20-F 1 d810632d20f.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, 2014

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, 2014, 1,091,831,827 shares of common stock, including 26,472,812 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      15   
   Sources of supply      16   
   Marketing and distribution      16   
   Service      16   
   Patents and licenses      17   
   Competition      17   
   Environmental regulations      19   
   Other regulations      21   
C.    Organizational structure      22   
D.    Property, plants and equipment      23   
Item 4A.    Unresolved Staff Comments      26   
Item 5.    Operating and Financial Review and Prospects      26   
A.    Operating results      26   
   Overview      26   
   Critical accounting policies and estimates      29   
   Consolidated results of operations      32   
  

2014 compared with 2013

     32   
  

2013 compared with 2012

     36   
  

Foreign operations and foreign currency transactions

     40   
B.    Liquidity and capital resources      40   
C.    Research and development, patents and licenses      42   
D.    Trend information      43   
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      54   
C.    Board practices      63   
D.    Employees      63   
E.    Share ownership      64   
Item 7.    Major Shareholders and Related Party Transactions      65   
A.    Major shareholders      65   
B.    Related party transactions      65   
C.    Interests of experts and counsel      66   
Item 8.    Financial Information      66   
A.    Consolidated financial statements and other financial information      66   
   Consolidated financial statements      66   
   Legal proceedings      66   
   Dividend policy      66   
B.    Significant changes      67   
Item 9.    The Offer and Listing      67   
A.    Offer and listing details      67   
   Trading in domestic markets      67   
   Trading in foreign markets      67   
B.    Plan of distribution      68   
C.    Markets      68   
D.    Selling shareholders      68   
E.    Dilution      68   
F.    Expenses of the issue      69   
Item 10.    Additional Information      69   
A.    Share capital      69   
B.    Memorandum and articles of association      69   
C.    Material contracts      76   
D.    Exchange controls      76   
E.    Taxation      78   
F.    Dividends and paying agents      82   
G.    Statement by experts      82   
H.    Documents on display      82   
I.    Subsidiary information      82   
Item 11.    Quantitative and Qualitative Disclosures about Market Risk      82   
   Market risk exposures      82   
   Equity price risk      82   
   Foreign currency exchange rate and interest rate risk      83   
Item 12.    Description of Securities Other than Equity Securities      84   
A.    Debt securities      84   
B.    Warrants and rights      84   
C.    Other securities      84   
D.    American Depositary Shares      84   

 

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     Page number  
   PART II   
Item 13.    Defaults, Dividend Arrearages and Delinquencies      85  
Item 14.    Material Modifications to the Rights of Security Holders and Use of Proceeds      85   
Item 15.    Controls and Procedures      85   
Item 16A.    Audit Committee Financial Expert      86   
Item 16B.    Code of Ethics      86   
Item 16C.    Principal Accountant Fees and Services      86   
Item 16D.    Exemptions from the Listing Standards for Audit Committees      87   
Item 16E.    Purchases of Equity Securities by the Issuer and Affiliated Purchasers      88   
Item 16F.    Change in Registrant’s Certifying Accountant      89   
Item 16G.    Corporate Governance      89   
   PART III   
Item 17.    Financial Statements      92   
Item 18.    Financial Statements      92   
   Reports of Independent Registered Public Accounting Firm      93   
   Consolidated Balance Sheets      95   
   Consolidated Statements of Income      96   
   Consolidated Statements of Comprehensive Income      97   
   Consolidated Statements of Equity      98   
   Consolidated Statements of Cash Flows      100   
   Notes to Consolidated Financial Statements      101   
   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, 2014 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 13, 2015, the noon buying rate for yen in New York City as reported by the Federal Reserve Bank of New York was ¥121.17= U.S.$1.

The Company’s fiscal year end is December 31. In this Annual Report “2014” refers to the Company’s fiscal year ended December 31, 2014, 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:

   2014      2013      2012      2011      2010  
     (Millions of yen, except average number of shares and per share data)  

Net sales

   ¥ 3,727,252      ¥ 3,731,380      ¥ 3,479,788      ¥ 3,557,433      ¥ 3,706,901   

Operating profit

     363,489        337,277        323,856        378,071        387,552   

Net income attributable to Canon Inc.

