20-F 1 d619942d20f.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, 2013

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)

Shinichi Aoyama, +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, 2013, 1,136,999,404 shares of common stock, including 23,634,424 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     10  
A.    History and development of the Company     10   
B.    Business overview     11   
   Products     11   
   Net sales by segment and geographic area     15   
   Seasonality     16   
   Sources of supply     16   
   Marketing and distribution     16   
   Service     17   
   Patents and licenses     17   
   Competition     18   
   Environmental regulations     19   
   Other regulations     21   
C.    Organizational structure     23   
D.    Property, plants and equipment     23   
Item 4A.    Unresolved Staff Comments     27   
Item 5.    Operating and Financial Review and Prospects     27   
A.    Operating results     27   
   Overview     27   
   Critical accounting policies and estimates     29   
   Consolidated results of operations     33   
  

2013 compared with 2012

    33   
  

2012 compared with 2011

    37   
  

Foreign operations and foreign currency transactions

    40   
B.    Liquidity and capital resources     41   
C.    Research and development, patents and licenses     43   
D.    Trend information     44   
E.    Off-balance sheet arrangements     45   
F.    Contractual obligations     45   

 

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         Page number  
Item 6.    Directors, Senior Management and Employees     46   
A.    Directors and senior management     46  
B.    Compensation     53  
C.    Board practices     66  
D.    Employees     66  
E.    Share ownership     67  
Item 7.    Major Shareholders and Related Party Transactions     68   
A.    Major shareholders     68  
B.    Related party transactions     68  
C.    Interests of experts and counsel     69  
Item 8.    Financial Information     69  
A.    Consolidated financial statements and other financial information     69  
   Consolidated financial statements     69  
   Legal proceedings     69  
   Dividend policy     69  
B.    Significant changes     70  
Item 9.    The Offer and Listing     70  
A.    Offer and listing details     70  
   Trading in domestic markets     70  
   Trading in foreign markets     71  
B.    Plan of distribution     72  
C.    Markets     72  
D.    Selling shareholders     72  
E.    Dilution     72  
F.    Expenses of the issue     72   
Item 10.    Additional Information     72  
A.    Share capital     72  
B.    Memorandum and articles of association     72  
C.    Material contracts     79  
D.    Exchange controls     80  
E.    Taxation     81  
F.    Dividends and paying agents     85  
G.    Statement by experts     85  
H.    Documents on display     85  
I.    Subsidiary information     85  
Item 11.    Quantitative and Qualitative Disclosures about Market Risk     85  
   Market risk exposures     85  
   Equity price risk     85  
   Foreign currency exchange rate and interest rate risk     86  
Item 12.    Description of Securities Other than Equity Securities     87  
A.    Debt securities     87  
B.    Warrants and rights     87  
C.    Other securities     87  
D.    American Depositary Shares     87  

 

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         Page number  
   PART II  
Item 13.    Defaults, Dividend Arrearages and Delinquencies     88  
Item 14.    Material Modifications to the Rights of Security Holders and Use of Proceeds     88  
Item 15.    Controls and Procedures     88  
Item 16A.    Audit Committee Financial Expert     89  
Item 16B.    Code of Ethics     89  
Item 16C.    Principal Accountant Fees and Services     89  
Item 16D.    Exemptions from the Listing Standards for Audit Committees     90  
Item 16E.    Purchases of Equity Securities by the Issuer and Affiliated Purchasers     91  
Item 16F.    Change in Registrant’s Certifying Accountant     92   
Item 16G.    Corporate Governance     92   
   PART III  
Item 17.    Financial Statements     94  
Item 18.    Financial Statements     94  
   Reports of Independent Registered Public Accounting Firm     95  
   Consolidated Balance Sheets     97  
   Consolidated Statements of Income     98  
   Consolidated Statements of Comprehensive Income     99   
   Consolidated Statements of Equity     100  
   Consolidated Statements of Cash Flows     102  
   Notes to Consolidated Financial Statements     103  
   Schedule II—Valuation and Qualifying Accounts     143  
Item 19.    Exhibits     144   

SIGNATURES

    145   

EXHIBIT INDEX

    146   

 

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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, 2013 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 14, 2014, the noon buying rate for yen in New York City as reported by the Federal Reserve Bank of New York was ¥101.46= U.S.$1.

The Company’s fiscal year end is December 31. In this Annual Report “2013” refers to the Company’s fiscal year ended December 31, 2013, 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 4. Information on the Company”, “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:

   2013      2012      2011      2010      2009  
     (Millions of yen, except average number of shares and per share data)  

Net sales

   ¥ 3,731,380      ¥ 3,479,788      ¥ 3,557,433      ¥ 3,706,901      ¥ 3,209,201   

Operating profit

     337,277        323,856        378,071        387,552        217,055   

Net income attributable to Canon Inc.

     230,483        224,564        248,630        246,603        131,647   

Advertising expenses

     86,398        83,134        81,232        94,794        78,009   

Research and development expenses

     306,324        296,464        307,800        315,817        304,600   

Depreciation of property, plant and equipment

     223,158        211,973        210,179        232,327        277,399   

Increase in property, plant and equipment

     188,826        270,457        226,869        158,976        216,128   

Long-term debt, excluding current installments

     1,448        2,117        3,368        4,131        4,912   

Common stock

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

Canon Inc. stockholders’ equity

     2,910,262        2,598,026        2,551,132        2,645,782        2,688,109   

Total assets

     4,242,710        3,955,503        3,930,727        3,983,820        3,847,557   

Average number of common shares in thousands

     1,147,934        1,173,648        1,215,832        1,234,817        1,234,482   

Per share data:

              

Net income attributable to Canon Inc. stockholders per share:

              

Basic

   ¥ 200.78      ¥ 191.34      ¥ 204.49      ¥ 199.71      ¥ 106.64   

Diluted

     200.78        191.34        204.48        199.70        106.64   

Cash dividends declared

     130.00        130.00        120.00        120.00        110.00   

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

   $ 1.309      $ 1.498      $ 1.503      $ 1.447      $ 1.196   

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 14, 2014, the noon buying rate for yen in New York City as reported by the Federal Reserve Bank of New York was ¥101.46 = U.S.$1.

 

Yen exchange rates per U.S. dollar:

   Average      Term end      High      Low  

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

     80.10         86.64         86.64         76.11  

2013 - Year

     98.00         105.25         105.25         86.92  

         - 1(st) half

        99.21         103.52         86.92  

         - July

        98.35         101.08         97.80  

         - August

        98.22         99.30         96.03  

         - September

        98.29         100.22         98.29  

         - October

        98.1         98.90         96.94  

         - November

        102.45         102.45         98.56  

         - December

        105.25         105.25         101.82  

2014 - January

        102.28         104.87         102.20  

         - February

        102.08         102.71         101.11  

 

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 Economic Environment

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

As a result of the economic downturn in Canon’s major markets, including Japan, the United States, Europe and Asia, declines in consumption and restrained investment may affect Canon’s operating results. The 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 declines in levels of consumer spending and corporate investment could adversely affect Canon’s operating results and financial position.

 

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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 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 transactions have fluctuated and may continue to fluctuate. Unpredictable fluctuations may have certain effects on Canon’s consolidated financial statements. Although Canon strives to mitigate the effects of foreign currency fluctuations arising from its international business activities, 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. Canon is also exposed to the risk of interest rate fluctuations, which may affect the value of Canon’s financial assets and liabilities.

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. Volatility in financial markets and overall economic uncertainty create 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.

High prices of raw materials could negatively impact Canon’s profitability.

Increases in prices for raw materials that Canon uses in manufacturing such as steel, non-ferrous metals and petrochemical products may lead to higher production costs and Canon may not be able to pass these increased production costs onto the sales prices of its products. Such increases in prices for raw materials could adversely affect Canon’s operating results.

Risks Related to Canon’s Industries and Business Operations

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. There are a number of risks inherent in doing business in international markets, including the following:

 

   

unfavorable political, diplomatic or economic conditions;

   

sharp fluctuations in foreign currency exchange rates;

   

unexpected political, legal or regulatory changes;

   

inadequate systems of intellectual property protection;

   

difficulties in recruiting and retaining qualified personnel; and

   

less developed production infrastructure.

Any inability to manage the risks inherent in Canon’s international activities could adversely affect its business and operating results.

 

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Canon has invested and will continue to invest actively in next-generation technologies. If the markets for these technologies do not develop as Canon expects, or if its competitors produce these or competing technologies in a more timely or effective manner, Canon’s operating results may be materially adversely affected.

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 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. Canon has sought to invest substantial resources into introducing appealing, innovative and cost-competitive new products. There are several risks inherent in introduction of new products and services, such as delays in development or manufacturing, unsuitable product quality during the introductory period, variations in manufacturing costs, negative impact on sales of current products, uncertainty in predicting customer demand and difficulty in effectively managing inventory levels. Moreover, if Canon is unable to respond quickly to 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 into its products of such new information technologies.

Canon’s revenues and gross margins also may suffer adverse effects because of the timing of product or service introductions by its competitors. This risk is exacerbated when a competitor introduces a new product immediately prior to Canon’s introduction of a similar product. If any of these risks materialize, future demand for Canon’s 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, its operating results may be adversely affected.

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 the 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 demand for semiconductor devices and FPD panels.

The semiconductor lithography equipment and FPD lithography equipment 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.

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.

In addition, Canon depends on Hewlett-Packard for a significant part of its business. 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.

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

 

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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 rise, triggered by the imbalance of supply and demand along with other factors. If such events occur as an outcome of the dependency on outside vendors, Canon’s operating results may be adversely affected.

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.

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 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 and net sales and increase the risk of unanticipated variations in its operating results.

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 acquired companies 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 acquired companies to successfully define and reach common objectives. Even if Canon and its partners or acquired companies 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 acquired companies. 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 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

 

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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 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 be able to prevent or mitigate the effect of disruptive events or developments such as the leakage of harmful substances and shutdowns of information systems. 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 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. The main factors which could damage its brand value are defective product quality, circulation of counterfeit and failures of its compliance regime. 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. Canon has been implementing 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.

 

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If Canon fails to maintain its overall compliance regime, especially legal and regulatory compliance, this also could result in damage to Canon’s credibility and brand value.

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. Due to the laws and regulations, Canon may face liability for additional costs and alleged damages. Such costs and damages could adversely affect Canon’s business and operating results.

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.

Canon is subject to risks relating to 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.

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.

In relation to protection of its technologies, 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.

In relation to third party intellectual property rights, if any governmental agency or third party is adjudicated to have a valid infringement 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 may need to litigate in order to enforce its intellectual property rights or in order to defend against claims of infringement, which can be expensive and time-consuming.

