented a new category stimulating consumer demand.

In terms of interchangeable lens digital cameras, on top of the need for higher resolution and more compact and lightweight sizes, there is also consumer demand for video recording functions which manufacturers are meeting with a full high definition (HD) format, which is becoming a standard feature. Canon believes there remains considerable room for future growth in this category through development of new products based on state-of-the-art technology. In emerging markets, sales volumes of interchangeable lens digital cameras are still increasing rapidly.

As for the interchangeable lens market, interchangeable lens digital cameras have made dramatic advances in popularity, and further growth is expected in the future. Canon will continue to endeavor to market products that meet customer needs, such as lenses equipped with an image stabilization function, so as to expand sales and market share.

 

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Overall, the compact digital camera market shrank year-on-year due to ongoing economic stagnation and the rapid growth of tablet PCs and smartphones. However, Canon’s position in the compact market improved such that Canon now maintains a higher market share compared to the previous fiscal year.

In the digital camera market, Canon faced intense price competition. This combined with the value of the yen remaining at historical highs throughout most of 2012, placed serious constraints on Canon’s profit margins. Throughout the industry, there has been a strong tendency toward reliance on EMS (electronic manufacturing services), and intense price competition is expected to continue for the foreseeable future. Canon’s strategies to address these challenges include boosting the added value of products, pressing forward with 100% internal production leveraging the economies of scale that come with being the industry leader, and building an optimum cost structure to combat the pressures that might return should the yen strengthen again.

The main recording media for digital camcorders has become flash memory and the shift from SD to HD is ongoing. The market for conventional camcorders has been shrinking primarily because many popular devices include a movie function. On the other hand, new categories like web cameras and action cameras are emerging and expanding. Canon aims to expand sales in this market with a robust product lineup including higher added value based around Canon’s distinctive high-definition, high-resolution technologies also found in Canon’s professional line. Canon plans to expand lineup of “CINEMA EOS SYSTEM” in the business-use digital video camcorder field. CINEMA EOS SYSTEM consists of new interchangeable lens digital cinema camcorders, EF Lenses and new EF Cinema Lenses. Canon is widely aiming to solidify its top position in the motion picture production market by introducing a new series of interchangeable lens cinema camcorders and cinema lenses to the market not only cinema but also broadcast, sports, documentary, etc. as the CINEMA EOS SYSTEM.

In 2012, Canon experienced robust growth in the field of projectors for business applications, and in particular brighter, installation type projectors. In this installation market, Canon launched the new install-type WUX5000, WX6000 and SX6000 with great success in 2012. Moving forward, Canon expects to extend its competitive product lineup based around the optical technology on which the company prides itself, and push for expanded sales.

In the field of network cameras for industrial surveillance and management applications, the fiscal year 2012 achieved double-digit growth. The four HD-compatible products Canon launched in the second half of 2011 have increased the importance of mega-pixels and image analysis and also achieved significant growth in terms of both units sold and monetary amount.

In the broadcast TV lens market, gradual market expansion has continued due to market growth in emerging economies although demand arising from the switchover to high-definition broadcast formats in developed countries dropped off. Despite the economic slump in Europe, the slowdown of exports to China and the progressive lowering of equipment prices, Canon still has a large share of the TV lens market with high value-added products. Canon’s successful introduction in 2012 of a new field lens for international level sporting events contributed to increased revenue.

In 2012, the consumer inkjet printer market declined compared to 2011, due to a worldwide economic downturn and competitor’s withdrawal from the business. Vendors introduced new product functions which make it easy to print from smartphone, tablet PC and the cloud computing environment, as well as functions which improve operability for users.

Such vendors also expanded their lineup of products from conventional home use to emerging market and business area use.

The large-format inkjet printer market decreased slightly in 2012 from the previous year, amid the situation of dropping in capital spending caused by the downturn in the European economy and the slowdown of the growth rate in the Asian economy. In this environment, Canon was able to increase sales of large-format inkjet

 

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printer units in 2012 compared to 2011. In the first quarter of 2012, Canon was unable to supply enough units to the market primarily as a result of supply delays caused by the floods in Thailand. However, owing to a keen focus on recovering production quickly, Canon has been able to exceed unit sales levels for each quarter from the second quarter of 2012 compared to the same quarter in the prior year. Because the overall market declined in 2012, Canon was accordingly able to increase its share of the market. Canon increased the unit sales of large-format inkjet printers in part by launching new products for the graphic art market and expanding sales channels.

Industry and Others Business Unit

In fiscal 2012, the market for semiconductor lithography equipment decreased approximately 30% from the previous year. In the memory segment, equipment investment by chip makers remained low primarily because supply continued to outweigh demand. However, image sensor, logic device and automotive device makers steadily increased their equipment investments, drawn by the growing market for smartphones, tablet PCs and hybrid cars. At the same time, some manufacturers started to invest in i-line steppers for small diameter wafers used in power devices and LEDs, as well as for new markets such as 3D mountings for through silicon Via (TSV).

As a result, Canon’s shipments of semiconductor lithography equipment in 2012 slightly decreased from the previous year. Shipments for memory makers remained low while i-line steppers for image sensor production enjoyed brisk sales. In addition, Canon released new i-line stepper FPA-3030i5+ suitable for the production of the green devices such as LEDs and power devices, which currently occupies a high share of automotive device and LEDs markets. Canon also released new KrF stepper FPA-6300ES6a with greatly improved productivity compared to conventional equipment.

In 2012, the market for FPD lithography equipment generally slowed because of a deterioration of panel makers’ earnings. Overall the market for 8th generation large-sized panel production declined 60% from the previous year while the market for 5.5-6th generation small-to-mid-sized panel production maintained high growth due to the brisk market of smartphones and tablet PCs.

As a result, Canon’s shipments of FPD lithography equipment decreased from the previous year primarily due to decline in the market for large-sized panels, where Canon is particularly competitive, and the delay in the development of new products for small-to-mid-sized panels, for which the market has maintained a healthy growth.

Canon expects FPD lithography equipment investments by panel makers to recover in 2013 mainly led by Chinese makers. Canon aims to turn around the market share by revamping its product lineup including products for small-to-mid-sized panels.

In the medical equipment business, the digital radiography (DR) market continued to expand in 2012, mainly in the emerging markets such as Asia. Moreover, the digital systems market of developed countries continued to experience a rapid transition from the digitalization format of computed radiography (CR) to the newest DR format. While competition increased with a growing number of new players, the target market of Canon DR products showed steady growth.

As a result, Canon accelerated sales of Canon’s static DR products; CXDI-401C/G, CXDI-401C/G COMPACT, CXDI-501C/G, and CXDI-80C Wireless, all launched in fiscal year 2011, led the revenue increase for fiscal year 2012. Canon’s dynamic DR product, CXDI-50RF, also recorded consistent sales growth, contributing to the overall sales expansion in DR business.

Regarding the ophthalmic products, the optical coherence tomography (“OCT”) market continued to expand in 2012, and Canon expects a further increase in both volume and competition in the market. In the OCT market, Canon launched the first Canon-brand OCT, OCT HS-100, in September 2012. This product was the result of collaboration with Optopol Technology, S.A. (Poland), a Canon Group consolidated subsidiary since 2010.

 

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Canon’s fiscal year 2012 ophthalmic product sales were supported by increased sales of TX-20/TX-20P a full auto tonometer and CR-2 Plus high-end non-mydriatic retinal camera, both released in 2011, and RK-F2, a full auto refkeratometer released in 2012.

With the addition of OCT to Canon’s product portfolio, Canon strives to further increase sales in the ophthalmic equipment market.

Sales of document scanners manufactured by Canon Electronics Inc. recovered in North America in addition to brisk sales in China, India and other Asian countries. As a result, overall unit sales increased.

Sales of organic LED panel manufacturing equipment made by Canon Tokki Corporation recorded steady sales from aggressive capital investment by organic LED panel manufacturers on the back of increasing demand for smartphones and tablet PCs.

Sales of film deposition equipment, made by Canon ANELVA Corporation, for magnetic heads and hard discs fell due to the weak PC market, while sales of semiconductor film deposition equipment significantly increased as demand for semiconductor devices used in smartphones was robust.

Although sales of die bonders manufactured by Canon Machinery Inc. decreased due to slow capital investment by semiconductor manufacturers, sales of equipment related to secondary batteries used in automobiles and smartphones increased.

E. 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 established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

Canon provides guarantees for 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 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 ¥13,333 million at December 31, 2012. The carrying amounts of the liabilities recognized for Canon’s obligations as a guarantor under those guarantees at December 31, 2012 were insignificant.

F. Contractual obligations

The following summarizes Canon’s contractual obligations at December 31, 2012.