     254,797        230,483        224,564        248,630        246,603   

Advertising expenses

     79,765        86,398        83,134        81,232        94,794   

Research and development expenses

     308,979        306,324        296,464        307,800        315,817   

Depreciation of property, plant and equipment

     213,739        223,158        211,973        210,179        232,327   

Increase in property, plant and equipment

     182,343        188,826        270,457        226,869        158,976   

Long-term debt, excluding current installments

     1,148        1,448        2,117        3,368        4,131   

Common stock

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

Canon Inc. stockholders’ equity

     2,978,184        2,910,262        2,598,026        2,551,132        2,645,782   

Total assets

     4,460,618        4,242,710        3,955,503        3,930,727        3,983,820   

Average number of common shares in thousands

     1,112,510        1,147,934        1,173,648        1,215,832        1,234,817   

Per share data:

              

Net income attributable to Canon Inc. stockholders per share:

              

Basic

   ¥ 229.03      ¥ 200.78      ¥ 191.34      ¥ 204.49      ¥ 199.71   

Diluted

     229.03        200.78        191.34        204.48        199.70   

Cash dividends declared

     150.00        130.00        130.00        120.00        120.00   

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

   $ 1.326      $ 1.309      $ 1.498      $ 1.503      $ 1.447   

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 13, 2015, the noon buying rate for yen in New York City as reported by the Federal Reserve Bank of New York was ¥121.17 = U.S.$1.

 

Yen exchange rates per U.S. dollar:

   Average      Term end      High      Low  

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

     98.00         105.25         105.25         86.92  

2014 - Year

     106.63         119.85         121.38         101.11  

         - 1(st) half

        101.28         104.87         101.11  

         - July

        102.75         102.90         101.26  

         - August

        104.00         104.12         101.91  

         - September

        109.66         109.66         104.88  

         - October

        112.09         112.09         105.98  

         - November

        118.70         118.70         113.44  

         - December

        119.85         121.38         117.28  

2015 - January

        117.44         120.20         116.78  

         - February

        119.72         120.38         117.33  

 

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.

Canon’s business activities are deployed globally in Japan, the United States, Europe, Asia, and in other regions. Declines in consumption and restrained investment due to economic downturn in these major markets 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. 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, 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.

The smartphone market has been growing dramatically on a global scale in recent years. Smartphones allow users not only to take photos, but also share them instantly on SNSs and it changed people’s photo taking behavior. If Canon’s digital cameras cannot clearly state their advantages over smartphones’ cameras, Canon could suffer from an erosion of the 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 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.

 

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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 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.

 

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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.

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 maintenance and development of 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, the continued manufacture and sale of such products could adversely affect Canon’s brand image as well as its operating results.

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.

 

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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 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, 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 licensing. The terms and conditions of such licensing or changes in the renewal conditions of such licenses could affect Canon’s business.

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

 

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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, procurement, 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 occurrence 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.

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 2014, 2013, and 2012, Canon’s increases in property, plant and equipment were ¥182,343 million, ¥188,826 million and ¥270,457 million, respectively. In 2014, 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 2015, Canon projects to invest in property, plant and equipment of approximately ¥205,000 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.

 

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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 2014, 80.6% of consolidated net sales were generated outside Japan, with approximately 27.8%, 29.3% and 23.5% 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 will work to realize the optimized global allocation of its production assets based on changes in local conditions in each country. 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 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.

In 2014, Canon enhanced its portfolio with the launch of the A4-size color device imageRUNNER ADVANCE C350iF/C250iF. Canon also launched imageRUNNER 2202/2002, a low-end A3-size monochrome device tailored to the emerging market. 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 imagePRESS C800/C700, the first imagePRESS series addressed to the color light production market, and the imagePRESS C60 for the graphic arts industry. In the high speed continuous feed printer area, the Océ ColorStream 3000 series has enjoyed a good reputation in the market.