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.

 

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With respect to employee inventions, Canon maintains company rules and an evaluation system and 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.

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

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 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 is subject to risks arising from dependency on electronic data.

Canon possesses confidential electronic data relating to manufacturing, research and development, and production, as well as sensitive information obtained from its customers relating to the customers and to other individuals and parties. This electronic data is used by Canon and third party managed systems and networks. Electronic data is also used for the information service functions in various products.

There are some risks inherent in the use of the electronic data, including vulnerability to hacking and computer viruses, service failures due to unexpected events, and infrastructure issues, such as insufficient power supply and issues arising from damage caused by natural disasters. Although Canon continues to make administrative and managerial improvements in order to alleviate these risks, such events may occur despite Canon’s best efforts.

The materialization of such risks could result in interruptions to essential work, leaks of confidential data and damage to the information service functions in products. The occurence of any of these events has the potential to cause Canon to be subject to claims from affected individuals and parties and to negatively influence Canon’s brand image, the social trust it has developed, and its operations and financial conditions.

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.

 

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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.

In 2013, 2012, and 2011, Canon’s increases in property, plant and equipment were ¥188,826 million, ¥270,457 million and ¥226,869 million, respectively. In 2013, 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 2014, Canon projects an increase in property, plant and equipment of approximately ¥210,000 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 2013, 80.8% of consolidated net sales were generated outside Japan, with approximately 28.4%, 30.1% and 22.3% 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, Vietnam and the Philippines.

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”.

- Office Business Unit -

Canon manufactures, markets and services a full range of MFDs, printers, copying machines for personal and office use and production print products for print professionals. Canon also delivers added value to

 

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customers through software, services and solutions. Our offerings cover a wide variety of markets from Small Office Home Office (“SOHO”), and Small and Midsize Business (“SMB”) to large enterprises and professional graphic arts.

In the industry, customer preference has been shifting from monochrome to color products and from hardware to services and solutions. Especially in the professional print market, customers are increasingly turning to short-run, print-on-demand and variable data printing. The importance of connectivity, mobility, security, integration, workflow and web services is growing, and such added value is increasingly delivered together with hardware. Canon seeks to maintain its position as a market leader* in these core markets.

 

* Source: IDC, Dec 2013 “IDC MarketScape: U.S. Smart Multifunction Peripheral 2013 Vendor Assessment”(245058)

In 2013, Canon enhanced its portfolio starting with the launch of the imageRUNNER ADVANCE 4200 series and the A4-size imageRUNNER ADVANCE 400iF and 500iF. To deliver higher value added and expand our presence in the existing market while acquiring new markets in the production print industry, Canon introduced the varioPRINT DP line with new Canon branding and the imagePRESS C1+II. Aiming to accelerate the transition from offset to high volume digital color, Canon previewed our future solution Niagara, an ultra high-volume color inkjet cutsheet printing platform. In the high speed continuous feed printer area, Océ announced new Océ ColorStream 3000 Z series.

As for software, services and solutions, Canon’s application development platform, the Multifunctional Embedded Application Platform (“MEAP”), allows the creation of customized applications for Canon MFDs enabling tight integration into the customer’s IT infrastructure. The integration boosts productivity and allows users to fully take advantage of the power of MFDs. Canon has introduced Enterprise Imaging Platform (“EIP”), a middleware application that enables customers to integrate enterprise applications and automate the business processes.

To maintain and enhance its competitive edge and to meet increasingly sophisticated customer demands, Canon is committed to the continued reinforcement of Canon’s hardware and software offerings and solutions capability.

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 aggressive competitors in 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. Canon implements numerous efforts to enhance mobile printing solutions to tackle with the new threat and create further business opportunities.

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

- Imaging System Business Unit -

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

In 2013, Canon launched three new products and particularly strengthened its product line up.

EOS Rebel T5i, succeeding T4i performance, is equipped with the smooth and silent Auto Focus the movie function with Stepping Motor (lead-screw type) lenses. The Vari-angle Touch Screen LCD monitor enables

 

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flexible shooting positions with clear views. EOS Rebel SL1 is the new offering in the Entry category and the world’s smallest and lightest digital SLR camera which uses APS-C size equivalent sensors. With excellent basic performance of the Digital SLR, it offers the smallest body through a redesigned inside structure. Despite its compact design, it offers outstanding grip and operability. EOS 70D is equipped with the new innovative AF system, Dual Pixel CMOS AF offers smooth and silent AF, and Built-in Wireless LAN, enabling to expand image capturing area and increase the communication performance. EOS 5D Mark III, EOS 7D and EOS 6D show steady sales and Canon keeps No.1 share in the advanced amateur category. In addition to the need for higher resolution and more compact and lightweight sizes, such function as video recording with a full high definition (“HD”) format, is becoming a new standard feature for interchangeable lens digital cameras. Canon believes there remains considerable room for future growth in this category through development of new products based on state-of-the-art technology.

Canon launched four new lens products, and cumulative production of the EF lens series surpassed 90 million in May 2013. The interchangeable lens line up currently exceeds 70 products. By enhancing our core capability, Canon has been introducing high-quality and high-performance lenses built on superior optical technology and new elemental technology, which Canon believes allowed it to maintain its advantage over the competition.

Canon introduced eighteen new models to the compact digital camera market in 2013 in order to add value to its products. While there has been a strong tendency toward reliance on electronic manufacturing services (“EMS”) in the compact digital camera industry, there is a possibility that the EMS manufactures cannot maintain their business and some of them might exit from the market. Canon is pressing forward with entire internal manufacturing leveraging the economies of scale and building an optimum cost structure to strive to maintain profitability.

The market for conventional camcorders has been shrinking, as many other popular devices start equipping 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 product lineup including higher value added based on Canon’s distinctive high-definition, high-resolution technologies. Concurrently, Canon has introduced a new product with unique styled camcorder especially for self-shooting, aiming to exploit a new market category. In the field of professional camcorders, Canon introduced new “XA” series; small sized camcorders equipped with a wide-angle and high magnification lens in addition to current “XF” series for use in broadcast news, documentary and independent filmmaking. “CINEMA EOS SYSTEM” has strengthened its line up by launching new digital cinema cameras capable of recording 4K-resolution video and improved user convenience through a wider selection of related software. Canon aims to solidify its top position in the motion picture production market by introducing new products that suit to a wide variety of market.

In 2013, Canon experienced robust growth in the field of projectors for business applications, and in particular brighter, installation type projectors. In this installation market, Canon enjoyed sales volume expansion in 2013, owing to the increased line-up of introducing three new install-type models in 2012. Canon launched two new install-type models in 2013, which differentiated from the competitor by advanced optical technology, imaging technology and compact design. Those will be strategic and leading models for expanding the projector business and advancing Canon’s position in the market. Moving forward, Canon expects to extend its competitive product lineup based around the optical technology on which the company prides itself.

In the broadcast TV lens market, worldwide market demand is stable although demand arising from the switchover to high definition broadcast formats in developed countries slowed down. Canon retains a large share of the TV lens market with high value-added products.

Canon launched the “MREAL” mixed reality (“MR”) system based on graphic information processing technology that can combine the real world with computer graphics for the purpose of, for example, realizing more efficient product design in July 2012.

 

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Inkjet printer technology has been evolving, driving expansion of application to not only for home use, but for office and commercial use such as poster printing and photo printing that require high-quality.

Canon offers a wide variety of products to meet such needs based on its core technology “Full-photolithography Inkjet Nozzle Engineering” (“FINE”), which enables realization of high-speed printing and high image quality at the same time.

For the home and business use printers, Canon offers such printer solutions as New PIXMA Cloud Link and PIXMA Printing to tighten the connection with Cloud environment, smartphone and tablet PC which have been proliferating. Canon also offers My Image Garden, the easy-to-use Intelligent Touch System, XL ink tank & ink cartridge. In 2012, Canon started to ship the DreamLabo 5000, the first inkjet production photo printer featuring new “FINE” high-density print head technology. In the professional printing market, Canon offers three professional photo inkjet printers: the PIXMA PRO-1 with a 12 LUCIA ink system of pigment-based inks, PIXMA PRO-10 with a 10 LUCIA ink system, and the PIXMA PRO-100 with eight dye inks to produce colorful and vivid prints. Canon aims to further expand its business leveraging its strength in the photo printing 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” pigment inks. Consequently, Canon receives a high evaluation and steadily boosts the market share.

- Industry and Others Business Unit -

The market for semiconductor lithography equipment has shown a recovery trend in the second half of 2013 due to the correction of supply-demand imbalances in the memory device market, although the investments by memory makers had remained low in recent years 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 integration for Through-Silicon Via (“TSV”).

Canon has been rationalizing production systems to more flexibly respond to these 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+, optimized for the production of green devices such as LEDs and power devices, and FPA-5510iV which enables high productivity in the advanced packaging process such as TSV and Bump. As a result of these activities, Canon has occupied a high share of the i-line stepper market. Canon also released a new DUV scanner FPA-6300ES6a with greatly improved productivity, overlay accuracy and uptime rate compared to conventional equipments.

The market for FPD lithography equipment has been on a downward trend in investment due to deterioration in the earnings of panel makers. The lithography market for small-to-mid sized panel production maintained steady trend drawn by growing demand for smartphones and tablet PCs. The lithography market for large-sized panel production, which has remained low in recent years, showed moderate recovery due to the demand from emerging countries and commercialization of 4K TVs.

Under the circumstances, the MPAsp-H760 supporting 8th generation large-sized panels continues to offer high productivity and has 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 where the market for FPD lithography equipment is growing. On the other hand, Canon has released new FPD lithography equipment, MPAsp-H800 for large-sized panel and the

 

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MPAsp-E810 for small-to-mid sized panels, with improved on resolution. Canon aims to gain an increasing share of the market for small-to-mid sized panel production in addition to large-sized panel production.

In the medical equipment business, the digital radiography (“DR”) market kept expanding, mainly in emerging markets such as Asia. Moreover, the digital systems market in industrialized nations continued to transition from the digitalization format of computed radiography (“CR”) to the newest format of DR. While the competition offered a rising number of new players, the target market of Canon DR products showed steady growth.

Canon launched new products with the “X-ray auto detection function”: CXDI-701C/G Wireless, CXDI-801C/G Wireless, CXDI-401C/G Wireless. Canon believes this function, which eliminates the need for communication with X-ray generators, is accelerating replacement of CR by DR.