 

          Payments Due By Period  
  Total     Less than
1 year
    1-3 years     3-5 years     More than
5 years
 
    (Millions of yen)  

Contractual obligations:

         

Long-Term Debt:

         

Capital Lease Obligations

  ¥ 3,535      ¥ 1,503      ¥ 1,775      ¥ 243      ¥ 14   

Other Long-Term Debt

    129        44        35        30        20   

Operating Lease Obligations

    75,807        25,101        27,808        13,152        9,746   

Purchase commitments for:

         

Property, Plant and Equipment

    39,520        39,520                        

Parts and Raw Materials

    65,311        65,311                        

Other long-term liabilities

         

Contribution to Defined Benefit Pension Plans

    40,064        40,064                        
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  ¥ 224,366      ¥ 171,543      ¥ 29,618      ¥ 13,425      ¥ 9,780   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Note: The table does not include provisions for uncertain tax positions and related accrued interest and penalties, as the specific timing of future payments related to these obligations cannot be projected with reasonable certainty. See Note 12, Income Taxes in the Notes to Consolidated Financial Statements for further details. Contribution to defined benefit pension plans reflects the expected amount only for the next fiscal year, since contributions beyond the next fiscal year are not currently determinable due to uncertainties related to changes in actuarial assumptions, returns on plan assets and changes to plan membership.

Canon provides warranties of generally less than one year against defects in materials and workmanship on most of its consumer products. Estimated product warranty related costs are established at the time revenue are recognized and are included in selling, general and administrative expenses. Estimates for accrued product warranty costs 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, 2012, accrued product warranty costs amounted to ¥12,163 million.

At December 31, 2012, commitments outstanding for the purchase of property, plant and equipment were approximately ¥39,520 million, and commitments outstanding for the purchase of parts and raw materials were approximately ¥65,311 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.

During fiscal 2013, Canon expects to contribute ¥18,610 million to its Japanese defined benefit pension plans and ¥21,454 million to its foreign defined benefit pension plans.

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.

 

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Item 6. Directors, Senior Management and Employees

A. Directors and senior management

Directors and Audit & Supervisory Board Members of the Company as of March 28, 2013 and their respective business experience are listed below.

 

Name

(Date of birth)

 

Position

(Group executive/function)

  Date of
commencement
   

Business experience

(*current position/function)

Fujio Mitarai

  Chairman & CEO     4/1961      Entered the Company

(Sept. 23, 1935)

      1/1979      President of Canon U.S.A., Inc.
      3/1981      Director
      3/1985      Managing Director
      1/1989      In charge of HQ administration
      3/1989      Senior Managing Director
      3/1993      Executive Vice President
      9/1995      President & CEO
      3/2006     

Chairman of the Board & President & CEO

      5/2006      Chairman & CEO*

 

 

 

 

 

 

   

 

Toshizo Tanaka

  Executive Vice President & CFO     4/1964      Entered the Company

(Oct. 8, 1940)

 

(Group Executive of Finance & Accounting HQ,

 Group Executive of Facilities Management HQ )

    1/1992     

Deputy Group Executive of Finance & Accounting HQ

      3/1995      Director
      4/1995     

Group Executive of Finance & Accounting HQ

      3/1997      Managing Director
      3/2001      Senior Managing Director
      1/2007     

Group Executive of Policy and Economy Research HQ

      3/2007      Executive Vice President & Director
      3/2008      Executive Vice President & CFO*
      1/2010      Group Executive of General Affairs HQ
      3/2010     

Group Executive of External Relations HQ

      4/2011     

Group Executive of Finance & Accounting HQ*

      4/2012     

Group Executive of Facilities Management HQ*

 

 

 

 

 

 

   

 

Toshiaki Ikoma

(Mar. 5, 1941)

 

Executive Vice President & CTO

(Group Executive of Corporate R&D HQ)

    4/1982     

Professor of Institute of Industrial Science, the University of Tokyo

      2/1997     

President of Texas Instruments Japan Limited

      2/2002     

Chairman of the Board of Texas Instruments Japan Limited

      10/2004    

Director-General of Center for Research and Development Strategy (CRDS), Japan Science and Technology Agency (JST)

      4/2005     

Entered the Company

     

Adviser of the Company

      12/2008    

President of Canon Foundation*

      1/2009     

Group Executive of Corporate R&D HQ*

      3/2009     

Director, Executive Vice President & CTO

      7/2009     

Chief Executive of Optical Products Operations

      3/2011     

Executive Vice President & CTO*

 

 

 

 

 

 

   

 

 

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Name

(Date of birth)

 

Position

(Group executive/function)

  Date of
commencement
   

Business experience

(*current position/function)

Kunio Watanabe

(Oct. 3, 1944)

 

Executive Vice President

(Group Executive of Corporate Planning Development HQ)

    4/1969     

Entered the Company

      4/1995     

Group Executive of Corporate Planning Development HQ*

      3/1999     

Director

      3/2003     

Managing Director

      1/2007     

Deputy Group Executive of Policy and Economy Research HQ

      3/2008     

Senior Managing Director

      3/2012     

Executive Vice President*

 

 

 

 

 

 

   

 

Yoroku Adachi

(Jan. 11, 1948)

  Senior Managing Director     4/1970     

Entered the Company

      3/2001     

Chairman of Canon Singapore Pte. Ltd.

     

Chairman of Canon Hong Kong Co., Ltd.

     

Director

      4/2001     

President of Canon (China) Co., Ltd.

      3/2005     

Managing Director

      4/2005     

President of Canon U.S.A., Inc.*

      3/2009     

Senior Managing Director*

 

 

 

 

 

 

   

 

Yasuo Mitsuhashi

(Nov. 23, 1949)

 

Senior Managing Director

(Chief Executive of Peripheral Products HQ)

    4/1974     

Entered the Company

      2/2001     

Chief Executive of Chemical Products HQ

      3/2001     

Director

      4/2003     

Chief Executive of Peripheral Products HQ*

      3/2005     

Managing Director

      3/2009     

Senior Managing Director*

      4/2009     

Chief Executive of Chemical Products Operations

 

 

 

 

 

 

   

 

Shigeyuki Matsumoto

 

Senior Managing Director

(Group Executive of Device Technology Development HQ)

    4/1977     

Entered the Company

(Nov. 15, 1950)

      1/2002     

Group Executive of Device Technology Development HQ*

      3/2004     

Director

      3/2007     

Managing Director

      3/2011     

Senior Managing Director*

 

 

 

 

 

 

   

 

Toshio Honma

 

Senior Managing Director

(Group Executive of Global Procurement HQ)

    4/1972     

Entered the Company

(Mar. 10, 1949)

      4/2001     

Deputy Chief Executive of i Printer Products HQ

      3/2003     

Director

      4/2003     

Group Executive of Business Promotion HQ

      7/2003     

Group Executive of L Printer Business Promotion HQ

      1/2007     

Chief Executive of L Printer Products HQ

      3/2008     

Managing Director

      3/2012     

Senior Managing Director*

     

Group Executive of Global Procurement HQ*

 

 

 

 

 

 

   

 

 

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Name

(Date of birth)

 

Position

(Group executive/function)

  Date of
commencement
   

Business experience

(*current position/function)

Masaki Nakaoka

  Senior Managing Director     4/1975      Entered the Company

(Jan. 3, 1950)

 

(Chief Executive of Office Imaging Products HQ)

    4/2001     

Deputy Chief Executive of Office Imaging Products HQ

      3/2004     

Director

      4/2005     

Chief Executive of Office Imaging Products HQ*

      3/2008     

Managing Director

      3/2012     

Senior Managing Director*

 

 

 

 

 

 

   

 

Haruhisa Honda

  Senior Managing Director     4/1974     

Entered the Company

(Oct. 14, 1948)

 

(Group Executive of Production Engineering HQ)

    4/2003     

Deputy Chief Executive of Chemical Products HQ

      3/2004     

Director

      4/2004     

Chief Executive of Chemical Products Operations

      3/2007     

Group Executive of Production Engineering HQ

      3/2008     

Managing Director

      4/2010     

Group Executive of Manufacturing HQ

      7/2011     

Group Executive of Production Engineering HQ*

      3/2012     

Senior Managing Director*

 

 

 

 

 

 

   

 

Hideki Ozawa

(Apr. 28, 1950)

  Managing Director     4/1973     

Entered Canon Sales Co., Inc. (renamed Canon Marketing Japan Inc.)