In software, services and solutions, Canon was one of the first vendors to launch its application development platform, the “Multifunctional Embedded Application Platform” (“MEAP”) which allows the creation of

 

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customized applications for Canon MFDs enabling users to fully take advantage of the power of our MFDs. Canon is reinforcing its solutions capability through offerings such as imageWARE software suite, business process automation software “Enterprise Imaging Platform” (“EIP”) and Canon MDS, a device management solution that reduces total cost of ownership.

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, including in the managed print service segment, 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 is executing on several initiatives to enhance mobile printing solutions to tackle 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 2014, Canon launched two new digital SLR cameras and strengthened its product lineup. EOS Rebel T5, launched in the first half of the year, is the best model for DSLR beginners to enjoy the art of true photography for both still and moving images in an easy, user-friendly way. The Canon EOS 7D Mark II, launched in the second half of the year, is designed to meet the demands of photographers and videographers who want a camera that can provide a wide range of artistic opportunities. It shoots up to 10 frames per second and has a 65-point all cross-type AF system. The number of available AF points, and whether single line or cross-type, varies depending on the lens. The new DSLR is capable of capturing precise moments of quickly and irregularly moving objects. These new models as well as the current models pushed sales and Canon gained number one market share* in volume terms in 2014 in the major regions, such as the United States, Europe, and Japan. Canon believes there remains considerable room for future growth through development of new products based on state-of-the-art technology following the trend of higher quality picture, small and light weight body and versatile movie functions.

 

* Source: NPD, Nov 2014 for USA / Gfk, Nov 2014 except USA

Canon launched seven new lens products for digital SLR and celebrated a milestone with the production of the 100-millionth EF-series interchangeable lens for EOS cameras in April 2014, including Cinema Lenses (EF-Mount). The interchangeable lens lineup currently exceeds 90 products, including Cinema Lenses (EF-Mount). By enhancing its core capability, Canon has been introducing high-quality and high-performance lenses developed by superior optical technology and new elemental technology, which Canon believes allowed it to maintain its advantage over the competition.

 

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Canon introduced fourteen new models to the compact digital camera market worldwide in 2014. While there has been a strong tendency toward reliance on electronic manufacturing services (“EMS”) in the compact digital camera industry, the EMS manufacturers will likely to be unable to maintain their business and some of them might exit from the market due to the market slowdown. Canon is pressing forward with entire self-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 action cameras are emerging and expanding. Canon aims to expand sales in this market with a product lineup with 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 the new model XF205/200 in its XF series; small sized camcorders equipped with a wide-angle and high magnification lens for use in broadcast news, documentary and independent filmmaking. CINEMA EOS SYSTEM has strengthened its lineup by launching new digital cinema camera named EOS C100 Mark II equipped with the Dual Pixel CMOS AF, 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 a wide variety of market.

Canon experienced robust growth in the field of projectors for business applications, and in particular brighter, installation type projectors. In this market, Canon offers a range of products from an interchangeable lens type to a lens built-in type. Canon launched two new install-type models with the industry’s first short-throw and high shift function as well as a brighter flagship model in 2014, which are strategic and leading models for expanding the projector business and advancing Canon’s position in the market.

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

The newly released CINE-SERVO lens is compatible with 4K cameras with large-format sensors. It has a detachable drive unit and can be used both in broadcast and cinema style shooting, which Canon believes underlies its popularity.

Inkjet printer technology has been evolving, driving expansion of application from home use to 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 home use, Canon offers such printer solutions as PIXMA Cloud Link and PIXMA Printing to tighten the connection with cloud computing, smartphone and tablet PC, whose functionality has been proliferating. Canon also offers My Image Garden, enabling a wide variety of photo-print, an easy-to-use Intelligent Touch System and XL ink tank & ink cartridge. Canon hopes such enhancement of function and service will increase user-friendliness and satisfaction of users.

In this year, Canon launched the new brand MAXIFY in the business inkjet printer segment, targeting the growing SOHO market. The MAXIFY printer series features Canon’s leading inkjet technologies such as high-quality printing with fast printing, and a low total cost of ownership.

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

 

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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’s 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.

Canon’s lineup also includes CanoScan LiDE, the flatbed scanners which use Contact Image Sensor (CIS), and a scanner with Charge-Coupled Devices (CCD) for high resolution. Although the scanner market has continued to shrink, Canon has maintained a number one market share, based on a Canon survey.