For the ophthalmic equipment market, the optical coherence tomography (“OCT”) segment showed continuous growth, and further increase in volume and competition is expected. In this OCT segment, Canon sold the first Canon-brand OCT, OCT HS-100 in collaboration with consolidated subsidiary Optopol Technology, Sp. z o.o. (Poland). By adding the OCT to our product portfolio, we strive to increase sales in the ophthalmic equipment market.

The market of network cameras for business surveillance and management applications is expected to show double-digit growth, reflecting the progress of IT and digital technologies. Canon established a dedicated product group in 2013 to expand its network camera business, with its proprietary technologies of optics, sensor, imaging and network devices. With the introduction of four new compact Full HD network cameras at the end of 2013, Canon has extended its market coverage to meet demand for surveillance products for such areas as retail stores and offices.

NET SALES BY SEGMENT

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

 

     Years ended December 31  
             2013             change             2012             change             2011          
     (Millions of yen, except percentage data)  

Office

   ¥ 2,000,073       13.8 %   ¥ 1,757,575       -8.4   ¥ 1,917,943   

Imaging System

     1,448,938       3.1       1,405,971       7.2       1,312,044   

Industry and Others

     374,870       -8.1        407,840       -3.1        420,863   

Eliminations

     (92,501 )            (91,598 )            (93,417
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   ¥ 3,731,380       7.2   ¥ 3,479,788       -2.2   ¥ 3,557,433   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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  
             2013              change             2012              change             2011          
     (Millions of yen, except percentage data)  

Japan

   ¥ 715,863        -0.6   ¥ 720,286        3.7   ¥ 694,450   

Americas

     1,059,501        12.7       939,873        -2.3        961,955   

Europe

     1,124,929        10.9       1,014,038        -8.9        1,113,065   

Asia and Oceania

     831,087        3.2       805,591        2.2       787,963   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   ¥ 3,731,380        7.2 %   ¥ 3,479,788        -2.2   ¥ 3,557,433   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

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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.

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 2013 and 2012, OEM sales to Hewlett-Packard constituted 17.6% and 17.0%, 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 optimizing inventory levels and business planning through weekly analysis of sales data.

 

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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.

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.

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:

 

Ricoh Company, Ltd.

   Electrophotography

Samsung Electronics Co., Ltd.

   Laser printers, multifunction printers and facsimile machines

Kyocera Document Solutions Inc.

   Electrophotography

Oki Electric Industry Co., Ltd.

   LED printers, multifunction printers and facsimile machines

Sharp Corporation

   Electrophotography

Brother Industries, Ltd.

   Electrophotography and facsimile machines

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

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

 

Hewlett-Packard Company

  

Bubble jet printers

Ricoh Company, Ltd.

  

Electrophotography products, facsimile machines and word processors

Xerox Corporation

  

Business machines

International Business Machines Corporation

  

Information handling systems

Eastman Kodak Company

  

Electrophotography and image processing technology

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.

 

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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 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 and the cloud) 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 emerging markets, for example in China, the current market leaders for business machines are Toshiba TEC Corporation, Sharp Corporation and Konica Minolta Inc. Canon hopes to join this group by introducing products tailored to the Chinese market and by strengthening sales and service channels.

 

* Based on the data by IDC’s Worldwide Quarterly Hardcopy Peripherals Tracker 2013Q4

- 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 2011. Nevertheless, Canon has continued to invest aggressively in competitive new products and intends to maintain its position in this market.

Canon’s primary competitors in the interchangeable lens digital camera market are Nikon Corporation and Sony Corporation.

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.

Average prices in the industry declined in 2013 from the previous year. 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 major 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 -

Very stiff competition continues 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, an integration of advanced optical, control and system technologies is required, 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 believes that it has helped its customers improve their productivity by continuously improving the cost performance of semiconductor lithography equipment using the i-line and KrF laser light sources. In particular, equipment using i-line has captured a large share of the global market. Canon believes that it has also been meeting the needs of image sensor manufacturers by quickly adapting to various unique specifications.

Canon belives its FPD lithography equipment with a common platform offers excellent productivity and reliability that has helped it capture market share of the industry-leading South Korea and the growing China. Panel makers are accelerating development of higher definition panels in recent years. Canon believes it has also been meeting the needs of panel makers by continuously offering new products with high-resolution.

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. 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”)

Under RoHS Directive, from July 1, 2006, companies have been required to ensure that electrical and electronic equipment (“EEE”) sold in the European Union does not contain lead, cadmium, hexavalent chromium, mercury, polybrominated biphenyls or polybrominated diphenyl ethers. The scope of products covered will be expanded to medical and measurement equipment from July 2014. An additional four or five substances will be proposed as restricted substances in 2014. In parallel with these developments, all the RoHS exempted applications for which the restricted substances can be used are now under review. If the exempted applications concerned would be decided to expire, additional design-changes may be required for Canon products, and cost of changing designs may increase total compliance costs.

The WEEE Directive requires that companies selling EEE 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 EEE waste. The WEEE recast Directive was published on July 24, 2012 and was applied from February 2014. Due to a change in official interpretation, the scope of products covered is to be expanded to include consumables.

If tighter restrictions are enforced in 2014 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.

 

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

The REACH Regulation 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. If certain substances are contained in an article, the substances must be communicated to the recipient or consumer of the article. Furthermore, additional of restrictions on the use of certain substances can be proposed at any time by the ECHA or member states propose so, and, as some additional restrictions have been already adopted, manufacturers such as Canon needs 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.

 

3. 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 and implementing measures with respect to off-mode and standby mode and external power supplies were adopted in and have been applied since 2010. This measure was expanded in 2013 to include requirements for energy modes with “networked standby”. The requirements for “networked standby” will be applied from 2015. For imaging equipments, the industry has made a public commitment to attain certain targets on environmentally conscious designs from 2012 by an industrial voluntary agreement (VA) and began implementation in 2011. The revision of the VA is under final review and the commitments will become tighter than ever because the European authorities and NGOs are expected to require a stricter VA. 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.

 

4. 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.

 

5. 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, and regulates the same six substances covered by the EU RoHS 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. 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 EU 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.

 

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6. 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. Producers and importers are 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.

 

7. 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 a “Measure required area” if effects to human health due to soil pollution are foreseen, and the prefecture governor may order removal of pollutants. The substances designated as pollutants consist of twenty-five chemical groups, including lead, arsenic and trichloroethylene. If an investigation shows 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.

 

8. 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 markets such as China, India, Russia, Vietnam, and other countries. 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, 2013, 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 58.5% owned Japanese subsidiary as of December 31, 2013, has a maintenance contract for one copier machine with the Iranian embassy in Tokyo, Japan. The current contract renews annually. Total gross sales for the contract and activities above during the year 2013 was approximately ¥233 thousand. The net profit was substantially less than that.

 

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Canon Marketing Malaysia Sdn bhd, a wholly-owned Malaysian subsidiary of Canon Singapore Pte. Ltd. (“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 2013 was in foreign currency of approximately ¥40 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 2013 was in foreign currency of approximately ¥198 thousand. The net profit was substantially less than that.

   

Canon India Pvt Ltd, a wholly-owned Indian subsidiary of CSPL, 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 2013 was in foreign currency of approximately ¥109 thousand. The net profit was substantially less than that.

   

Canon Australia Pty. Ltd., a wholly-owned Australian subsidiary, has 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 2013 was in foreign currency of approximately ¥954 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 2013 was in foreign currency of approximately ¥6,639 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 2014. Total gross sales under this contract during the year 2013 was in foreign currency of approximately ¥144 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 2013 was in foreign currency of approximately ¥629 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. Total gross sales under this contract during the year 2013 was in foreign currency of approximately ¥912 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. Total gross sales under this contract during the year 2013 was approximately ¥11 thousand. The net profit was substantially less than that.

   

Canon Svenska AB, a wholly-owned Swedish subsidiary of CENV, performed a spot repair on a copier machine of Iran Air in Stockholm, Sweden. The gross sales for this activity was in foreign currency of approximately ¥30 thousand. The net profit was substantially less than that.

   

Canon Danmark A/S, a wholly-owned Danish subsidiary of CENV, has 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 2013 was in foreign currency of approximately ¥247 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 2013, 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 ¥306 thousand. The net profit was substantially less than that.

 

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Canon France, a wholly-owned subsidiary of CENV, has a service contract for a copier machine with the Iranian embassy in Paris, France. The current contract will expire in April 2014. Total gross sales was in foreign currency of approximately ¥93 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, 2013 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, 2013, Canon Inc. had 257 consolidated subsidiaries and 11 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, 2013.

 

Name of company

  

Head office location

   Proportion of
ownership interest
owned
     Proportion of
voting power
held
 

Canon Marketing Japan Inc.

   Tokyo, Japan      50.1%         58.5%   

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 18 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, 2013 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

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

 

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Name and location

   Floor space
(including
leased space)
    

Principal activities and products manufactured

Domestic    (Thousands of
square feet)
      

Hiratsuka Plant, Kanagawa

     1,118      

R&D of display products

Tamagawa Office, Kanagawa

     149      

Quality engineering

Oita Plant, Oita

     279      

Manufacturing of semiconductor devices

Yako Office, Kanagawa

     903      

Development of inkjet printers, inkjet chemical products

Utsunomiya Plant, Tochigi

     2,761      

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 supports; 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

     1,309      

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

     1,506      

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

     610      

Contact image sensors, inkjet cartridges and medical equipment

Oita Canon Inc., Oita

     1,225      

Digital cameras, lenses and digital video camcorders

Nagahama Canon Inc., Shiga

     1,093      

Toner cartridges and A-Si drums

Oita Canon Materials Inc., Oita

     2,995      

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

     971      

Inkjet printers and inkjet cartridges

 

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Name and location

   Floor space
(including
leased space)
    

Principal activities and products manufactured

Domestic    (Thousands of
square feet)
      

Canon Semiconductor Equipment Inc., Ibaraki

     423      

Development and production of semiconductor production-related equipment

Canon Ecology Industry Inc., Ibaraki

     646      

Recycling of toner cartridges, repair and recycling of business machines

Nisca Corporation, Yamanashi

     391      

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

     746      

Production equipment for electron devices, flat panel display and semiconductors

Canon Machinery Inc., Shiga

     623      

Automated production equipment and semiconductor production-related equipment

Canon Tokki Corporation, Niigata, Kanagawa and Tokyo

     232      

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

     336      

Remanufacturing of copying machines and semiconductor production equipment

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

     487      

Manufacturing and recycling of toner cartridges

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

     2,493      

Document management, high speed digital production printing systems and wide format printers

Océ-Printing Systems GmbH, Poing, Germany

     1,233      

High speed digital production printing systems

Americas

     

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

     1,679      

Toner cartridges, molds and remanufacturing of copying machines

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

     185      

Recycling of toner cartridges

 

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Name and location

   Floor space
(including
leased space)
    

Principal activities and products manufactured

Overseas    (Thousands of
square feet)
      

Asia

     

Canon Inc., Taiwan, Taiwan

     1,774      

Lenses and digital cameras

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

     584      

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

     1,909      

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

     3,269      

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

     3,233      

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

Canon (Suzhou) Inc., Suzhou, China

     1,517      

Copying machines

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

     706      

Copying machines and laser printer peripherals

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

     308      

Components

Canon Business Machines (Philippines), Inc., Batangas, Philippines

     910      

Laser printers

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     

Kawasaki Office, Kanagawa

  

New Administration and R&D base

Tamagawa Office, Kanagawa

  

New Administration and R&D base

Canon Ecology Industry Inc., Ibaraki

  

New production base* (Office business unit)

* To be leased to Canon Ecology Industry Inc., a wholly-owned subsidiary, by the Company

 

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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 2013, although the U.S. and Japanese economies began heading toward moderate recoveries during the latter half of the year, the economic downturn in Europe continued to drag on while the economies of emerging countries such as China faced slowdowns. As such, contrary to expectations at the beginning of the year, the global economy remained stagnant. As for exchange rates, the correction of the historic high value of the yen continued, with a trend toward a weaker yen growing increasingly clear.