      7/1980     

Entered the Company

      4/2005     

President of Canon (China) Co., Ltd.*

      3/2007     

Director

      3/2010     

Managing Director*

 

 

 

 

 

 

   

 

Masaya Maeda

 

Managing Director

    4/1975     

Entered the Company

(Oct. 17, 1952)

 

(Chief Executive of Image Communication Products HQ)

    1/2006     

Group Executive of Digital Imaging Business Group

      3/2007     

Director

      4/2007     

Chief Executive of Image Communications Products HQ*

      3/2010     

Managing Director*

 

 

 

 

 

 

   

 

Yasuhiro Tani

  Director     4/1980     

Entered the Company

(Jul. 30, 1956)

 

(Group Executive of Digital System Technology Development HQ)

    1/2008     

Group Executive of Digital Platform Technology Development HQ

      4/2008     

Executive Officer

      3/2011     

Director*

      7/2012     

Group Executive of Digital System Technology Development HQ*

 

 

 

 

 

 

   

 

Makoto Araki

 

Director

    4/1978     

Entered the Company

(Jul. 16, 1954)

 

(Group Executive of Information & Communication Systems HQ)

    10/2009     

Group Executive of Information & Communication Systems HQ*

      4/2010      Executive Officer
      3/2011      Director*

 

 

 

 

 

 

   

 

 

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Name

(Date of birth)

 

Position

(Group executive/function)

  Date of
commencement
   

Business experience

(*current position/function)

Hiroyuki Suematsu

  Director     4/1980      Entered the Company

(Nov. 15, 1955)

 

(Group Executive of Quality Management HQ)

    4/2007     

Chief Executive of Chemical Products Operations

      4/2008     

Executive Officer

      4/2009     

Deputy Chief Executive of Chemical Products Operations

      1/2010     

Deputy Chief Executive of Peripheral Products Operations

      3/2012     

Director*

     

Group Executive of Quality Management HQ

     

Group Executive of Environment HQ

      4/2012     

Group Executive of Environment & Quality HQ

      1/2013     

Group Executive of Quality Management HQ*

 

 

 

 

 

 

   

 

Shigeyuki Uzawa

  Director     12/1986     

Entered the Company

(Jan. 30, 1953)

 

(Chief Executive of Optical Products Operations)

    7/2009     

Group Executive of Semiconductor Production Equipment Operations

      4/2010     

Executive Officer

      7/2010     

Deputy Chief Executive of Optical Products Operations

      1/2011     

Chief Executive of Optical Products Operations*

      3/2012     

Director*

 

 

 

 

 

 

   

 

Kenichi Nagasawa

  Director     4/1981     

Entered the Company

(Jan. 31, 1959)

 

(Group Executive of Corporate Intellectual Property and Legal HQ)

    3/2010     

Deputy Group Executive of Corporate Intellectual Property and Legal HQ

      4/2010     

Executive Officer

     

Group Executive of Corporate Intellectual Property and Legal HQ*

      3/2012     

Director*

 

 

 

 

 

 

   

 

Naoji Otsuka

  Director     4/1981     

Entered the Company

(Apr. 24, 1958)

 

(Chief Executive of Inkjet Products Operations)

    1/2010     

Group Executive of Inkjet Products Development Group

      4/2011     

Executive Officer

     

Deputy Chief Executive of Inkjet Products Operations

      3/2012     

Director*

     

Chief Executive of Inkjet Products Operations*

 

 

 

 

 

 

   

 

Masanori Yamada

  Director     4/1981     

Entered the Company

(Jul. 3, 1954)

 

(Group Executive of Network Visual Solution Business Promotion HQ)

    4/2008     

Executive Officer

     

Deputy Chief Executive of Office Imaging Products HQ

      4/2012     

Senior Executive Officer

      1/2013     

Group Executive of Network Visual Solution Business Promotion HQ*

      3/2013     

Director*

 

 

 

 

 

 

   

 

 

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Table of Contents

Name

(Date of birth)

 

Position

(Group executive/function)

  Date of
commencement
   

Business experience

(*current position/function)

Aitake Wakiya

 

Director

    4/1979     

Entered the Company

(Nov. 8, 1955)

 

(Deputy Group Executive of Finance & Accounting HQ)

    4/2011     

Deputy Group Executive of Finance & Accounting HQ*

      4/2012     

Executive Officer

      3/2013     

Director*

 

 

 

 

 

 

   

 

Kazuto Ono

 

Director

    4/1980     

Entered the Company

(Jul. 20, 1957)

 

(Group Executive of Human Resources Management & Organization HQ)

    5/2011     

Senior General Manager of Finance & Accounting HQ

      4/2012     

Executive Officer

     

Group Executive of Human Resources Management & Organization HQ*

      3/2013     

Director*

 

 

 

 

 

 

   

 

Shunji Onda

(Mar. 13, 1950)

 

Audit & Supervisory Board Member

    4/1972     

Entered Canon Sales Co., Inc. (renamed Canon Marketing Japan Inc.)

      7/1980     

Entered the Company

      4/2004     

Senior General Manager of Optical Products Business Administration Center

      3/2006     

Director

      4/2006     

Deputy Group Executive of Finance & Accounting HQ

      4/2007     

Group Executive of Global Procurement HQ

      3/2010     

Audit & Supervisory Board Member*

 

 

 

 

 

 

   

 

Kengo Uramoto

(Aug. 23, 1953)

 

Audit & Supervisory Board Member

    4/1978     

Entered the Company

      10/2007     

Deputy Group Executive of Human Resources Management & Organization HQ

      4/2008     

Executive Officer

     

Group Executive of Human Resources Management & Organization HQ

      1/2009     

Deputy Group Executive of Human Resources Management & Organization HQ

      4/2010     

Group Executive of Human Resources Management & Organization HQ

      3/2012     

Audit & Supervisory Board Member*

 

 

 

 

 

 

   

 

Tadashi Ohe

(May 20, 1944)

 

Audit & Supervisory Board Member

    4/1969     

Registration as a lawyer*

      4/1989     

Instructor of Judicial Research and Training Institute

      3/1994     

Audit & Supervisory Board Member*

 

 

 

 

 

 

   

 

Kazunori Watanabe

(Oct. 9, 1950)

 

Audit & Supervisory Board Member

    9/1978     

Registration as a Certified Public Accountant*

      8/2008     

Senior Executive of Ernst & Young ShinNihon LLC

      3/2010     

Audit & Supervisory Board Member*

 

 

 

 

 

 

   

 

 

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Name

(Date of birth)

 

Position

(Group executive/function)

  Date of
commencement
   

Business experience

(*current position/function)

Kuniyoshi Kitamura

(Apr. 8, 1956)

 

Audit & Supervisory Board Member

    4/1981     

Entered The Dai-Ichi Mutual Life Insurance Co.

      4/2002     

General Manager of Network Service Management Department of

     

The Dai-Ichi Mutual Life Insurance Co.

      4/2004     

General Manager of Corporate Relations Department No.2 of

     

The Dai-Ichi Mutual Life Insurance Co.

      4/2006     

General Manager of Research Department of

     

The Dai-Ichi Mutual Life Insurance Co.

      11/2007     

General Manager of Corporate Planning Department No.2 of

     

The Dai-Ichi Mutual Life Insurance Co.

      4/2009     

General Manager of Corporate Relations Department No.8 of

     

The Dai-Ichi Mutual Life Insurance Co.

      3/2010     

Audit & Supervisory Board Member*

 

 

 

 

 

 

   

 

Term

All directors and Audit & Supervisory Board Members are elected by the shareholders at their general meeting.

Tadashi Ohe, Kazunori Watanabe and Kuniyoshi Kitamura, are outside Audit & Supervisory Board Members as stipulated in Item16, Article 2 of the Corporation Law of Japan. The term of office of directors is one year. The current term of all directors expires in March 2013. The term of office of Audit & Supervisory Board Members is four years. The current term for Tadashi Ohe expires in March 2015, and the current term for Shunji Onda, Kazunori Watanabe and Kuniyoshi Kitamura, who were elected in the general meeting of shareholders in March 2010, expires in March 2014, and the current term for Kengo Uramoto, who was elected in the general meeting of shareholders in March 2012, expires in March 2016.

Board members and Audit & Supervisory Board Members may serve any number of consecutive terms.

There is no arrangement or understanding between any director or Audit & Supervisory Board Member and any major shareholder, customer, supplier or other material stakeholders in connection with the selection of such director or Audit & Supervisory Board Member.

Board of Directors and Audit & Supervisory Board Members

The Company’s articles of incorporation provide for a board of directors of not more than 30 members and for not more than five Audit & Supervisory Board Members. Currently the number of board members is 21 and the number of Audit & Supervisory Board Members is five. There is no maximum age limit for members of the board. Board members and Audit & Supervisory Board Members may be removed from office at any time by a resolution of a general meeting of shareholders.

The board of directors has ultimate responsibility for the administration of the Company’s affairs. By resolution, the board of directors designates, from among its members, representative directors who have authority individually to represent the Company generally in the conduct of its affairs.

Under the Corporation Law of Japan, board members must refrain from engaging in any business competing with the Company unless approved by a board resolution, and no board member may vote on a proposal, arrangement or contract in which that board member is deemed to be materially interested.

 

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The Corporation Law of Japan requires a resolution of the board of directors for a company to acquire or dispose of material assets, to borrow substantial amounts of money, to employ or discharge important employees such as corporate officers, and to establish, change or abolish material corporate organizations such as a branch office.

The Audit & Supervisory Board Members are not required to be certified public accountants, although Kazunori Watanabe is a certified public accountant. At least half of the Audit & Supervisory Board Members must be persons who have not been either board members or employees of the Company or any of its subsidiaries. An Audit & Supervisory Board Member may not at the same time be a board member or an employee of the Company or any of its subsidiaries. The Audit & Supervisory Board Members have the statutory duty of examining the Company’s financial statements and the Company’s business reports to be submitted annually by the board of directors at the general meetings of shareholders and of reporting their opinions to the shareholders. They also have the statutory duty of supervising the administration by the board members of the Company’s affairs. They shall participate in the meetings of the board of directors but are not entitled to vote.

The Audit & Supervisory Board Members constitute the Audit & Supervisory Board. Under the Corporation Law of Japan, the Audit & Supervisory Board has a statutory duty to prepare and submit its audit report to the board of directors each year. An Audit & Supervisory Board member may note an opinion in the auditor report if an Audit & Supervisory Board member’s opinion is different from the opinion expressed in the audit report. The Audit & Supervisory Board is empowered to establish audit principles, the method of examination by Audit & Supervisory Board Members of the Company’s affairs and financial position and other matters concerning the performance of the Audit & Supervisory Board Members’ duties. The Company does not have an audit committee.