- Industry and Others Business Unit -

In the market for semiconductor lithography equipment, investments by memory makers have recovered due to the increase in demand for DRAM and NAND Flash memory, drawn by the growth of the mobile device market such as smartphones. Moreover, investments for image sensor production have been performing well, with expectations of market expansion in on-vehicle cameras and medical devices in addition to mobile devices.

In the market for i-line steppers, investments for automotive devices, power devices and LEDs have been stable while investments for 3D integration with Through-Silicon Via (TSV) are expected to expand.

Through various activities to respond to these market changes, Canon has been developing a “design-in” business style, which enables customer needs to be reflected in the early stage of our product development process, and Canon believes steady progress has been made in developing products with high added value. For example, Canon released a new i-line stepper FPA-3030i5+, optimized for the production of 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. For memory and logic devices, FPA-5550iZ has captured a high share of the i-line stepper market. Canon also aims to gain an increased share of the market for DUV scanners by releasing the high productivity FPA-6300ES6a. Furthermore, to accelerate development of Nano-Imprint Lithography (“NIL”) equipment, Canon acquired Molecular Imprints, Inc. in April 2014, which has top-level intelligence and number of patents granted in NIL technology.

In the market for FPD lithography equipment, investments for large-sized panel production have been recovering due to demand from emerging markets and 4K TVs. Investments for small-to-mid-sized panel production, which had been strong for the last few years, have shrunken drastically. In addition, panel makers are expected to require higher resolution in FPD lithography equipment for both large-sized and mid-to-small-sized panel production.

Under these circumstances, Canon believes MPAsp-H800 series for large-sized panels has contributed to our customers’ production plans by offering world-highest resolution and high productivity. This has helped Canon capture and maintain a large share of the FPD lithography equipment market for large-sized panel production. Furthermore, Canon has released MPAsp-E810 series for small-to-mid-sized panels, with improved resolution. Canon also aims to capture a large share of the market for small-to-mid sized panel production in addition to large-sized panel production.

In the medical equipment market, the digital static X-ray equipment maintains steady growth as a result of a shift in demand from “Computed Radiography” (CR) to “Digital Radiography” (DR). Although competition is increasing along with market expansion, Canon grew its sales and kept a large share of the static DR market owing to such well-received products as equipping an X-ray automatic detection mode, based on a Canon survey. In addition, Canon has recently made strong efforts to promote in the dynamic X-ray equipment market, which is also expanding along with static equipment market. As a result, sales of fluoroscopy and high-end angiography systems have increased.

 

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The ophthalmic equipment market remained stable and Canon’s sales have slightly increased. Also, Canon believes its Canon-branded “Optical Coherence Tomography” (OCT), launched in 2012, has a good reputation, and Canon expects future growth of its sales.

The market of network cameras for video surveillance applications is expected to grow, with the progress of IT and digital technologies. Canon established a dedicated product group at the beginning of 2013 to expand its network camera business by utilizing its proprietary technologies of optics, sensor, imaging, and video streaming. In 2014, Canon launched ten new HD and Full HD network cameras. In addition, with the acquisition of the world’s largest video management software vendor, Milestone Systems, by Canon Europe in July, Canon as a whole has been accelerating enhancement of its video surveillance business. Furthermore, on March 3, 2015, Canon commenced a public tender offer for all of the issued shares of Axis AB, a global leader in the network video solutions industry. Canon will further ensure its goal of becoming the world leader in network surveillance camera systems and aim for a further leap forward.

NET SALES BY SEGMENT

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

 

     Years ended December 31  
             2014              change             2013              change             2012          
     (Millions of yen, except percentage data)  

Office

   ¥ 2,078,732        3.9 %   ¥ 2,000,073        13.8 %   ¥ 1,757,575   

Imaging System

     1,343,194        -7.3        1,448,938        3.1       1,405,971   

Industry and Others

     398,765         6.4       374,870        -8.1        407,840   

Eliminations

     (93,439 )             (92,501 )             (91,598
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   ¥ 3,727,252        -0.1   ¥ 3,731,380        7.2 %   ¥ 3,479,788   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

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  
             2014              change             2013              change             2012          
     (Millions of yen, except percentage data)  

Japan

   ¥ 724,317        1.2 %   ¥ 715,863        -0.6   ¥ 720,286   

Americas

     1,036,500        -2.2        1,059,501        12.7       939,873   

Europe

     1,090,484        -3.1        1,124,929        10.9       1,014,038   

Asia and Oceania

     875,951        5.4       831,087        3.2       805,591   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   ¥ 3,727,252        -0.1   ¥ 3,731,380        7.2 %   ¥ 3,479,788   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

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.