Market environment

As for the markets in which Canon operates amid these conditions, owing to the economic slowdown, flat demand led to a continuation of the harsh business environment especially for consumer products. Among MFDs, color models continued to drive growth while demand for laser printers realized a turnaround toward recovery. Although demand for interchangeable-lens digital cameras continued to show strong growth in Japan, demand overseas fell short of the previous year’s level as the economic rebound in such markets as Europe and China takes longer than expected. As for digital compact cameras, demand continued to shrink in both developed countries as well as emerging markets. Overall market demand for inkjet printers, hit by the prolonged economic downturn, also declined in all major markets. In the industry and others sector, a rebound in capital investment for memory devices led to a pickup in demand for semiconductor lithography equipment in the latter half of the year, while demand for lithography equipment used in the production of FPDs showed healthy market growth for mid- and small-size panels used mainly in smartphones and tablet PCs, and a modest recovery for large-size panels.

The average value of the yen during the year was ¥97.84 against the U.S. dollar, a year-on-year depreciation of approximately ¥18, and ¥130.01 against the euro, a year-on-year depreciation of approximately ¥27.

Summary of operations

Despite the decline in demand for digital compact cameras and industrial equipment, net sales for the year increased 7.2% to ¥3,731.4 billion from the previous year. This was realized through the steady demands for

 

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MFDs and laser printers, along with an increase in sales of inkjet printers, made possible through sales-promotion efforts despite the harsh conditions posed by the shrinking inkjet printer market, as well as the positive effects of favorable currency exchange rates. The gross profit ratio rose 0.8 points year on year to 48.2% thanks to the effects of ongoing cost-cutting efforts along with the depreciation of the yen. Despite an increase in foreign-currency-denominated operating expenses after conversion into yen due to the depreciation of the yen, Group-wide efforts to thoroughly reduce spending contributed to limiting the increase in operating expenses to just ¥1,461.1 billion, an increase of 10.2% year on year. Consequently, operating profit increased by 4.1% to ¥337.3 billion. Other income decreased by ¥8.4 billion due to foreign currency exchange losses while income before income taxes increased by 1.5% year on year to ¥347.6 billion. Net income attributable to Canon Inc. increased by 2.6% to ¥230.5 billion. Accordingly, Canon achieved increases in both sales and profit.

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

 

    2013     2012     2011     2010     2009  

Net sales (Millions of yen)

  ¥ 3,731,380     ¥ 3,479,788     ¥ 3,557,433     ¥ 3,706,901     ¥ 3,209,201  

Gross profit to net sales ratio

    48.2     47.4     48.8     48.1     44.5

R&D expense to net sales ratio

    8.2     8.5     8.7     8.5     9.5

Operating profit to net sales ratio

    9.0     9.3     10.6     10.5     6.8

Inventory turnover measured in days

    52 days        57 days        46 days        35 days        39 days   

Debt to total assets ratio

    0.1     0.1     0.3     0.3     0.3

Canon Inc. stockholders’ equity to total
assets ratio

    68.6     65.7     64.9     66.4     69.9

 

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 of 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 adequate spending in core technology to sustain Canon’s leading position in its current business areas and to exploit opportunities 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 relating to cash flow management that Canon’s management believes to be important.

Inventory turnover measured in days is a KPI because it measures the efficiency 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 due to lead times required for 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’s management believes a high stockholders’ equity ratio will enable the company 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.

 

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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.

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. In 2011, the sales incentive program accruals were quite difficult to estimate compared to prior years because of the significant fluctuation in consumer product supplies from our manufacturing facilities, due to the earthquake in Japan and the flooding in Thailand. Although Canon utilized available data to produce its best estimate of promotion payments to be claimed in 2012, actual claims in 2012 were not as high as Canon had estimated. Moreover, in recent years, as a result of the market conditions and customer preferences, usage of incentive programs has shifted from mail-in rebates to instant rebates. Accordingly, the historical data relating to mail-in-rebates could not be used to determine instant rebates. Given the limited experience with instant rebates, this led Canon to maintain its estimated accruals for a longer period of time. As 2012 progressed and new information became available, Canon reviewed the 2011 accrual balance in order to determine whether the accrual needed to be revised during 2012. By using new additional statistical information and gathering sales and inventory data from customers, Canon was able to revise its estimates.

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.

 

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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, due for example to 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 are 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 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. Fair value of a reporting unit is determined primarily based on the discounted cash flow analysis which involves estimates of projected future cash flows and discount rates. Estimates of projected future cash flows are primarily based on Canon’s forecast of future growth rates. Estimates of discount rates are determined based on the weighted average cost of capital, which considers primarily market and industry data as well as specific risk factors. 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.

 

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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.

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 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 2013, Canon estimated a weighted-average discount rate used to determine benefit obligations of 1.6% for Japanese plans and 3.8% for foreign plans and a weighted-average expected long-term rate of return on plan assets of 3.1% for Japanese plans and 5.2% for foreign plans. In estimating the discount rate, Canon uses available information about rates of return on high-quality fixed-income government 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 2013, a decrease of 50 basis points in the discount rate increases the projected benefit obligation by approximately ¥97,589 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 2013, a change of 50 basis points in the expected long-term rate of return on plan assets would cause a change of approximately ¥4,713 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.

 

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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

2013 compared with 2012

Summarized results of operations for 2013 and 2012 are as follows:

 

     2013        Change       2012  
     (Millions of yen, except per share
amounts and percentage data)
 

Net sales

   ¥ 3,731,380        +7.2   ¥ 3,479,788   

Operating profit

     337,277        +4.1       323,856   

Income before income taxes

     347,604        +1.5       342,557   

Net income attributable to Canon Inc.

     230,483        +2.6       224,564   

Net income attributable to Canon Inc. stockholders per share:

       

Basic

     200.78        +4.9       191.34   

Diluted

     200.78        +4.9       191.34   

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

Sales

Canon’s consolidated net sales in 2013 totaled ¥3,731,380 million, representing a 7.2% increase from the previous year. This was realized through steady demands for MFDs and laser printers, along with an increase in sales of inkjet printers as well as the positive effects of favorable currency exchange rates, despite the decline in demand for digital compact cameras and industrial equipment.

Overseas operations are significant to Canon’s operating results and generated 80.8% of total net sales in 2013. Such sales are denominated in the applicable local currency and are subject to fluctuations in the value of the yen relative 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 during the year was ¥97.84 against the U.S. dollar, a year-on-year depreciation of approximately ¥18, and ¥130.01 against the euro, a year-on-year depreciation of approximately ¥27. The effects of foreign exchange rate fluctuations positively affected net sales by approximately ¥514,000 million in 2013. This favorable impact consisted of approximately ¥257,000 million for the U.S. dollar denominated sales, ¥193,600 million for the euro denominated sales and ¥63,400 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 2013 and 2012 was 51.8% and 52.6%, respectively.

 

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Gross profit

Canon’s gross profit in 2013 increased by 9.0% to ¥1,798,421 million from 2012. The gross profit ratio also increased by 0.8 points year on year to 48.2%. The growth of gross profit ratio was achieved due to the cost reductions and production innovation along with the positive effects of the depreciation of the yen.

Operating expenses

The major components of operating expenses are payroll, R&D, advertising expenses and other marketing expenses. Despite group-wide efforts to thoroughly reduce spending, total operating expenses increased by 10.2% to ¥1,461,144 million in 2013 mainly due to the negative effect of depreciation of the yen.

Operating profit

Operating profit in 2013 increased 4.1% to a total of ¥337,277 million from 2012. The ratio of operating profit to net sales decreased 0.3% to 9.0% from 2012.

Other income (deductions)

Other income (deductions) for 2013 decreased ¥8,374 million to ¥10,327 million, owing primarily to foreign currency exchange losses.

Income before income taxes

Income before income taxes in 2013 was ¥347,604 million, an increase of 1.5% from 2012, and constituted 9.3% of net sales.

Income taxes

Provision for income taxes in 2013 decreased by ¥2,024 million from 2012. The effective tax rate during 2013 remained consistent with 2012. The effective tax rate for 2013 was 31.1%, which was lower than the statutory tax rate in Japan. This was mainly due to the tax credit for R&D expenses.

Net income attributable to Canon Inc.

As a result, net income attributable to Canon Inc. in 2013 increased by 2.6% to ¥230,483 million, which represents 6.2% 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 multifunction devices (“MFDs”), laser multifunction printers (“MFPs”), laser printers, digital production printing systems, high speed continuous feed printers, wide-format printers and document solutions.

   

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

   

The Industry and Others Business Unit mainly includes semiconductor lithography equipment, flat panel display (“FPD”) lithography equipment, digital radiography systems, ophthalmic equipment, vacuum thin-film deposition equipment, organic LED (“OLED”) panel manufacturing equipment, die bonders, micromotors, network cameras, handy terminals and document scanners.

 

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Sales by segment

Please refer to the table of sales by segment in Note 20 of the Notes to Consolidated Financial Statements.