The amount of remuneration payable to the Company’s board members as a group and that of the Company’s Audit & Supervisory Board Members as a group in respect of a fiscal year is subject to approval by a general meeting of shareholders. Within those authorized amounts, the compensation for each board member and Audit & Supervisory Board Member is determined by the board of directors and a consultation with the Audit & Supervisory Board Members, respectively. The Company does not have a remuneration committee.

Under the Corporation Law of Japan and the Company’s articles of incorporation, the board of directors may, by resolution, release current and former directors and Audit & Supervisory Board Members from liability for damages resulting from negligence in the fulfillment of their respective duties to the extent permitted by law. Furthermore, the Company may enter into contracts with outside Audit & Supervisory Board Members limiting their liability for damages resulting from negligence in the fulfillment of their respective duties in an amount consistent with the limitation stipulated by law.

In fiscal 2004, Canon established a standing committee, the Internal Control Committee, with the president appointed as chairman of the group. The Internal Control Committee has built a highly effective internal control system unique to Canon, which not only serves to ensure the reliability of the Company’s financial reporting, but also aims to ensure the effectiveness and efficiency of its business operations, as well as compliance with related laws, regulations and internal controls.

Additionally, in fiscal 2005, the Disclosure Committee was established with the president appointed as chairman. This committee was formed to ensure that Canon is not only in compliance with applicable laws, rules and regulations, but also to ensure that information disclosed to shareholders and capital markets is both correct and comprehensive.

Executive Officer System

Canon adopted an Executive Officer System effective April 1, 2008. Executive Officers are appointed and discharged by the Board of Directors and have a term of office of one year. Taking into consideration growth in

 

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the scope of its business activities, Canon recognizes the need to bolster its management execution structure. By promoting capable human resources with accumulated executive knowledge across specific business areas, the Company is endeavoring to realize more flexible and efficient management operations. To this end, Canon intends to gradually increase the number of Executive Officers and further solidify its management systems.

Executive Officers of the Company appointed by the Board of Directors meeting held on January 30, 2013, whom are expected to take the assignment on April 1, 2013, are listed below.

 

Name

  

Position

  

(Group executive/function)

Sachio Kageyama

   Senior Executive Officers    Group Executive of Global Manufacturing HQ

Akio Noguchi

   Senior Executive Officers    Deputy Chief Executive of Peripheral Products HQ

Seymour Liebman

   Senior Executive Officers    Executive Vice President of Canon U.S.A., Inc.

Masato Okada

   Executive Officers    Deputy Chief Executive of Image Communication Products HQ

Akiyoshi Kimura

   Executive Officers    Deputy Chief Executive of Office Imaging Products HQ

Kazuto Ogawa

   Executive Officers    President of Canon Canada Inc.

Kenji Kobayashi

   Executive Officers    President of Canon France S.A.S

Ryuichi Ebinuma

   Executive Officers    Deputy Group Executive of Corporate R&D HQ

Rokus van Iperen

   Executive Officers    President of Canon Europa N.V. and Canon Europe Ltd.

Yuichi Ishizuka

   Executive Officers    Executive Vice President of Canon U.S.A., Inc.

Kazuhiko Noguchi

   Executive Officers    Group Executive of External Relations HQ

Eiji Osanai

   Executive Officers    Deputy Group Executive of Production Engineering HQ

Hiroaki Takeishi

   Executive Officers    Group Executive of Semiconductor Production Equipment Group

Nobutoshi Mizusawa

   Executive Officers    Group Executive of R&D Project Group

Yoichi Iwabuchi

   Executive Officers    Senior General Manager of Software Platform Technology Development Center

B. Compensation

In the fiscal year ended December 31, 2012, Canon pays an aggregate of approximately ¥2,187 million to its directors and Audit & Supervisory Board Members. This amount includes bonuses, stock options and retirement allowances.

Directors and Audit & Supervisory Board Members are not covered by the Company’s retirement program. However, in accordance with customary Japanese business practices, directors and Audit & Supervisory Board Members receive lump-sum retirement benefits, subject to shareholder approval. Retirement benefits include benefits to five Directors and one Audit & Supervisory Board Member who have retired at the conclusion of the Ordinary General Meeting of Shareholders for the 111th Business Term held on March 29, 2012. The retirement allowance system for Audit & Supervisory Board Members was abolished at the conclusion of the Ordinary General Meeting of Shareholders for the 109th Business Term held on March 30, 2010. At the same meeting, the Company received approval for the final retirement benefit for Audit & Supervisory Board Members. The retirement allowance for Audit & Supervisory Board Members represents the final retirement benefit for retired Audit & Supervisory Board Member.

Beginning from the fiscal year ended December 31, 2010, the Company is required to disclose the compensation of any director who receives total aggregate annual compensation exceeding ¥100 million in accordance with the Financial Instruments and Exchange Act of Japan and related ordinances. The following table sets forth the amount of compensation paid or planned to be paid directors whose aggregate compensation exceeded ¥100 million in fiscal 2012.

 

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Name

(Position)

          Category of remuneration         
   Company      Basic
Compensation
     Bonus      SubTotal      Retirement
Allowance
     Stock Option      Total  
            (Millions of yen)         

Fujio Mitarai (Director)

     Canon Inc.       ¥                 171       ¥     32       ¥       203       ¥           42       ¥             22       ¥ 267   

Tsuneji Uchida (Director)

     Canon Inc.         26                 26         210         6         242   

Toshizo Tanaka (Director)

     Canon Inc.         81         18         99         19         20         138   

Toshiaki Ikoma (Director)

     Canon Inc.         79         16         95         17         19         131   

Kunio Watanabe (Director)

     Canon Inc.         62         13         75         16         14         105   

Notes:

(1) Bonus amounts represent the increased portion of accrued directors’ bonuses in fiscal year 2012.
(2) Directors’ retirement allowance represents an increased amount of accrued directors’ retirement benefits. For Tsuneji Uchida, however, retirement allowance represents the amount paid as retirement benefit.
(3) The stock option amounts represent an expense recognized during fiscal year 2012 determined based on the fair value on the date of grant using the Black-Scholes option pricing model.
(4) Apart from the remuneration contained in the above table, Océ N.V. paid ¥1 million to Toshizo Tanaka as basic compensation. Toshizo Tanaka received ¥139 million in aggregate compensation including remuneration from Océ N.V. Compensation amounts from Océ N.V. are translated from euros based on the average rate for fiscal year 2012 of ¥102.55 = Euro 1.

The following three elements comprise remuneration to directors:

 

   

Basic Compensation: compensation for executing of business operations

   

Bonus: bonus links to business results of current fiscal year

   

Retirement Allowance: remuneration for the contribution to the Company during tenure

In addition to the above, the Company issues stock options for the purpose of providing effective incentives to improve business results on a medium and long-term basis. The remuneration to Audit & Supervisory Board Members consists of only basic compensation, which is not affected by the performance of the Company.

The determination methods of remuneration are as follows:

Basic Compensation

Each maximum amount of total compensation to directors and Audit & Supervisory Board Members is determined by the Ordinary General Meeting of Shareholders. The remuneration to each director is determined by the meeting of the Board of Directors based on criteria set by the Company, and the remuneration to each Audit & Supervisory Board Member is determined by the meeting of Audit & Supervisory Board Members.

Bonus

Director bonuses are calculated based on internal criteria considering the performance of the Company. The total amount is proposed to and approved by the Ordinary General Meeting of Shareholders. The bonus amount paid to individual directors is determined at a meeting of the Board of Directors, based on the total approved amount, taking into account the position and performance of each director.

Retirement Allowance

Retirement allowances are paid at the time of retirement in appreciation of their services during their terms in offices. The amount of allowance is calculated based on monthly basic compensation and the number of years of service, etc. to the Company and is proposed to and approved by the Ordinary General Meeting of Shareholders. The retirement allowance system for Directors was abolished at the conclusion of the Ordinary General Meeting of Shareholders for the 112th Business Term held on March 28, 2013. At the same meeting, the Company received approval for the final retirement benefit for Directors.

 

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Stock Option

The Company issues stock option plans for the purpose of enhancing directors’ motivation and morale to improve the Company’s performance. Issuance of share options as stock options without compensation and features of such stock options is proposed to and approved by the Ordinary General Meeting of Shareholders.

The Company has four stock option (share option) plans. These plans were approved at the meeting of the Board of Directors in accordance with the Ordinary General Meeting of Shareholders for the 107th, 108th, 109th and 110th Business Term of the Company, pursuant to Articles 236, 238 and 239 of the Corporation Law of Japan, held on March 28, 2008, March 27, 2009, March 30, 2010, and March 30, 2011. Under and pursuant to these plans, share options will be issued as stock options to the Company’s directors, executive officers and senior employees.

The descriptions of the stock option plans are below.