 

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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. and Canon Canada 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 2014 and 2013, OEM sales to Hewlett-Packard constituted 17.4% and 17.6%, 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.

Service

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

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

 

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Canon services its copying machines, MFDs, printers, 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.

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.

 

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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.

- Imaging System Business Unit -

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.

Average prices for compact digital cameras in the industry increased in 2014 from the previous year. Market contraction is 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.

Canon’s primary competitors in the compact digital camera market are Sony Corporation; Nikon Corporation; and Samsung Electronics 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.

 

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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 believes 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 Korean market and the growing Chinese market. Canon’s sales and service support systems have also received high accolades from the customers in these markets. 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 was expanded to medical and measurement equipment from July 2014. An additional four substances will be published as restricted substances in 2015, and will be restricted from 2019. In parallel with these developments, all the RoHS exempted applications for which the restricted substances can be used are now under review. If these exemptions 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 waste EEE. 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 the future, 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.

 

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 of very high concern are contained in an article, the substances must be communicated to the recipient or consumer of the article. Furthermore, additional restrictions on the use of certain substances can be proposed at any time by the ECHA (European Chemical Agency) or member states, and, some of them have been already adopted and others are now under discussion, manufacturers such as Canon must take steps to address such new restrictions.

 

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Canon keeps meeting these existing and newly-added requirements under the REACH Regulation, and their implementation 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” were applied from 2015. For imaging equipment, the industry 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. By the 1st revision of the VA, commitments will become tighter than ever because the European authorities and NGOs are expected to require a stricter VA. In addition, many new or revised implementing measures (expanded both in scope and requirements) are now considered, and some of them will cover Canon’s products. Canon is continuing to comply with requirement under 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

E-waste recycling laws have been enacted or proposed in more than twenty American states. Although most 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.

 

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 list of products falling under the waste electrical and electronic products catalogue on February 9, 2015 includes printer, copying machine and facsimile machine. The Regulation of those payment fees described above will be enforced on March 1, 2016.

 

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These requirements will likely increase Canon’s costs and could adversely affect 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, and necessary procedures are being carrying out. Additional costs may arise if these investigations reveal that additional 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, during the reporting period, 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, 2014, 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, 2014, 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 2014 was approximately ¥123 thousand. The net profit was substantially less than that.

   

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. Total gross sales for this activity during the year 2014 was in foreign currency of approximately ¥42 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. Total gross sales under this contract during the year 2014 was in foreign currency of approximately ¥62 thousand. The net profit was substantially less than that.

 

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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. Total gross sales under this contract during the year 2014 was in foreign currency of approximately ¥114 thousand. The net profit was substantially less than that.

   

Canon Australia Pty. Ltd., a wholly-owned Australian subsidiary, has service and lease contracts for two copier machines with the Iranian embassy in Canberra, Australia. Total gross sales under this contract during the year 2014 was in foreign currency of approximately ¥540 thousand. The net profit was substantially less than that.

   

Canon Deutschland GmbH, a wholly-owned German subsidiary of Canon Europe N.V. (“CENV”), a wholly-owned Dutch subsidiary of Canon Finance Netherlands B.V., which is wholly-owned by Canon Inc., has a service contract for three copier machines with the consulate general of Iran in Munich, Germany. Total gross sales under this contract during the year 2014 was in foreign currency of approximately ¥64 thousand. The net profit was substantially less than that.