Canon’s sales by segment are summarized as follows:

 

     2013       Change       2012  
     (Millions of yen, except percentage data)  

Office

   ¥ 2,000,073       +13.8   ¥ 1,757,575   

Imaging System

     1,448,938       +3.1       1,405,971   

Industry and Others

     374,870       -8.1        407,840   

Eliminations

     (92,501            (91,598
  

 

 

   

 

 

   

 

 

 

Total

   ¥ 3,731,380       +7.2   ¥ 3,479,788   
  

 

 

   

 

 

   

 

 

 

Within the Office Business Unit, as for office MFDs, sales of color models increased from 2012 led by the imageRUNNER ADVANCE C5200/C2200 series. Results for high speed continuous feed printers and wide-format printers, sales of the Océ ColorStream 3000 series showed solid growth. With regard to laser printers, laser multifunction models recorded strong growth contributing to a year-on-year increase in sales volume. As a result, along with the positive effects of favorable currency exchange rates offset primarily due to decreased sales in monochrome printers, sales for the business unit totaled ¥2,000.1 billion in 2013, an increase of 13.8% year on year, while operating profit totaled ¥266.9 billion, increasing 31.1%.

Within the Imaging System Business Unit, interchangeable-lens digital cameras maintained their top market share despite the challenging environment, which was marked by a drop in demand in Europe and China due to the economic downturn, although demand in Japan continued to expand. In particular, the EOS 5D Mark III and 70D advanced-amateur-model digital SLR cameras continued to realize healthy growth. Furthermore, in Japan, the new entry-level EOS Digital Rebel SL1 and T5i cameras proved popular. As for digital compact cameras, although total sales volume declined due to the market slowdown and the increasing popularity of smartphones, sales volume increased from 2012 for high-added-value models incorporating features that differentiate them from smartphones, such as large-size image sensors and models like the PowerShot SX50 HS and SX510 HS, which feature high-magnification zoom lenses. With regard to inkjet printers, despite the harsh market environment due to the rapid fall in demand in emerging markets, sales volume showed solid growth thanks to efforts to boost sales through the introduction of new products offering enhanced support for cloud services. As a result, along with the positive effects of favorable currency exchange rates offset primarily due to decreased sales in lower-end compact digital cameras, sales for the business unit increased by 3.1% to ¥1,448.9 billion in 2013, while operating profit totaled ¥203.8 billion, a decrease of 3.1%.

In the Industry and Others Business Unit, within semiconductor lithography equipment, despite an increase in sales volume for memory devices in the latter half of 2013 fueled by renewed investment in capital expenditure by memory manufacturers, sales volumes for the year decreased slightly owing to restrained capital expenditure in the first half. As for FPD lithography equipment, sales volume remained the same as for the previous year amid the recovery in investment for large-size panels. With respect to medical equipment, sales volume for Canon’s mainstay digital radiography systems steadily increased. Consequently, sales for the business unit totaled ¥374.9 billion in 2013, a decrease of 8.1% year on year, while operating profit recorded a loss of ¥25.3 billion, declining by ¥31.2 billion from 2012.

Intersegment sales of ¥92,501 million, representing 2.4% of total sales, are eliminated from total sales for the three segments, and are described as “Eliminations”.

 

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Sales by geographic area

Please refer to the table of sales by geographic area in Note 20 of the Notes to Consolidated Financial Statements.

A summary of net sales by geographic area in 2013 and 2012 is provided below:

 

     2013        Change       2012  
     (Millions of yen, except percentage data)  

Japan

   ¥ 715,863        -0.6   ¥ 720,286   

Americas

     1,059,501        +12.7       939,873   

Europe

     1,124,929        +10.9       1,014,038   

Asia and Oceania

     831,087        +3.2       805,591   
  

 

 

    

 

 

   

 

 

 

Total

   ¥ 3,731,380        +7.2   ¥ 3,479,788   
  

 

 

    

 

 

   

 

 

 

 

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 2013 increased in all areas except Japan.

In Japan, sales slightly decreased in 2013 due to the slowdown in the Industry and Others Business, although the interchangeable-lens digital cameras continued to expand.

In the Americas, despite the decline in sales of digital compact cameras from the previous year due to the significant slowdown in the market, the depreciation of the yen against the U.S. dollar along with increased sales of inkjet printers including consumable supplies, caused sales to increase by 12.7% in 2013.

In Europe, although sales of interchangeable lens digital cameras declined due to shifting to low-end models as well as declining sales of digital compact cameras owing to shrinking market, the effect of depreciation of the yen along with steady sales of inkjet printers and MFDs amid increasing uncertainty in European economy, caused sales to increase by 10.9% in 2013.

In Asia and Oceania, sales of interchangeable lens digital cameras, which have been an engine for solid growth in Asia and Oceania, showed a slowdown in growth. In addition sales of digital compact cameras and laser printers faced harsh conditions. Inkjet printers including consumable supplies, on the other hand, showed steady sales growth. Reflecting these factors and the effect of depreciation of the yen, net sales increased by 3.2% in 2013.

Operating profit by segment

Please refer to the table of segment information in Note 20 of the Notes to Consolidated Financial Statements.

Operating profit for the Office Business Unit in 2013 increased by ¥63,330 million to ¥266,908 million. This increase resulted from the sales increase.

Operating profit for the Imaging System Business Unit in 2013 decreased by ¥6,524 million to ¥203,794 million. This decrease resulted primarily from the increase in expense due to depreciation of the yen.

Operating profit for the Industry and Others Business Unit in 2013 declined by ¥31,241 million, largely owing to the decrease in sales.

 

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2012 compared with 2011

Summarized results of operations for 2012 and 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”.

Sales

Canon’s consolidated net sales in 2012 totaled ¥3,479,788 million, representing a 2.2% decrease from the previous 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 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 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 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 2012 and 2011 was 52.6% and 51.2%, respectively.

Gross profit

Canon’s gross profit in 2012 decreased by 5.0% to ¥1,649,966 million from 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.

 

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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 2012.

Operating profit

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

Other income (deductions)

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

Income before income taxes

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

Income taxes

Provision for income taxes in 2012 decreased by ¥10,303 million from 2011. The effective tax rate during 2012 remained consistent with 2011. The effective tax rate for 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 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 solutions.

   

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.

 

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Sales by segment

Please refer to the table of sales by segment in Note 20 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   
  

 

 

   

 

 

   

 

 

 

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 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 2012.

Sales of the Industry and Others Business Unit constituted 11.7% of consolidated net sales in 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 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”.

 

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Sales by geographic area

Please refer to the table of sales by geographic area in Note 20 of the Notes to Consolidated Financial Statements.

A summary of net sales by geographic area in 2012 and 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 2012 increased in Japan and Asia and Oceania while decreased in Americas and Europe.

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

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 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 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 2012.

Operating profit by segment

Please refer to the table of segment information in Note 20 of the Notes to Consolidated Financial Statements.

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

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.

 

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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 20 of the Notes to Consolidated Financial Statements.

B. Liquidity and capital resources

Cash and cash equivalents in 2013 increased by ¥122,231 million to ¥788,909 million, compared with ¥666,678 million in 2012 and ¥773,227 million in 2011. Canon’s cash and cash equivalents are typically denominated both in Japanese yen and in U.S. dollars, with the remainder denominated in foreign currencies.

Net cash provided by operating activities in 2013 increased by ¥123,565 million from the previous year to ¥507,642 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 2013, cash inflow from cash received from customers increased due to the increase in sales. There were no significant changes in Canon’s collection rates. Cash outflow for payments for parts and materials decreased, as a result of our efforts to decrease inventory. Cash outflow for payments for selling, general and administrative expenses increased due to the impact of Japanese Yen on operating expenses denominated in foreign currencies. On the other hand, operation expenses in local currency base declined due to cost reduction activities of group companies. Cash outflow for income taxes increased due to the increase in taxable income.

Net cash used in investing activities in 2013 was ¥250,212 million, increasing by ¥37,472 million from ¥212,740 million in 2012, due to the increasing amount of time deposits included in short-term investments. Purchases of fixed assets were focused on items relevant to new products.

Canon defines “free cash flow” by deducting cash flows from investing activities from cash flows from operating activities. For 2013, free cash flow totaled ¥257,430 million as compared with ¥171,337 million for 2012. 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 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 uses 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.

Net cash used in financing activities totaled ¥222,181 million in 2013, mainly resulting from repurchase of treasury stock of ¥50,007 million, and dividends of ¥155,627 million. The Company paid dividends in 2013 of ¥135.00 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.

 

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Short-term loans (including the current portion of long-term debt) amounted to ¥1,299 million at December 31, 2013 compared with ¥1,866 million at December 31, 2012. Long-term debt (excluding the current portion) amounted to ¥1,448 million at December 31, 2013 compared with ¥2,117 million at December 31, 2012.

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 14, 2014, 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.

Following the natural disasters which occurred in 2011, Canon determined that its concerted focus on decreasing levels of total inventory, even for competitive and strong-selling products, had resulted in shortages of finished goods, adversely affecting its ability to capitalize on selling opportunities. As a consequence, Canon re-evaluated its priorities for targeting levels of finished goods inventory, and decided on a new management policy to increase levels of finished goods inventories at sales locations as a buffer in order to increase its resilience in response to unexpected natural or man-made disasters and consequent production line stoppages. Canon’s initiative in recent periods to optimize inventory levels is intended to maintain an appropriate balance among relevant imperatives, including minimizing working capital, avoiding undue exposure to the risk of inventory obsolescence, and maintaining the ability to sustain sales despite the occurrence of unexpected disasters.

Reflecting the foregoing circumstances, Canon’s total inventory turnover ratios were 52, 57, and 46 days at the end of the fiscal years 2013, 2012, and 2011, respectively and the increases over the last three years are in line with Canon’s expectations and its revised inventory management policy.

Increase in property, plant and equipment on an accrual basis in 2013 amounted to ¥188,826 million compared with ¥270,457 million in 2012 and ¥226,869 million in 2011. For 2014, Canon projects its increase in property, plant and equipment will be approximately ¥210,000 million.

Employer contributions to Canon’s worldwide defined benefit pension plans were ¥48,515 million in 2013, ¥30,421 million in 2012 and ¥30,510 million in 2011. In addition, employer contributions to Canon’s worldwide defined contribution pension plans were ¥14,383 million in 2013, ¥13,021 million in 2012, and ¥12,511 million in 2011.

Working capital in 2013 increased by ¥199,814 million to ¥1,437,635 million, compared with ¥1,237,821 million in 2012 and ¥1,259,457 million in 2011. 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 2013 was 2.69 compared to 2.47 for 2012 and to 2.41 for 2011.

Return on assets (net income attributable to Canon Inc. divided by the average of total assets) was 5.6% in 2013, compared to 5.7% in 2012 and 6.3% in 2011.