The Stock Option Plan Approved on March 28, 2008

1. The Reason for the Necessity to Solicit Those Who Subscribe for Share Options on Particularly Favorable Conditions

Share options were issued to the Company’s directors, executive officers and senior employees for the purpose of further enhancing their motivation and morale to improve the Company’s performance, with a view to long-term improvement of its corporate value.

2. Grantees of Share Options

The Company’s directors, 8 executive officers, and 30 senior employees who are entrusted with important functions.

3. Number of Share Options

The number of share options that the Board of Directors are authorized to issue is 5,920.

4. Cash Payment for Share Options

No cash payment will be required for the share options.

5. Exercise Price

The exercise price is ¥5,502 per share.

6. Features of Share Options

The features of share options are as follows:

(1) Number of Shares acquired upon Exercise of a Share Option

The number of shares acquired upon exercise of one share option (the “Allotted Number of Shares”) is 100 common shares, and the total number of shares to be delivered due to the exercise of share options is 592,000 common shares.

 

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However, if the Company effects a share split (including allotment of common shares without compensation; this inclusion being applicable below) or a share consolidation after the date of the allotment of the share options, the Allotted Number of Shares will be adjusted by the following calculation formula:

Allotted Number of Shares after Adjustment

= Allotted Number of Shares before Adjustment × Ratio of Share Splitting or Share Consolidation

Such adjustment will be made only with respect to the number of issued share options that have not then been exercised, and any fractional number of less than one share resulting from such adjustment will be rounded off.

(2) Amount of Property to Be Contributed upon Exercise of Share Options

The amount of property to be contributed upon the exercise of each share option is the amount obtained by multiplying the amount to be paid in for one share (the “Exercise Price”) to be delivered upon the exercise of a share option by the Allotted Number of Shares. The Exercise Price is the product of the multiplication of 1.05 and the closing price of one common share of the Company in ordinary trading at the Tokyo Stock Exchange as of the date of allotment of the share options (or if no trade is made on such date, the date immediately preceding the date on which such ordinary shares are traded), with any fractional amount of less than one yen to be rounded up to one yen.

The Exercise Price will be adjusted as follows:

(i) If the Company effects a share split or a share consolidation after the date of the allotment of the share options, the Exercise Price will be adjusted by the following calculation formula, with any fractional amount of less than one yen to be rounded up to one yen:

Exercise Price after Adjustment

 

=Exercise Price before adjustment ×

   1
   Ratio of Share Splitting or Share Consolidation

(ii) If, after the date of allotment of share options, the Company issues common shares at a price lower than the then market price thereof (other than by way of conversion of the third series of Unsecured Convertible Debentures Due 2008 of the Company) or disposes of common shares owned by it, the Exercise Price will be adjusted by the following calculation formula, with any fractional amount of less than one yen to be rounded up to one yen; however, the Exercise Price will not be adjusted in the case of the exercise of share options:

Exercise Price after Adjustment = Exercise Price before Adjustment×

 

Number of Issued and Outstanding Shares +

   Number of Newly Issued Shares × Payment amount per Share
   Market Price

Number of Issued and Outstanding Shares + Number of Newly Issued Shares

The “Number of Issued and Outstanding Shares” is the number of shares already issued by the Company after subtraction of the number of shares owned by the Company. In the case of the Company’s disposal of shares owned by it, the “Number of Newly Issued Shares” will be replaced with the “Number of Own Shares to Be Disposed.”

(iii) In the case of a merger, a company split or capital reduction after the date of allotment of share options, or in any other analogous case requiring the adjustment of the Exercise Price, the Exercise Price shall be appropriately adjusted within a reasonable range.

(3) Period during Which Share Options Are Exercisable

From May 1, 2010 to April 30, 2014.

 

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(4) Matters regarding Stated Capital and Capital Reserves Increased When Shares Are Issued upon Exercise of Share Options

(i) The increased amount of stated capital will be half of the maximum amount of increases of stated capital, etc.

Any fractional amount of less than one yen resulting from such calculation will be rounded up to one yen.

(ii) The increased amount of capital reserves shall be the amount of the maximum amount of increases of stated capital, etc., mentioned in (i) above, after the subtraction of increased amount of stated capital mentioned in (i) above.

(5) Restriction on Acquisition of Share Options by Transfer

An acquisition of share options by way of transfer requires the approval of the Board of Directors.

(6) Events for the Company’s Acquisition of Share Options

If a proposal for the approval of a merger agreement under which the Company will become an extinguishing company or a proposal for the approval for a share exchange agreement or a share transfer plan under which the Company will become a wholly-owned subsidiary is approved by the Company’s shareholders at a shareholders meeting (or by the Board of Directors if no resolution of a shareholders meeting is required for such approval), the Company will be entitled to acquire the share options, without compensation, on a date separately designated by the Board of Directors.

(7) Handling of Fractions

Any fraction of a share (less than one share) to be delivered to any holder of share options who has exercised share options will be disregarded.

(8) Other Conditions for Exercise of Share Options

(i) One share option may not be exercised partially.

(ii) Each holder of share options must continue to be a director, executive officer or employee of the Company until the end of the Company’s general meeting of shareholders regarding the final business term within 2 years from the end of the Ordinary General Meeting of Shareholders for the 107th Business Term of the Company.

(iii) Holders of share options will be entitled to exercise their share options for 2 years, and during the exercisable period, even after they lose their positions as directors, executive officers or employees. However, if a holder of share options loses such position due to resignation at his/her initiative, or due to dismissal or discharge by the Company, his/her share options will immediately lose effect.

(iv) No succession by inheritance is authorized for the share options.

(v) Any other conditions for the exercise of share options may be established by the Board of Directors.

7. Specific Method of Calculation of Remuneration to Directors

The amount of share options issued to the directors of the Company, as remuneration, is the amount obtained by multiplying the fair market value per share option as of the allotment date thereof by the total number of share options allotted to the directors existing as of such allotment date. The fair market value of a share option was calculated with the use of the Black-Scholes model on the basis of various conditions applicable on the allotment date.

 

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The Stock Option Plan Approved on March 27, 2009

1. The Reason for the Necessity to Solicit Those Who Subscribe for Share Options on Particularly Favorable Conditions

Share options were issued to the Company’s directors, executive officers and senior employees for the purpose of further enhancing their motivation and morale to improve the Company’s performance, with a view to long-term improvement of its corporate value.

2. Grantees of Share Options

The Company’s directors, 10 executive officers, and 29 senior employees who are entrusted with important functions.

3. Number of Share Options

The number of share options that the Board of Directors are authorized to issue is 9,540.

4. Cash Payment for Share Options

No cash payment will be required for the share options.

5. Exercise Price

The exercise price is ¥3,287 per share.

6. Features of Share Options

The features of share options are as follows:

(1) Number of Shares acquired upon Exercise of a Share Option

The number of shares acquired upon exercise of one share option (the “Allotted Number of Shares”) is 100 common shares, and the total number of shares to be delivered due to the exercise of share options is 954,000 common shares.

However, if the Company effects a share split (including allotment of common shares without compensation; this inclusion being applicable below) or a share consolidation after the date of the allotment of the share options, the Allotted Number of Shares will be adjusted by the following calculation formula:

Allotted Number of Shares after Adjustment

= Allotted Number of Shares before Adjustment × Ratio of Share Splitting or Share Consolidation

Such adjustment will be made only with respect to the number of issued share options that have not then been exercised, and any fractional number of less than one share resulting from such adjustment will be rounded off.

(2) Amount of Property to Be Contributed upon Exercise of Share Options

The amount of property to be contributed upon the exercise of each share option is the amount obtained by multiplying the amount to be paid in for one share (the “Exercise Price”) to be delivered upon the exercise of a share option by the Allotted Number of Shares. The Exercise Price is the product of the multiplication of 1.05 and the closing price of one common share of the Company in ordinary trading at the Tokyo Stock Exchange as

 

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of the date of allotment of the share options (or if no trade is made on such date, the date immediately preceding the date on which such ordinary shares are traded), with any fractional amount of less than one yen to be rounded up to one yen.

The Exercise Price will be adjusted as follows:

(i) If the Company effects a share split or a share consolidation after the date of the allotment of the share options, the Exercise Price will be adjusted by the following calculation formula, with any fractional amount of less than one yen to be rounded up to one yen:

Exercise Price after Adjustment

 

=Exercise Price before adjustment ×

   1
   Ratio of Share Splitting or Share Consolidation

(ii) If, after the date of allotment of share options, the Company issues common shares at a price lower than the then market price thereof or disposes common shares owned by it, the Exercise Price will be adjusted by the following calculation formula, with any fractional amount of less than one yen to be rounded up to one yen; however, the Exercise Price will not be adjusted in the case of the exercise of share options:

Exercise Price after Adjustment = Exercise Price before Adjustment ×

 

Number of Issued and Outstanding Shares +

   Number of Newly Issued Shares × Payment amount per Share
   Market Price

Number of Issued and Outstanding Shares + Number of Newly Issued Shares

The “Number of Issued and Outstanding Shares” is the number of shares already issued by the Company after subtraction of the number of shares owned by the Company. In the case of the Company’s disposal of shares owned by it, the “Number of Newly Issued Shares” will be replaced with the “Number of Own Shares to Be Disposed.”