   

Canon (Austria) GmbH, a wholly-owned Austrian subsidiary of CENV, has a rental contract for three copier machines with the Iranian embassy in Hamburg, Germany. Total gross sales for this contract during the year 2014 was in foreign currency of approximately ¥1,631 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 2014 was in foreign currency of approximately ¥818 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 2014 was approximately ¥26 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 gross sales under these contracts during the year 2014 was in foreign currency of approximately ¥366 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, 2014 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, 2014, Canon Inc. had 261 consolidated subsidiaries and 7 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, 2014.

 

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%   

 

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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, 2014 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

Hiratsuka Plant, Kanagawa

     1,099      

R&D of display products and manufacturing of semiconductor devices

Tamagawa Office, Kanagawa

     383      

Quality engineering

Oita Plant, Oita

     283      

Manufacturing of semiconductor devices

Yako Office, Kanagawa

     905      

Development of inkjet printers, inkjet chemical products

Utsunomiya Office, 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

     3,176      

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

 

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Name and location

   Floor space
(including
leased space)
    

Principal activities and products manufactured

Domestic    (Thousands of
square feet)
      

Canon Precision Inc., Aomori

     1,503      

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

     1,872     

Toner cartridges and rubber functional components

Canon Components, Inc., Saitama

     610     

Contact image sensors, inkjet cartridges and medical equipment

Oita Canon Inc., Oita

     1,218     

Digital cameras, lenses and digital video camcorders

Nagahama Canon Inc., Shiga

     1,093     

Toner cartridges and A-Si drums

Oita Canon Materials Inc., Oita

     2,949     

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

     981     

Inkjet printers and inkjet cartridges

Canon Semiconductor Equipment Inc., Ibaraki

     345     

Development and production of semiconductor production-related equipment

Canon Ecology Industry Inc., Ibaraki

     651     

Recycling of toner cartridges, repair and recycling of business machines

Nisca Corporation, Yamanashi

     380     

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

     749     

Production equipment for electron devices, flat panel display and semiconductors

Canon Machinery Inc., Shiga

     622      

Automated production equipment and semiconductor production-related equipment

Canon Tokki Corporation, Niigata, Kanagawa and Tokyo

     253     

Vacuum technology-related equipment

Nagasaki Canon Inc., Nagasaki

     477      

Digital cameras

Hita Canon Materials Inc., Oita

     369      

Rubber functional components

 

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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

     489      

Manufacturing and recycling of toner cartridges

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

     2,550      

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

Océ-Printing Systems GmbH, Poing, Germany

     1,232      

High speed digital production printing systems

Americas

     

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

     1,679      

Toner cartridges, molds and remanufacturing of copying machines

Canon Environmental Technologies, Inc., Virginia, U.S.

     185      

Recycling of toner cartridges

Asia

     

Canon Inc., Taiwan, Taiwan

     1,717      

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

     1,157      

Digital cameras, digital video camcorders and contact image sensors

Canon Prachinburi (Thailand) Ltd., Prachinburi, Thailand

     904      

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., Zhongshan, China

     1,335      

Laser printers

Canon Vietnam Co., Ltd., Hanoi, Vietnam

     3,482      

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

     721      

Copying machines and laser printer peripherals

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

     308      

Components

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

     898      

Laser printers

 

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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

Toride Plant, Ibaraki

  

New Manufacturing Training Center

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

Overseas

  

Canon Canada Inc.

  

New Administration base

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 FPD (Flat panel display) 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 2014, although the United States and other developed countries were initially expected to bring about a return to a path of full-fledged growth, such expectations came up short due to the ongoing occurrence of such unforeseen circumstances as the conflict between Russia and Ukraine. In the U.S., despite the negative impact of the major cold wave that struck at the beginning of the year, the economy showed steady signs of recovery, buoyed by the improvement in employment conditions and healthy growth in consumer spending. In Europe, the economy remained sluggish due to such factors as the negative impact of Russia’s deteriorating economy on neighboring euro area countries. The pace of economic expansion in China was modest while other emerging countries in Southeast Asia and South America faced slowdowns in market growth due to economic stagnation. In Japan, with the economy yet to recover from the decline following the rush in demand leading up to the hike in the country’s consumption tax, growth fell short of the rate recorded in the previous year.