Return on Canon Inc. stockholders’ equity (net income attributable to Canon Inc. divided by the average of total Canon Inc. stockholders’ equity) was 8.4% in 2013 compared with 8.7% in 2012 and 9.6% in 2011.

 

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The debt to total assets ratio was 0.1%, 0.1% and 0.3% as of December 31, 2013, 2012 and 2011, respectively. Canon had short-term loans and long-term debt of ¥2,747 million as of December 31, 2013, ¥3,983 million as of December 31, 2012 and ¥11,711 million as of December 31, 2011.

C. Research and development, patents and licenses

Year 2013 marks the third 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 is pursuing collaboration among the government, industry and academia, and has strengthened relationships with universities and other research institutes worldwide, such as Kyoto University, Tokyo Institute of Technology, Osaka University, Stanford University, the University of Arizona, and the New Energy and Industrial Technology Development Organization to assist with fundamental research and to develop cutting-edge technologies. Additionally, Canon is currently working on a collaborative research with Massachusetts General Hospital (“MGH”) and Brigham and Women’s Hospital (“BWH”) to develop biomedical optical imaging and medical robotics technologies at the Healthcare Optics Research Laboratory in Cambridge, Massachusetts, founded in June of 2013.

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 ¥306,324 million in 2013, ¥296,464 million in 2012 and ¥307,800 million in 2011. The ratios of R&D expenses to the consolidated total net sales for 2013, 2012 and 2011 were 8.2%, 8.5% and 8.7%, 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.

Canon obtained the third greatest number of private sector patents in 2013, according to the United States patent annual list, released by IFI CLAIMS® Patent Services.

 

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D. Trend information

As for the outlook in 2014, there are signs of brightness among developed countries with steady economic growth in the U.S. and Japan, and the European economy expected to realize a turnaround toward recovery. Although uncertainties remain in emerging countries such as China, since they are expected to maintain their course of moderate expansion, the global economy, having bottomed out in 2013, is also expected to realize a moderate recovery.

2014 represents the fourth year of Phase IV (2011-2015) of the Excellent Global Corporation Plan. The Canon Group will work in unity, taking steps to realize sound business growth and overcome challenges to firmly return to a path of growth.

In order to achieve its targets, Canon will implement various measures under a basic policy of carrying out further reforms in order to return to the growth track.

 

   

Bolstering Strengths of Existing Core Businesses by Creating Outstanding Hit Products

Canon aims to improve its market share for existing core businesses, developing appealing products that outperform the competition, not only in terms of basic performance, but also cost and usability. At the same time, Canon will strengthen the development of businesses derived from existing core businesses.

 

   

Securely Launch and Steadily Expand New Businesses

Canon will work to accelerate the business expansion of network camera systems for which significant growth is expected. The Company will also focus on strengthening its business foundation for 4K reference displays and mixed-reality systems, while also concentrating on the commercialization of Super Machine Vision. In the medical field, Canon aims to realize the early launch of DNA diagnostic systems.

 

   

Holistically Developing Global Sales Forces

In emerging markets, Canon will work to expand sales networks and enhance product lineups in accordance with conditions in each country. In developed countries, in addition to boosting the Company’s ability to respond to Internet-based and other direct-order sales, Canon will strengthen its response to the centralized purchasing practices used by global corporations when procuring office products.

 

   

Optimizing the Global Production System

Based on such factors as changes in local conditions in each country, Canon will work to realize the optimized global allocation of its production assets. The Company will also work to maintain or expand its production in Japan through automation, while also accelerating localized production of mainly consumables in the Americas and Europe through automated production systems.

 

   

Exploring a New Dimension of Cost Reductions

Canon will strive to further accelerate procurement reforms as well as expand in-house production and promote automation. Additionally, the Company will work to significantly reduce product development times and achieve cost savings, promoting prototype-less production through the utilization of its super computer. Furthermore, it will move forward with the fundamental reform of manufacturing through the utilization of 3D printers.

In addition to the above, in order to return to a path of growth in the face of the dramatically changing business environment, Canon will select and concentrate on technological themes that will open the way to the future, further enhance product quality management, effectively make use of the Company’s workforce, and carry out reforms such as thoroughly strengthening information security.

 

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For a discussion of the trend by business segments, see “Item 4 B. Business overview” and “Item 5 A. Operating Result”.

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 will 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 ¥12,315 million at December 31, 2013. The carrying amounts of the liabilities recognized for Canon’s obligations as a guarantor under those guarantees at December 31, 2013 were insignificant.

F. Contractual obligations

The following summarizes Canon’s contractual obligations at December 31, 2013.

 

            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

   ¥ 2,482      ¥ 1,213      ¥ 1,098      ¥ 171      ¥   

Other Long-Term Debt

     211        32        101        48        30   

Operating Lease Obligations

     96,064        28,523        37,915        16,446        13,180   

Purchase commitments for:

              

Property, Plant and Equipment

     26,218        26,218                        

Parts and Raw Materials

     73,914        73,914                        

Other long-term liabilities

              

Contribution to Defined Benefit Pension Plans

     20,649         20,649                           
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   ¥ 219,538      ¥ 150,549      ¥ 39,114      ¥ 16,665      ¥ 13,210   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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 11, 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, 2013, accrued product warranty costs amounted to ¥10,890 million.

 

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Table of Contents

At December 31, 2013, commitments outstanding for the purchase of property, plant and equipment were approximately ¥26,218 million, and commitments outstanding for the purchase of parts and raw materials were approximately ¥73,914 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 2014, Canon expects to contribute ¥13,589 million to its Japanese defined benefit pension plans and ¥7,060 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.

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, 2014 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,

Group Executive of Human Resources Management & Organization 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*

     3/2014   

Group Executive of Human Resources Management & Organization HQ*

 

 

 

  

 

  

 

 

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Table of Contents

Name

(Date of birth)

 

Position

(Group executive/function)

   Date of
commencement
  

Business experience

(*current position/function)

Toshiaki Ikoma

(Mar. 5, 1941)

 

Executive Vice President & CTO

(Group Executive of Corporate R&D HQ,

Group Executive of Medical Equipment Group)

   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*
     1/2014   

Group Executive of Medical Equipment Group*

 

 

 

  

 

  

 

Yoroku Adachi

  Senior Managing Director    4/1970    Entered the Company

(Jan. 11, 1948)

     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

  Senior Managing Director    4/1974    Entered the Company

(Nov. 23, 1949)

 

(Chief Executive of Peripheral Products HQ)

   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

(Nov. 15, 1950)

 

Senior Managing Director

(Group Executive of Device Technology Development HQ)

   4/1977    Entered the Company
     1/2002   

Group Executive of Device Technology Development HQ*

     3/2004    Director
     3/2007    Managing Director
     3/2011    Senior Managing Director*

 

 

 

  

 

  

 

 

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Table of Contents

Name

(Date of birth)

 

Position

(Group executive/function)

   Date of
commencement
  

Business experience

(*current position/function)

Toshio Honma

(Mar. 10, 1949)

 

Senior Managing Director

(Group Executive of Global Procurement HQ)

   4/1972   

Entered the Company

     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*

 

 

 

  

 

  

 

Hideki Ozawa

(Apr. 28, 1950)

  Senior 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

     3/2014   

Senior Managing Director*

 

 

 

  

 

  

 

Masaya Maeda

(Oct. 17, 1952)

 

Senior Managing Director

(Chief Executive of Image Communication Products HQ)

   4/1975   

Entered the Company

     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

     3/2014   

Senior Managing Director*

 

 

 

  

 

  

 

Yasuhiro Tani

(Jul. 30, 1956)

  Director    4/1980   

Entered the Company

 

(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*

 

 

 

  

 

  

 

Kenichi Nagasawa

(Jan. 31, 1959)

  Director    4/1981   

Entered the Company

 

(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*

 

 

 

  

 

  

 

 

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Table of Contents

Name

(Date of birth)

 

Position

(Group executive/function)

   Date of
commencement
  

Business experience

(*current position/function)

Naoji Otsuka

(Apr. 24, 1958)

  Director    4/1981   

Entered the Company

 

(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

(Jul. 3, 1954)

  Director    4/1981   

Entered the Company

 

(Group Executive of Network Visual Solution Business Promotion HQ)

   4/2005   

Group Executive of Office Imaging Products Corporate System

     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*

 

 

 

  

 

  

 

Aitake Wakiya

(Nov. 8, 1955)

  Director    4/1979   

Entered the Company

 

(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

(Jul. 20, 1957)

  Director    4/1980   

Entered the Company

 

(Group Executive of Corporate Planning Development HQ)

   5/2011   

Senior General Manager of Finance & Accounting HQ

     3/2012   

Group Executive of Human Resources Management & Organization HQ

     4/2012   

Executive Officer

     3/2013   

Director*

     3/2014   

Group Executive of Corporate Planning Development HQ*

 

 

 

  

 

  

 

Akiyoshi Kimura

(Jul. 19, 1956)

  Director    4/1980   

Entered the Company

 

(Chief Executive of Office Imaging Products HQ)

   1/2009   

Group Executive of Office Imaging Products Production System HQ

     4/2011   

Executive Officer

       

Deputy Chief Executive of Office Imaging Products HQ

     1/2013   

Group Executive of Office Imaging Products corporate system HQ*

       

Group Executive of Office Imaging Products Development Group*

     3/2014   

Director*

       

Chief Executive of Office Imaging Products HQ*

 

 

 

  

 

  

 

Eiji Osanai

  Director    8/1983    Entered the Company

(Feb. 17, 1959)

 

(Group Executive of Production Engineering HQ)

   7/2010   

Senior General Manager of Production Engineering Research Laboratory

     4/2012    Executive Officer
       

Deputy Group Executive of Production Engineering HQ

     1/2013   

Senior Group Manager of Production Equipment Administration Center*

     3/2014   

Director*

       

Group Executive of Production Engineering HQ*

 

 

 

  

 

  

 

 

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Name

(Date of birth)

 

Position

(Group executive/function)

   Date of
commencement
  

Business experience

(*current position/function)

Kunitaro Saida

  Director    5/2006    Qualified for attorney*

(May. 4, 1943)

     6/2007   

Audit & Supervisory Board Member of NICHIREI CORPORATION*

     6/2008   

Director of Sumitomo Osaka Cement Co., Ltd.*

     6/2010   

Director of HEIWA REAL ESTATE CO., LTD.*

     3/2014    Director*

 

 

 

  

 

  

 

Haruhiko Kato

(Jul. 21, 1952)

  Director    7/2009   

Commissioner of National Tax Agency

     1/2011   

Senior Managing Director of Japan Securities Depository Center, Incorporated

     6/2011   

President and CEO of Japan Securities Depository Center, Incorporated*

     6/2013   

Director of Toyota Motor Corporation*

     3/2014    Director*

 