(iii) In the case of a merger, a company split or capital reduction after the date of allotment of share options, or in any other analogous case requiring the adjustment of the Exercise Price, the Exercise Price shall be appropriately adjusted within a reasonable range.

(3) Period during Which Share Options Are Exercisable

From May 1, 2011 to April 30, 2015.

(4) Matters regarding Stated Capital and Capital Reserves Increased When Shares Are Issued upon Exercise of Share Options

(i) The increased amount of stated capital will be half of the maximum amount of increases of stated capital, etc.

Any fractional amount of less than one yen resulting from such calculation will be rounded up to one yen.

(ii) The increased amount of capital reserves shall be the amount of the maximum amount of increases of stated capital, etc., mentioned in (i) above, after the subtraction of increased amount of stated capital mentioned in (i) above.

(5) Restriction on Acquisition of Share Options by Transfer

An acquisition of share options by way of transfer requires the approval of the Board of Directors.

 

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(6) Events for the Company’s Acquisition of Share Options

If a proposal for the approval of a merger agreement under which the Company will become an extinguishing company or a proposal for the approval for a share exchange agreement or a share transfer plan under which the Company will become a wholly-owned subsidiary is approved by the Company’s shareholders at a shareholders meeting (or by the Board of Directors if no resolution of a shareholders meeting is required for such approval), the Company will be entitled to acquire the share options, without compensation, on a date separately designated by the Board of Directors.

(7) Handling of Fractions

Any fraction of a share (less than one share) to be delivered to any holder of share options who has exercised share options will be disregarded.

(8) Other Conditions for Exercise of Share Options

(i) One share option may not be exercised partially.

(ii) Each holder of share options must continue to be a director, executive officer or employee of the Company until the end of the Company’s general meeting of shareholders regarding the final business term within 2 years from the end of the Ordinary General Meeting of Shareholders for the 108th Business Term of the Company.

(iii) Holders of share options will be entitled to exercise their share options for 2 years, and during the exercisable period, even after they lose their positions as directors, executive officers or employees. However, if a holder of share options loses such position due to resignation at his/her initiative, or due to dismissal or discharge by the Company, his/her share options will immediately lose effect.

(iv) No succession by inheritance is authorized for the share options.

(v) Any other conditions for the exercise of share options may be established by the Board of Directors.

7. Specific Method of Calculation of Remuneration to Directors

The amount of share options issued to the directors of the Company, as remuneration, is the amount obtained by multiplying the fair market value per share option as of the allotment date thereof by the total number of share options allotted to the directors existing as of such allotment date. The fair market value of a share option was calculated with the use of the Black-Scholes model on the basis of various conditions applicable on the allotment date.

The Stock Option Plan Approved on March 30, 2010

1. The Reason for the Necessity to Solicit Those Who Subscribe for Share Options on Particularly Favorable Conditions

Share options were issued to the Company’s directors, executive officers and senior employees for the purpose of further enhancing their motivation and morale to improve the Company’s performance, with a view to long-term improvement of its corporate value.

2. Grantees of Share Options

The Company’s directors, 13 executive officers, and 33 senior employees who are entrusted with important functions.

 

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3. Number of Share Options

The number of share options that the Board of Directors are authorized to issue is 8,900.

4. Cash Payment for Share Options

No cash payment will be required for the share options.

5. Exercise Price

The exercise price is ¥4,573 per share.

6. Features of Share Options

The features of share options are as follows:

(1) Number of Shares acquired upon Exercise of a Share Option

The number of shares acquired upon Exercise of one share option (the “Allotted Number of Shares”) is 100 common shares, and the total number of shares to be delivered due to the exercise of share options is 890,000 common shares.

However, if the Company effects a share split (including allotment of common shares without compensation; this inclusion being applicable below) or a share consolidation after the date of the allotment of the share options, the Allotted Number of Shares will be adjusted by the following calculation formula:

Allotted Number of Shares after Adjustment

= Allotted Number of Shares before Adjustment × Ratio of Share Splitting or Share Consolidation

Such adjustment will be made only with respect to the number of issued share options that have not then been exercised, and any fractional number of less than one share resulting from such adjustment will be rounded off.

(2) Amount of Property to Be Contributed upon Exercise of Share Options

The amount of property to be contributed upon the exercise of each share option is the amount obtained by multiplying the amount to be paid in for one share (the “Exercise Price”) to be delivered upon the exercise of a share option by the Allotted Number of Shares. The Exercise Price is the product of the multiplication of 1.05 and the closing price of one common share of the Company in ordinary trading at the Tokyo Stock Exchange as of the date of allotment of the share options (or if no trade is made on such date, the date immediately preceding the date on which such ordinary shares are traded), with any fractional amount of less than one yen to be rounded up to one yen.

The Exercise Price will be adjusted as follows:

(i) If the Company effects a share split or a share consolidation after the date of the allotment of the share options, the Exercise Price will be adjusted by the following calculation formula, with any fractional amount of less than one yen to be rounded up to one yen:

Exercise Price after Adjustment

 

=Exercise Price before adjustment ×

   1
   Ratio of Share Splitting or Share Consolidation

 

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(ii) If, after the date of allotment of share options, the Company issues common shares at a price lower than the then market price thereof or disposes common shares owned by it, the Exercise Price will be adjusted by the following calculation formula, with any fractional amount of less than one yen to be rounded up to one yen; however, the Exercise Price will not be adjusted in the case of the exercise of share options:

Exercise Price after Adjustment = Exercise Price before Adjustment ×

 

Number of Issued and Outstanding Shares +

   Number of Newly Issued Shares × Payment amount per Share
   Market Price

Number of Issued and Outstanding Shares + Number of Newly Issued Shares

The “Number of Issued and Outstanding Shares” is the number of shares already issued by the Company after subtraction of the number of shares owned by the Company. In the case of the Company’s disposal of shares owned by it, the “Number of Newly Issued Shares” will be replaced with the “Number of Own Shares to Be Disposed.”

(iii) In the case of a merger, a company split or capital reduction after the date of allotment of share options, or in any other analogous case requiring the adjustment of the Exercise Price, the Exercise Price shall be appropriately adjusted within a reasonable range.

(3) Period during Which Share Options Are Exercisable

From May 1, 2012 to April 30, 2016.

(4) Matters regarding Stated Capital and Capital Reserves Increased When Shares Are Issued upon Exercise of Share Options

(i) The increased amount of stated capital will be half of the maximum amount of increases of stated capital, etc.

Any fractional amount of less than one yen resulting from such calculation will be rounded up to one yen.

(ii) The increased amount of capital reserves shall be the amount of the maximum amount of increases of stated capital, etc., mentioned in (i) above, after the subtraction of increased amount of stated capital mentioned in (i) above.

(5) Restriction on Acquisition of Share Options by Transfer

An acquisition of share options by way of transfer requires the approval of the Board of Directors.

(6) Events for the Company’s Acquisition of Share Options

If a proposal for the approval of a merger agreement under which the Company will become an extinguishing company or a proposal for the approval for a share exchange agreement or a share transfer plan under which the Company will become a wholly-owned subsidiary is approved by the Company’s shareholders at a shareholders meeting (or by the Board of Directors if no resolution of a shareholders meeting is required for such approval), the Company will be entitled to acquire the share options, without compensation, on a date separately designated by the Board of Directors.

(7) Handling of Fractions

Any fraction of a share (less than one share) to be delivered to any holder of share options who has exercised share options will be disregarded.

 

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(8) Other Conditions for Exercise of Share Options

(i) One share option may not be exercised partially.

(ii) Each holder of share options must continue to be a director, executive officer or employee of the Company until the end of the Company’s general meeting of shareholders regarding the final business term within 2 years from the end of the Ordinary General Meeting of Shareholders for the 109th Business Term of the Company.

(iii) Holders of share options will be entitled to exercise their share options for 2 years, and during the exercisable period, even after they lose their positions as directors, executive officers or employees. However, if a holder of share options loses such position due to resignation at his/her initiative, or due to dismissal or discharge by the Company, his/her share options will immediately lose effect.

(iv) No succession by inheritance is authorized for the share options.

(v) Any other conditions for the exercise of share options may be established by the Board of Directors.

7. Specific Method of Calculation of Remuneration to Directors

The amount of share options issued to the directors of the Company, as remuneration, is the amount obtained by multiplying the fair market value per share option as of the allotment date thereof by the total number of share options allotted to the directors existing as of such allotment date. The fair market value of a share option was calculated with the use of the Black-Scholes model on the basis of various conditions applicable on the allotment date.

The Stock Option Plan Approved on March 30, 2011

1. The Reason for the Necessity to Solicit Those Who Subscribe for Share Options on Particularly Favorable Conditions

Share options were issued to the Company’s directors, executive officers and senior employees for the purpose of further enhancing their motivation and morale to improve the Company’s performance, with a view to long-term improvement of its corporate value.

2. Grantees of Share Options

The Company’s directors, 16 executive officers, and 27 senior employees who are entrusted with important functions.

3. Number of Share Options

The number of share options that the Board of Directors are authorized to issue is 9,120.

4. Cash Payment for Share Options

No cash payment will be required for the share options.

5. Exercise Price

The exercise price is ¥3,990 per share.