 

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Market environment

Looking at the markets in which Canon operates amid these conditions, demand for MFDs and laser printers maintained steady growth. Demand for interchangeable-lens digital cameras continued to face harsh conditions due to the economic slowdown. Demand for digital compact cameras continued to shrink in both developed countries and emerging markets. Demand for inkjet printers, decreased due to the sluggish economies of Asia and Europe. In the industry and others sector, a rebound in capital investment for both memory devices and image sensors led to a pickup in demand for semiconductor lithography equipment. Additionally, demand for lithography equipment used in the production of FPDs increased for large-size panels.

The average value of the yen during the year was ¥106.18 against the U.S. dollar, a year-on-year depreciation of approximately ¥8, and ¥140.62 against the euro, a year-on-year depreciation of approximately ¥11.

Summary of operations

MFDs and laser printers enjoyed solid demand during the year and industrial equipment sales increased significantly. Within the shrinking market for interchangeable-lens digital cameras and digital compact cameras, less-than-expected demand during the year-end shopping season led to a decline in net sales. As a result, despite the positive effects of favorable currency exchange rates, net sales for the year decreased by 0.1% year on year to ¥3,727.3 billion. The gross profit ratio, however, rose 1.7 points year on year to 49.9% 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 due to the depreciation of the yen, Group-wide efforts to reduce spending contributed to limiting operating expenses to ¥1,498.0 billion, an increase of just 2.5% year on year. As a result, operating profit increased by 7.8% year on year to ¥363.5 billion. Other income increased by ¥9.4 billion due to foreign currency exchange gains while income before income taxes increased by 10.3% to ¥383.2 billion. Net income attributable to Canon Inc. increased by 10.5% to ¥254.8 billion. Accordingly, despite the slight decline in net sales, Canon achieved profit growth.

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

 

    2014     2013     2012     2011     2010  

Net sales (Millions of yen)

  ¥ 3,727,252     ¥ 3,731,380     ¥ 3,479,788     ¥ 3,557,433     ¥ 3,706,901  

Gross profit to net sales ratio

    49.9     48.2     47.4     48.8     48.1

R&D expense to net sales ratio

    8.3     8.2     8.5     8.7     8.5

Operating profit to net sales ratio

    9.8     9.0     9.3     10.6     10.5

Inventory turnover measured in days

    50 days        52 days        57 days        46 days        35 days   

Debt to total assets ratio

    0.0     0.1     0.1     0.3     0.3

Canon Inc. stockholders’ equity to total
assets ratio

    66.8     68.6     65.7     64.9     66.4

 

Note: Inventory turnover measured in days is determined by: 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.

 

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Net sales is one such KPI. Canon derives net sales primarily from the sale of products and, to a 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 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.

 

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Critical accounting policies and estimates

The consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and based on the selection and application of significant accounting policies which require management to make significant estimates and assumptions. These estimates and assumptions include future market conditions, net sales growth rate, gross margin and discount rate. Though Canon believes that the estimates and assumptions are reasonable, actual future results may differ from these estimates and assumptions. Canon believes that the following are the more critical judgment areas in the application of its accounting policies that currently affect its financial condition and results of operations.

Revenue recognition

Canon generates revenue principally through the sale of office and imaging system products, equipment, supplies, and related services under separate contractual arrangements. Canon recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred and title and risk of loss have been transferred to the customer or services have been rendered, the sales price is fixed or determinable, and collectibility is probable.

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

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

 

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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.

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.

 

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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 primarily 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 lives, which range from 8 years to 16 years. Customer relationships are amortized principally using the declining-balance method over the estimated useful life of 5 years.

Income tax uncertainties

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

Valuation of deferred tax assets

Canon currently has significant deferred tax assets, which are subject to periodic recoverability assessments. Realization of Canon’s deferred tax assets is principally dependent upon its achievement of projected future taxable income. Canon’s judgments regarding future profitability may change due to future market conditions, its ability to continue to successfully execute its operating restructuring activities and other factors. Any changes in these factors may require possible recognition of significant valuation allowances to reduce the net carrying value of these deferred tax asset balances. When Canon determines that certain deferred tax assets may not be recoverable, the amounts, which may not be realized, are charged to income tax expense and will adversely affect net income.