 

 

  

 

  

 

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*

 

 

 

  

 

  

 

Makoto Araki

(Jul. 16, 1954)

 

Audit & Supervisory Board Member

   4/1978    Entered the Company
     10/2009   

Group Executive of Information & Communication Systems HQ

     4/2010    Executive Officer
     3/2011    Director
     3/2014    Audit & Supervisory Board Member*

 

 

 

  

 

  

 

Tadashi Ohe

(May 20, 1944)

 

Audit & Supervisory Board Member

   4/1969    Qualified for attorney*
     4/1989   

Instructor of Judicial Research and Training Institute

     3/1994    Audit & Supervisory Board Member*

 

 

 

  

 

  

 

Osami Yoshida

(Nov. 4, 1950)

 

Audit & Supervisory Board Member

   9/1982   

Registered as Certified Public Accountant*

     12/2011   

Deputy Group Executive of Human Resources HQ,
Deloitte Touche Tohmatsu LLC

       
     3/2014    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, Osami Yoshida and Kuniyoshi Kitamura, are outside Audit & Supervisory Board Members as stipulated in Item16, Article 2 of the Corporation Law of Japan. Kunitaro Saida and Haruhiko Kato are outside directors. The term of office of directors is one year. The current term of all directors expires in March 2014. 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 Kuniyoshi Kitamura expires in March 2018, and the current term for Kengo Uramoto, who was elected in the general meeting of shareholders in March 2012, expires in March 2016, and the current term for Makoto Araki, Osami Yoshida who were elected in the general meeting of shareholders in March 2014, expires in March 2018.

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 19 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.

 

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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.

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 Osami Yoshida 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 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 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.

 

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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 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 29, 2014, whom are expected to take the assignment on April 1, 2014, are listed below.

 

Name

  

Position

  

(Group executive/function)

Hiroyuki Suematsu

   Senior Executive Officers    Group Executive of Quality Management HQ

Shigeyuki Uzawa

   Senior Executive Officers    Chief Executive of Optical Products Operations

Akio Noguchi

   Senior Executive Officers    Group Executive of Mixed Reality Solution Business Promotion HQ

Seymour Liebman

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

Yuichi Ishizuka

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

Rokus van Iperen

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

Masato Okada

   Executive Officers    Deputy Chief Executive of Image Communication Products HQ

Kazuto Ogawa

   Executive Officers    Executive Vice President of Canon (China) Co., LTD.

Ryuichi Ebinuma

   Executive Officers    Deputy Group Executive of Corporate R&D HQ

Kazuhiko Noguchi

   Executive Officers    Group Executive of Public Affairs HQ

Hiroaki Takeishi

   Executive Officers    Group Executive of Semiconductor Production Equipment Group

Nobutoshi Mizusawa

   Executive Officers    Deputy Group Executive of Corporate R&D HQ

Yoichi Iwabuchi

   Executive Officers    Senior General Manager of Software Platform Technology Development Center

Masaaki Nakamura

   Executive Officers    Deputy Group Executive of Facilities Management HQ
      Deputy Group Executive of Human Resources Management & Organization HQ

Takashi Takeya

   Executive Officers    Senior General Manager of Global Logistics Management Center

Katsumi Iijima

   Executive Officers   

Group Executive of Information & Communication Systems HQ

Nobuyuki Tainaka

   Executive Officers    Deputy Senior General Manager of Corporate Legal Center

B. Compensation

In the fiscal year ended December 31, 2013, Canon pays an aggregate of approximately ¥3,505 million to its directors and Audit & Supervisory Board Members. This amount includes bonuses, stock options and retirement allowances.

Directors are not covered by the Company’s retirement program. However, in accordance with customary Japanese business practices, directors receive lump-sum retirement benefits, subject to shareholder approval. 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. The retirement allowance for Directors represents the final retirement benefit for retired Director.

 

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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 2013.

 

Name

(Position)

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

Fujio Mitarai (Director)

    Canon Inc.      ¥             227      ¥     32      ¥       259      ¥           841      ¥             5      ¥ 1,105   

Toshizo Tanaka (Director)

    Canon Inc.        105        18        123        236        5        364   

Toshiaki Ikoma (Director)

    Canon Inc.        99        16        115        63        5        183   

Kunio Watanabe (Director)

    Canon Inc.        85        15        100        128        3        231   

Yoroku Adachi (Director)

    Canon Inc.        78        13        91        104        3        198   

Yasuo Mitsuhashi (Director)

    Canon Inc.        73        13        86        104        3        193   

Shigeyuki Matsumoto (Director)

    Canon Inc.        69        11        80        70        3        153   

Toshio Honma (Director)

    Canon Inc.        67        11        78        71        3        152   

Masaki Nakaoka (Director)

    Canon Inc.        66        12        78        65        3        146   

Haruhisa Honda (Director)

    Canon Inc.        66        12        78        65        3        146   

Hideki Ozawa (Director)

    Canon Inc.        72        8        80        40        3        123   

Masaya Maeda (Director)

    Canon Inc.        56        8        64        40        3        107   

Notes:

(1) Bonus amounts represent the increased portion of accrued directors’ bonuses in fiscal year 2013.
(2) 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.
(3) The stock option amounts represent an expense recognized during fiscal year 2013 determined based on the fair value on the date of grant using the Black-Scholes option pricing model.
(4) Yoroku Adachi and Hideki Ozawa serve as president of Canon U.S.A. and Canon China, respectively. Compensation amounts to Yoroku Adachi and Hideki Ozawa from the subsidiaries are translated from U.S. dollars and Chinese yuan based on the average rate for fiscal year 2013 of ¥97.72 to the U.S. dollar and ¥15.91 to the yen, respectively and are included above.

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

 

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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.

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.

 

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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.

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

 

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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.

(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.

 

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(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.

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.

 

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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 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.

 

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(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.

(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

 

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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.

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

 

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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

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.

 

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(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 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.

 

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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

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

 

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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, 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.

 

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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 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.

(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, 2013, 2012 and 2011.

 

     Total      Japan      Americas      Europe      Asia and Oceania  

December 31, 2013

              

Office

     99,360         29,389         15,009         19,328         35,634   

Imaging System

     61,798         16,069         2,510         2,083         41,136   

Industry and Others

     22,401         14,606         1,225         1,166         5,404   

Corporate

     10,592         9,761                         831   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     194,151         69,825         18,744         22,577         83,005   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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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.

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, 2014. The total is 353,441 shares, constituting 0.03% of all outstanding shares.

 

Name

  

Position

   Number of shares  

Fujio Mitarai

   Chairman & CEO      112,223   

Toshizo Tanaka

   Executive Vice President & CFO      21,410   

Toshiaki Ikoma

   Executive Vice President & CTO      14,700   

Yoroku Adachi

   Senior Managing Director      24,697   

Yasuo Mitsuhashi

   Senior Managing Director      19,757   

Shigeyuki Matsumoto

   Senior Managing Director      22,852   

Toshio Honma

   Senior Managing Director      31,552   

Hideki Ozawa

   Senior Managing Director      13,300   

Masaya Maeda

   Senior Managing Director      11,400   

Yasuhiro Tani

   Director      6,200   

Kenichi Nagasawa

   Director      2,200   

Naoji Otsuka

   Director      5,500   

Masanori Yamada

   Director      5,900   

Aitake Wakiya

   Director      3,300   

Kazuto Ono

   Director      2,300   

Akiyoshi Kimura

   Director      2,200   

Eiji Osanai

   Director      1,900   

Kunitaro Saida

   Director      0   

Haruhiko Kato

   Director      0   

Kengo Uramoto

   Audit & Supervisory Board Member      3,950   

Makoto Araki

   Audit & Supervisory Board Member      6,900   

Tadashi Ohe

   Audit & Supervisory Board Member      39,000   

Osami Yoshida

   Audit & Supervisory Board Member      0   

Kuniyoshi Kitamura

   Audit & Supervisory Board Member      2,200   
     

 

 

 
   Total      353,441   
     

 

 

 

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 144,000 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 256,000 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 303,000 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 335,000 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, 2013:

 

Name of major shareholder

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

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

     59,911,200        4.5

Japan Trustee Services Bank, Ltd. (Trust Account)

     53,302,300         4.0

The Dai-Ichi Mutual Life Insurance Company, Limited

     37,416,380        2.8

State Street Bank and Trust Company

     36,555,985         2.7

Barclays Capital

     30,000,000        2.3

Moxley and Co.

     23,634,424         1.8

Bank of Mizuho

     22,558,173         1.7

Northern Trust Company (AVFC) Sub Account American Client

     20,191,600         1.5

Sompo Japan Insurance Inc.

     18,799,987        1.4

Nomura Securities CO., LTD

     18,562,600                            1.4

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 196,764,060 shares (14.75% of total issued shares) of treasury stock.
  4: Apart from the above shares, The Bank of Mizuho, Limited held 9,057,000 shares contributed to a trust fund for its retirement and severance plans.

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

As of December 31, 2013, 14.7% of the issued shares of common stock, including the Company’s treasury stock, were held of record by 234 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

 

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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 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, 2014.

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 11 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, 2013 and 2012 and for each of the three years in the period ended December 31, 2013 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, 2011, 2012, and 2013 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

 

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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.

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 2013, despite the challenging business environment characterized by the prolonged 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 ¥65 per share [already distributed], and year-end dividend of ¥65  per share), the same dividend amount as the previous year (including the commemorative dividend).

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 three other regional markets in Japan (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          

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 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   

2013 1(st) quarter

     3,670        3,185        1,061.75        862.62        12,650.26         10,398.61   

         2(nd) quarter

     4,115        3,070        1,289.77         971.33        15,942.60         11,805.78   

         3(rd) quarter

     3,480        2,913        1,232.02         1,103.94        14,953.29         13,188.14   

         4(th) quarter

     3,410        3,035        1,302.87         1,138.75        16,320.22         13,748.94   

2013 Year

     4,115        2,913        1,302.87         862.62        16,320.22         10,398.61   

 

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

Period

       High              Low              High              Low                  High                      Low          

2013 July

   ¥ 3,480      ¥ 3,005        1,232.02        1,127.01       ¥ 14,953.29      ¥ 13,562.70   

         August

     3,210        2,929        1,196.17        1,103.94        14,466.16        13,188.14   

         September

     3,260        2,913        1,223.12        1,107.90        14,817.50        13,407.53   

         October

     3,220        3,035        1,222.56        1,138.75        14,799.28        13,748.94   

         November

     3,410        3,060        1,261.04        1,171.20        15,729.09        14,026.17   

         December

     3,410        3,240        1,302.87        1,222.20        16,320.22        15,112.54   

2014 January

     3,330        2,995        1,308.08        1,211.22        16,164.01        14,764.57   

         February

     3,197        2,889        1,234.54        1,139.27        15,094.54        13,995.86   

Trading in foreign markets

The Company’s ADRs are listed on the New York Stock Exchange (“NYSE”).