6. Features of Share Options

 

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The features of share options are as follows:

(1) Number of Shares acquired upon Exercise of a Share Option

The number of shares acquired upon Exercise of one share option (the “Allotted Number of Shares”) is 100 common shares, and the total number of shares to be delivered due to the exercise of share options is 912,000 common shares.

However, if the Company effects a share split (including allotment of common shares without compensation; this inclusion being applicable below) or a share consolidation after the date of the allotment of the share options, the Allotted Number of Shares will be adjusted by the following calculation formula:

Allotted Number of Shares after Adjustment

= Allotted Number of Shares before Adjustment × Ratio of Share Splitting or Share Consolidation

Such adjustment will be made only with respect to the number of issued share options that have not then been exercised, and any fractional number of less than one share resulting from such adjustment will be rounded off.

(2) Amount of Property to Be Contributed upon Exercise of Share Options

The amount of property to be contributed upon the exercise of each share option is the amount obtained by multiplying the amount to be paid in for one share (the “Exercise Price”) to be delivered upon the exercise of a share option by the Allotted Number of Shares. The Exercise Price is the product of the multiplication of 1.05 and the closing price of one common share of the Company in ordinary trading at the Tokyo Stock Exchange as of the date of allotment of the share options (or if no trade is made on such date, the date immediately preceding the date on which such ordinary shares are traded), with any fractional amount of less than one yen to be rounded up to one yen.

The Exercise Price will be adjusted as follows:

(i) If the Company effects a share split or a share consolidation after the date of the allotment of the share options, the Exercise Price will be adjusted by the following calculation formula, with any fractional amount of less than one yen to be rounded up to one yen:

Exercise Price after Adjustment

 

=Exercise Price before adjustment ×

  

1

   Ratio of Share Splitting or Share Consolidation

(ii) If, after the date of allotment of share options, the Company issues common shares at a price lower than the then market price thereof or disposes common shares owned by it, the Exercise Price will be adjusted by the following calculation formula, with any fractional amount of less than one yen to be rounded up to one yen; however, the Exercise Price will not be adjusted in the case of the exercise of share options:

Exercise Price after Adjustment = Exercise Price before Adjustment ×

 

Number of Issued and Outstanding Shares +

  

Number of Newly Issued Shares × Payment amount per Share

   Market Price

Number of Issued and Outstanding Shares + Number of Newly Issued Shares

 

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The “Number of Issued and Outstanding Shares” is the number of shares already issued by the Company after subtraction of the number of shares owned by the Company. In the case of the Company’s disposal of shares owned by it, the “Number of Newly Issued Shares” will be replaced with the “Number of Own Shares to Be Disposed.”

(iii) In the case of a merger, a company split or capital reduction after the date of allotment of share options, or in any other analogous case requiring the adjustment of the Exercise Price, the Exercise Price shall be appropriately adjusted within a reasonable range.

(3) Period during Which Share Options Are Exercisable

From May 1, 2013 to April 30, 2017.

(4) Matters regarding Stated Capital and Capital Reserves Increased When Shares Are Issued upon Exercise of Share Options

(i) The increased amount of stated capital will be half of the maximum amount of increases of stated capital, etc.

Any fractional amount of less than one yen resulting from such calculation will be rounded up to one yen.

(ii) The increased amount of capital reserves shall be the amount of the maximum amount of increases of stated capital, etc., mentioned in (i) above, after the subtraction of increased amount of stated capital mentioned in (i) above.

(5) Restriction on Acquisition of Share Options by Transfer

An acquisition of share options by way of transfer requires the approval of the Board of Directors.

(6) Events for the Company’s Acquisition of Share Options

If a proposal for the approval of a merger agreement under which the Company will become an extinguishing company or a proposal for the approval for a share exchange agreement or a share transfer plan under which the Company will become a wholly-owned subsidiary is approved by the Company’s shareholders at a shareholders meeting (or by the Board of Directors if no resolution of a shareholders meeting is required for such approval), the Company will be entitled to acquire the share options, without compensation, on a date separately designated by the Board of Directors.

(7) Handling of Fractions

Any fraction of a share (less than one share) to be delivered to any holder of share options who has exercised share options will be disregarded.

(8) Other Conditions for Exercise of Share Options

(i) One share option may not be exercised partially.

(ii) Each holder of share options must continue to be a director, executive officer or employee of the Company until the end of the Company’s general meeting of shareholders regarding the final business term within 2 years from the end of the Ordinary General Meeting of Shareholders for the 110th Business Term of the Company.

(iii) Holders of share options will be entitled to exercise their share options for 2 years, and during the exercisable period, even after they lose their positions as directors, executive officers or employees. However, if a holder of share options loses such position due to resignation at his/her initiative, or due to dismissal or discharge by the Company, his/her share options will immediately lose effect.

 

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(iv) No succession by inheritance is authorized for the share options.

(v) Any other conditions for the exercise of share options may be established by the Board of Directors.

7. Specific Method of Calculation of Remuneration to Directors

The amount of share options to be issued to the directors of the Company, as remuneration, is the amount to be obtained by multiplying the fair market value per share option as of the allotment date thereof by the total number of share options to be allotted to the directors existing as of such allotment date. The fair market value of a share option will be calculated with the use of the Black-Scholes model on the basis of various conditions applicable on the allotment date.

C. Board practices

See Item 6A “Directors and senior management” and Item 6B “Compensation.”

D. Employees

The following table shows the numbers of Canon’s employees as of December 31, 2012, 2011 and 2010.

 

     Total      Japan      Americas      Europe      Asia and Oceania  

December 31, 2012

              

Office

     97,275         29,027         15,451         20,094         32,703   

Imaging System

     64,320         15,842         2,300         1,838         44,340   

Industry and Others

     24,403         15,396         1,335         1,229         6,443   

Corporate

     10,970         9,969                         1,001   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     196,968         70,234         19,086         23,161         84,487   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011

              

Office

     99,847         29,874         15,609         19,680         34,684   

Imaging System

     63,105         15,284         2,227         1,827         43,767   

Industry and Others

     24,779         15,664         1,369         1,232         6,514   

Corporate

     10,576         9,524                         1,052   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     198,307         70,346         19,205         22,739         86,017   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2010

              

Office

     104,173         31,890         16,528         20,278         35,477   

Imaging System

     59,053         16,081         2,157         1,817         38,998   

Industry and Others

     23,133         13,900         1,497         1,339         6,397   

Corporate

     11,027         10,083                         944   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     197,386         71,954         20,182         23,434         81,816   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The Company and its subsidiaries have their own independent labor union. Canon has not experienced a labor strike since its establishment. The Company believes that the relationship between Canon and its labor union is good.

 

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E. Share ownership

The following table shows the numbers of shares owned by the directors and Audit & Supervisory Board Members of the Company as of March 28, 2013. The total is 409,781 shares, constituting 0.03% of all outstanding shares.

 

Name

  

Position

   Number of shares  

Fujio Mitarai

   Chairman & CEO      110,423   

Toshizo Tanaka

   Executive Vice President & CFO      21,010   

Toshiaki Ikoma

   Executive Vice President & CTO      12,900   

Kunio Watanabe

   Executive Vice President      26,949   

Yoroku Adachi

   Senior Managing Director      24,297   

Yasuo Mitsuhashi

   Senior Managing Director      19,457   

Shigeyuki Matsumoto

   Senior Managing Director      21,052   

Toshio Honma

   Senior Managing Director      24,552   

Masaki Nakaoka

   Senior Managing Director      13,700   

Haruhisa Honda

   Senior Managing Director      20,189   

Hideki Ozawa

   Managing Director      11,800   

Masaya Maeda

   Managing Director      10,300   

Yasuhiro Tani

   Director      5,600   

Makoto Araki

   Director      5,200   

Hiroyuki Suematsu

   Director      4,400   

Shigeyuki Uzawa

   Director      5,300   

Kenichi Nagasawa

   Director      1,200   

Naoji Otsuka

   Director      4,500   

Masanori Yamada

   Director      5,000   

Aitake Wakiya

   Director      2,100   

Kazuto Ono

   Director      1,400   

Shunji Onda

   Audit & Supervisory Board Member      12,902   

Kengo Uramoto

   Audit & Supervisory Board Member      3,350   

Tadashi Ohe

   Audit & Supervisory Board Member      36,600   

Kazunori Watanabe

   Audit & Supervisory Board Member      3,700   

Kuniyoshi Kitamura

   Audit & Supervisory Board Member      1,900   
     

 

 

 
   Total      409,781   
     

 

 

 

The number of shares that may be subscribed for under rights granted to the Directors and the Audit & Supervisory Board Members, listed above, pursuant to the stock option plan approved by the stockholders on March 28, 2008 is 205,000 shares of common stock. The exercise price of the rights is ¥5,502 per share and the rights are exercisable from May 1, 2010 to April 30, 2014.

The number of shares that may be subscribed for under rights granted to the Directors and the Audit & Supervisory Board Members, listed above, pursuant to the stock option plan approved by the stockholders on March 27, 2009 is 348,000 shares of common stock. The exercise price of the rights is ¥3,287 per share and the rights are exercisable from May 1, 2011 to April 30, 2015.

The number of shares that may be subscribed for under rights granted to the Directors and the Audit & Supervisory Board Member, listed above, pursuant to the stock option plan approved by the stockholders on March 30, 2010 is 392,000 shares of common stock. The exercise price of the rights is ¥4,573 per share and the rights are exercisable from May 1, 2012 to April 30, 2016.

 

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The number of shares that may be subscribed for under rights granted to the Directors and the Audit & Supervisory Board Member, listed above, pursuant to the stock option plan approved by the stockholders on March 30, 2011 is 412,000 shares of common stock. The exercise price of the rights is ¥3,990 per share and the rights are exercisable from May 1, 2013 to April 30, 2017.

For additional information on the stock option plan, see “B. Compensation” of this Item.

The Company and certain of its subsidiaries encourage its employees to purchase shares of their Common Stock in the market through an employees’ stock purchase association.

Item 7. Major Shareholders and Related Party Transactions

A. Major shareholders

The table below shows the numbers of the Company’s shares held by the top ten holders of the Company’s shares and their ownership percentage as of December 31, 2012:

 

Name of major shareholder

   Shares owned      Percentage  
            Number of shares owned /
Number of shares issued
 

Japan Trustee Services Bank, Ltd. (Trust Account)

     74,157,600         5.6

The Master Trust Bank of Japan, Ltd. (Trust Account)

     74,062,200         5.6

The Dai-Ichi Mutual Life Insurance Company, Limited

     49,888,380         3.7

SSBT OD05 OMNIBUS ACCOUNT—TREATY CLIENTS

     27,571,600         2.1

Moxley and Co.

     23,389,219         1.8

State Street Bank and Trust Company

     19,688,481         1.5

Sompo Japan Insurance Inc.

     18,485,987         1.4

State Street Bank and Trust Company

     18,176,851         1.4

Mellon Bank, N.A. as agent for its client Mellon Omnibus US Pension

     16,992,955         1.3

Obayashi Corporation

     16,527,607                             1.2

Notes:

  1: Moxley and Co. is a nominee of JPMorgan Chase Bank, which is the depositary of Canon’s ADRs (American Depositary Receipts).
  2: Apart from the above shares, The Dai-Ichi Mutual Life Insurance Company, Limited held 6,180,000 shares contributed to a trust fund for its retirement and severance plans.
  3: Apart from the above shares, the Company owns 180,972,173 shares (13.57% of total issued shares) of treasury stock.

Canon’s major shareholders do not have different voting rights from other shareholders.

As of December 31, 2012, 15.4% of the issued shares of common stock, including the Company’s treasury stock, were held of record by 256 residents of the United States of America.

The Company is not directly or indirectly owned or controlled by any other corporation, by any government, or by any other natural or legal person or persons severally or jointly.

B. Related party transactions

During the latest three fiscal years, Canon has not transacted with, nor does Canon currently plan to transact with a related party (other than certain transactions with subsidiaries and affiliates of the Company). For purposes of this paragraph, a related party includes: (a) enterprises that directly or indirectly through one or more intermediaries, control or are controlled by, or are under common control with, Canon; (b) associates; (c) individuals owning, directly or indirectly, an interest in the voting power of Canon that gives them significant

 

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influence over Canon, and close members of any such individual’s family; (d) key management personnel, that is, those persons having authority and responsibility for planning, directing and controlling the activities of Canon, including directors and senior management of companies and close member of such individual’s families; (e) enterprises in which a substantial interest in the voting power is owned, directly or indirectly, by any person described in (c) or (d) or over which such a person is able to exercise significant influence. This includes enterprises owned by directors or major shareholders of Canon and enterprises that have a member of key management in common with Canon. Close members of an individual’s family are those that may be expected to influence, or be influenced by, that person in their dealings with Canon. An associate is an unconsolidated enterprise in which Canon has a significant influence or which has significant influence over Canon. Significant influence over an enterprise is the power to participate in the financial and operating policy decisions of the enterprise but is less than control over those policies. Shareholders beneficially owning a 10% interest in the voting power of the Company are presumed to have a significant influence on Canon.

To the Company’s knowledge, no person owned a 10% interest in the voting power of the Company as of March 28, 2013.

In the ordinary course of business on an arm’s length basis, Canon purchases and sells materials, supplies and services from and to its affiliates accounted for by the equity method. There are 9 affiliates which are accounted for by the equity method. Canon does not consider the amounts of the transactions with the above affiliates to be material to its business.

C. Interests of experts and counsel

Not applicable.

Item 8. Financial Information

A. Consolidated financial statements and other financial information

Consolidated financial statements

This Annual Report contains consolidated financial statements as of December 31, 2012 and 2011 and for each of the three years in the period ended December 31, 2012 prepared in accordance with U.S. generally accepted accounting principles and audited in accordance with the standards of the Public Company Accounting Oversight Board (United States) by an Independent Registered Public Accounting Firm. The financial statements as of and for the years ended December 31, 2010, 2011, and 2012 have been audited by Ernst & Young ShinNihon LLC, and their audit report covering each of the periods is included in Item 18 of this report.

Refer to Item 18 “Financial Statements.”

Legal proceedings

There are no outstanding legal or other proceedings which could reasonably be expected to have a material adverse effect on Canon’s consolidated financial position, results of operations or cash flows.

Dividend policy

Dividends are proposed by the Board of Directors of the Company based on the year-end non-consolidated financial statements of the Company, and are approved at the ordinary general meeting of shareholders, which is held in March of each year. Recordholders of the Company’s ADSs on the dividends’ record dates are entitled to receive payment in full of the declared dividends. In addition to annual dividends, by resolution of the Board of Directors, the Company may declare a cash distribution as an interim dividend. The record date for the Company’s year-end dividends and for the interim dividends are December 31 and June 30, respectively.

 

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Canon is being more proactive in returning profits to shareholders, mainly in the form of a dividend, taking into consideration mid-term profit forecasts, planned future investments, cash flow and other factors.

In 2012, despite the challenging business environment characterized by the European recession, Canon was able to generate adequate cash on hand thanks to comprehensive cash flow management and subsequent improvements in management efficiency. In light of this situation, Canon plans to distribute a full-year dividend totaling ¥130 per share (interim dividend of ¥60 per share [already distributed], and year-end dividend of ¥70 per share), a regular dividend of ¥120 and a commemorative dividend of ¥10 to mark the 75th anniversary of the company’s establishment.

B. Significant changes

No significant change has occurred since the date of the annual financial statements.

Item 9. The Offer and Listing

A. Offer and listing details

Trading in domestic markets

The common stock of the Company has been listed on the Tokyo Stock Exchange (“TSE”), the principal stock exchange market in Japan, since 1949, and is traded on the First Section of the TSE. The shares are also listed on four other regional markets in Japan (Osaka, Nagoya, Fukuoka and Sapporo).

The following table lists the reported high and low sales prices of the shares on the TSE and the closing highs and lows of the Tokyo Stock Price Index (“TOPIX”) and Nikkei Stock Average for the five most recent years. TOPIX is an index of the market value of stocks listed on the First Section of the TSE. The Nikkei Stock Average, an index of 225 selected stocks on the First Section of the TSE, is another widely accepted index.

 

     TSE
(Canon Inc.)
     TOPIX
(Reference  data)
     Nikkei Stock Average
(Reference data)
 
     (Japanese yen)      (Points)      (Japanese yen)  

Period

       High              Low              High              Low                  High                      Low          

2008 Year

   ¥ 5,820       ¥ 2,215         1,461.31         721.53       ¥ 15,156.66       ¥ 6,994.90   

2009 Year

     4,070         2,115         987.27         698.46         10,767.00         7,021.28   

2010 Year

     4,520         3,205         1,001.77         799.64         11,408.17         8,796.45   

2011 1(st) quarter

     4,280         3,310         976.28         725.90         10,891.60         8,227.63   

         2(nd) quarter

     3,945         3,470         874.35         801.78         10,017.47         9,318.62   

         3(rd) quarter

     3,935         3,270         879.48         727.33         10,207.91         8,359.70   

         4(th) quarter

     3,630         3,220         779.08         703.88         9,152.39         8,135.79   

2011 Year

     4,280         3,220         976.28         703.88         10,891.60         8,135.79   

2012 1(st) quarter

     4,015         3,230         872.42         722.85         10,255.15         8,349.33   

         2(nd) quarter

     4,005         2,880         863.23         692.18         10,190.35         8,238.96   

         3(rd) quarter

     3,240         2,308         781.94         703.31         9,288.53         8,328.02   

         4(th) quarter

     3,455         2,328         861.57         710.32         10,433.63         8,488.14   

2012 Year

     4,015         2,308         872.42         692.18         10,433.63         8,238.96   

 

     TSE
(Canon Inc.)
     TOPIX
(Reference  data)
     Nikkei Stock  Average
(Reference data)
 
     (Japanese yen)      (Points)      (Japanese yen)  

Period

       High              Low              High              Low                  High                      Low          

2012 July

   ¥ 3,240       ¥ 2,308            781.94            703.31       ¥ 9,136.02       ¥   8,328.02   

         August

     2,848         2,594         769.79         720.03         9,222.87         8,513.20   

         September

     2,874         2,432         769.54         715.05         9,288.53         8,646.03   

         October

     2,698         2,328         757.59         710.32         9,075.59  &