Since the Company’s 1969 public offering in the United States of U.S.$9,000,000 principal amount of its 6 1/2 % Convertible Debentures due 1984, there has been limited trading in the over-the-counter market in the Company’s ADRs. Since March 16, 1998, each ADR represents one share of the Company’s common stock. The Company’s ADSs had been quoted on the National Association of Securities Dealers Automated Quotation system (“NASDAQ”) from 1972 to September 13, 2000 under the symbol CANNY.

On September 14, 2000, Canon listed its ADSs on the NYSE under the symbol CAJ. The table below displays historical high and low prices of our ADSs on the NYSE.

 

     NYSE
(Canon Inc.)
 
     (U.S. dollars)  

Period

   High      Low  

2009 Year

   $ 43.950      $ 21.230   

2010 Year

     52.150        36.800   

2011 Year

     52.300        41.700   

2012 1(st) quarter

     48.340        42.460   

         2(nd) quarter

     48.480        37.820   

         3(rd) quarter

     40.270        31.210   

         4(th) quarter

     40.940        29.810   

2012 Year

     48.480        29.810   

2013 1(st) quarter

     40.430        34.690   

         2(nd) quarter

     38.890        32.090   

         3(rd) quarter

     34.800        29.820   

         4(th) quarter

     33.550        31.110   

2013 Year

     40.430        29.820   

 

     (Canon Inc.)  
     (U.S. dollars)  

Period

   High      Low  

2013 July

   $ 34.800       $ 30.710   

         August

     32.630         29.820   

         September

     33.060         30.950   

         October

     33.000         31.190   

         November

     33.550         31.110   

         December

     33.440         31.540   

2014 January

     31.950         29.020   

         February

     31.390         28.670   

 

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The depositary and agent of the ADRs is JPMorgan Chase Bank, N.A., located at 1 Chase Manhattan Plaza, Floor 58, New York, N.Y. 10005-1401, U.S.A.

B. Plan of distribution

Not applicable.

C. Markets

See Item 9A “Offer and listing details”.

D. Selling shareholders

Not applicable.

E. Dilution

Not applicable.

F. Expenses of the issue

Not applicable.

Item 10. Additional Information

A. Share capital

Not applicable.

B. Memorandum and articles of association

Objects and Purposes in the Company’s Articles of Incorporation

The objects and purposes of the Company, as provided in Article 2 of the Company’s Articles of Incorporation, are to engage in the following businesses:

 

(1) Manufacture and sale of optical machineries and instruments of various kinds.

 

(2) Manufacture and sale of acoustic, electrical and electronic machineries and instruments of various kinds.

 

(3) Manufacture and sale of precision machineries and instruments of various kinds.

 

(4) Manufacture and sale of medical machineries and instruments of various kinds.

 

(5) Manufacture and sale of general machineries, instruments and equipment of various kinds.

 

(6) Manufacture and sale of parts, materials, etc. relative to the products mentioned in each of the preceding items.

 

(7) Production and sale of software products.

 

(8) Manufacture and sale of pharmaceutical products.

 

(9) Telecommunications business, and information service business such as information processing service business, information providing service business, etc.

 

(10) Contracting for telecommunications works, electrical works and machinery and equipment installation works.

 

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(11) Sale, purchase and leasing of real properties, contracting for construction works, design of buildings and supervision of construction works.

 

(12) Manpower providing business, property leasing business and travel business.

 

(13) Business relative to investigation, analysis of the environment and purification process of soil, water, etc.

 

(14) Any and all business relevant to any of the preceding items.

Provisions Regarding Directors

There is no provision in the Company’s Articles of Incorporation as to a Director’s power to vote on a proposal, arrangement or contract in which the Director is materially interested, but, under the Corporation Law of Japan, the law relating to joint stock corporations (known in Japanese as kabushiki kaisha) which came into effect on May 1, 2006, a director is required to refrain from voting on such matters at meetings of the board of directors.

The Corporation Law of Japan provides that compensation for directors is determined at a general meeting of shareholders of a company. Within the upper limit approved at the shareholders’ meeting, the board of directors determines the amount of compensation for each director. The board of directors may, by its resolution, leave such decision to the discretion of the company’s representative director.

The Corporation Law of Japan provides that the incurrence by a company of a significant loan from a third party should be approved by the company’s board of directors. The Company’s Regulations of the Board of Directors incorporate this requirement.

There is no mandatory retirement age for the Company’s Directors under the Corporation Law of Japan or its Articles of Incorporation.

There is no requirement concerning the number of shares an individual must hold in order to qualify him as a director of the Company under the Corporation Law of Japan or its Articles of Incorporation.

Holding of Shares by Foreign Investors

Other than the Japanese unit share system that is described in “Rights of Shareholders—Japanese Unit Share System” below, there are no limitations on the rights of non-residents or foreign shareholders to hold or exercise voting rights on the Company’s shares imposed by the laws of Japan or the Company’s Articles of Incorporation or other constituent documents.

Rights of Shareholders

Set forth below is information relating to the Company’s common stock, including brief summaries of the relevant provisions of its Articles of Incorporation and Regulations for Handling of Shares, as currently in effect, and of the Corporation Law of Japan and related legislation.

General

The Company’s authorized share capital is 3,000,000,000 shares, of which 1,333,763,464 shares were issued, including the Company’s treasury stock, as of December 31, 2013. On January 5, 2009, a new central clearing system for shares of Japanese listed companies was established pursuant to the Law Concerning Book-Entry Transfer of Corporate Bonds, Shares, etc. (including regulations promulgated thereunder; the “Book-Entry Law”), and the shares of all Japanese companies listed on any Japanese stock exchange, including the Company’s shares, became subject to this new system. On the same day, all existing share certificates for such shares became null and void. At present, the Japan Securities Depository Center, Inc. (“JASDEC”) is the only

 

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institution that is designated by the relevant authorities as a clearing house which is permitted to engage in the clearing operations of shares of Japanese listed companies under the Book-Entry Law. Under the new clearing system, in order for any person to hold, sell or otherwise dispose of shares of Japanese listed companies, it must have an account at an account management institution unless such person has an account at JASDEC. “Account management institutions” are financial instruments traders (i.e., securities companies), banks, trust companies and certain other financial institutions which meet the requirements prescribed by the Book-Entry Law.

Under the Book-Entry Law, any transfer of shares is effected through book entry, and title to the shares passes to the transferee at the time when the transferred number of the shares is recorded at the transferee’s account at an account management institution. The holder of an account at an account management institution is presumed to be the legal owner of the shares held in such account.

Under the Corporation Law of Japan and the Book-Entry Law, in order to assert shareholders’ rights against the Company, a shareholder must have its name and address registered in the register of shareholders of the Company, except in limited circumstances.

The registered beneficial holder of deposited shares underlying the ADSs is the depositary for the ADSs. Accordingly, holders of ADSs will not be able to directly assert shareholders’ rights.

Distributions of Surplus

Under the Corporation Law of Japan, distributions of cash or other assets by joint stock corporations to their shareholders, so called “dividends,” are referred to as “distributions of Surplus” (“Surplus” is defined in “Restriction on Distributions of Surplus” below). The Company may make distributions of Surplus to the shareholders any number of times per fiscal year, subject to certain limitations described in “Restriction on Distributions of Surplus”. Under the Corporation Law of Japan, distributions of Surplus are required to be authorized by a resolution of a general meeting of shareholders.

Under the Articles of Incorporation of the Company, year-end dividends and interim dividends, if any, may be distributed to shareholders (or pledgees) appearing in the register of shareholders as of December 31 and June 30 of each year, respectively.

Distributions of Surplus may be made in cash or in kind in proportion to the number of shares held by each shareholder. A resolution of a shareholders’ meeting must specify the kind and aggregate book value of the assets to be distributed, the manner of allocation of such assets to shareholders, and the effective date of the distribution. If a distribution of Surplus is to be made in kind, the Company may, pursuant to a resolution of shareholders’ meeting, grant a right to its shareholders to require the Company to make such distribution in cash instead of in kind. If no such right is granted to shareholders, the relevant distribution of Surplus must be approved by a special resolution of a general meeting of shareholders.

Restriction on Distributions of Surplus

When the Company makes a distribution of Surplus, the Company must, until the aggregate amount of its additional paid-in capital and legal reserve reaches one-quarter of its stated capital, set aside in its additional paid-in capital and/or legal reserve an amount equal to one-tenth of the amount of Surplus so distributed.

The amount of Surplus at any given time must be calculated in accordance with the following formula:

A + B + C + D – (E + F + G)

In the above formula, the letters from “A” to “G” are defined as follows:

“A”= the total amount of “other capital surplus” and “other retained earnings,” each such amount that is appearing on its non-consolidated balance sheet as of the end of the last fiscal year;

 

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“B”= (if the Company has disposed of its treasury stock after the end of the last fiscal year) the amount of the consideration for such treasury stock received by the Company less the book value thereof;

“C”= (if the Company has reduced its stated capital after the end of the last fiscal year) the amount of such reduction less the portion thereof that has been transferred to additional paid-in capital or legal reserve (if any);

“D”= (if the Company has reduced its additional paid-in capital or legal reserve after the end of the last fiscal year) the amount of such reduction less the portion thereof that has been transferred to stated capital (if any);

“E”= (if the Company has cancelled its treasury stock after the end of the last fiscal year) the book value of such treasury stock;

“F”= (if the Company has distributed Surplus to its shareholders after the end of the last fiscal year) the total book value of the Surplus so distributed;

“G”= certain other amounts set forth in the ordinances of the Ministry of Justice, including (if the Company has reduced Surplus and increased its stated capital, additional paid-in capital or legal reserve after the end of the last fiscal year) the amount of such reduction and (if the Company has distributed Surplus to the shareholders after the end of the last fiscal year) the amount set aside in the additional paid-in capital or legal reserve (if any) as required by the ordinances of the Ministry of Justice.

The aggregate book value of Surplus distributed by the Company may not exceed a prescribed distributable amount (the “Distributable Amount”), as calculated on the effective date of such distribution. The Distributable Amount at any given time shall be equal to the amount of Surplus less the aggregate of the following:

(a) the book value of the Company’s treasury stock;