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 2014, Canon estimated a weighted-average discount rate used to determine benefit obligations of 1.1% for Japanese plans and 2.9% for foreign plans and a weighted-average expected long-term rate of return on plan assets of 3.1% for Japanese plans and 4.9% for foreign plans. In estimating the discount rate, Canon uses available information about rates of return on high-quality fixed-income

 

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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 2014, a decrease of 50 basis points in the discount rate increases the projected benefit obligation by approximately ¥91,609 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 2014, a change of 50 basis points in the expected long-term rate of return on plan assets would cause a change of approximately ¥4,218 million in net periodic benefit cost. Canon multiplies management’s expected long-term rate of return on plan assets by the value of its plan assets to arrive at the expected return on plan assets that is included in pension expense. Canon defers recognition of the difference between this expected return on plan assets and the actual return on plan assets. The net deferral affects future pension expense.

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

Consolidated results of operations

2014 compared with 2013

Summarized results of operations for 2014 and 2013 are as follows:

 

     2014        Change       2013  
     (Millions of yen, except per share
amounts and percentage data)
 

Net sales

   ¥ 3,727,252        -0.1   ¥ 3,731,380   

Operating profit

     363,489        +7.8       337,277   

Income before income taxes

     383,239        +10.3       347,604   

Net income attributable to Canon Inc.

     254,797        +10.5       230,483   

Net income attributable to Canon Inc. stockholders per share:

       

Basic

     229.03        +14.1       200.78   

Diluted

     229.03        +14.1       200.78   

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

Sales

The shrinking market for interchangeable-lens digital cameras and digital compact cameras, and less-than-expected demand during the year-end shopping season led to a major decline in net sales in Imaging System Business Unit. However, due to the stable demand for MFDs and laser printers, and industrial equipment sales along with the positive effects of favorable currency exchange rates, Canon’s consolidated net sales in 2014 totaled ¥3,727,252 million, a slight decrease of 0.1% from the previous year.

Overseas operations are significant to Canon’s operating results and generated 80.6% of total net sales in 2014. Such sales are denominated in the applicable local currency and are subject to fluctuations in the value of

 

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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 ¥106.18 against the U.S. dollar, a year-on-year depreciation of approximately ¥8, and ¥140.62 against the euro, a year-on-year depreciation of approximately ¥11. The effects of foreign exchange rate fluctuations positively affected net sales by approximately ¥186,000 million in 2014. This favorable impact consisted of approximately ¥98,200 million for the U.S. dollar denominated sales, ¥66,800 million for the euro denominated sales and ¥21,000 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 2014 and 2013 was 50.1% and 51.8%, respectively.

Gross profit

Canon’s gross profit in 2014 increased by 3.5% to ¥1,861,472 million from 2013. The gross profit ratio also increased by 1.7 points year on year to 49.9%. The increase in the gross profit ratio reflects ongoing cost-cutting efforts 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 the negative effect of depreciation of the yen, group-wide efforts to thoroughly reduce spending contributed to limit the increase year on year to 2.5% to a total of ¥1,497,983 million.

Operating profit

Operating profit in 2014 increased 7.8% from 2013 to a total of ¥363,489 million. The ratio of operating profit to net sales increased 0.8% to 9.8% from 2013.

Other income (deductions)

Other income (deductions) for 2014 increased ¥9,423 million to ¥19,750 million, mainly due to foreign currency exchange gain.

Income before income taxes

Income before income taxes in 2014 was ¥383,239 million, an increase of 10.3% from 2013, and constituted 10.3% of net sales.

Income taxes

Provision for income taxes in 2014 increased by ¥9,912 million from 2013. The effective tax rate during 2014 remained consistent with 2013. The effective tax rate for 2014 was 30.8%, which was lower than the statutory tax rate in Japan. This was mainly due to the tax credit for R&D expenses.

 

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Net income attributable to Canon Inc.

As a result, net income attributable to Canon Inc. in 2014 increased by 10.5% to ¥254,797 million, which represents 6.8% 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, FPD (Flat panel display) 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.

Sales by segment

Please refer to the table of sales by segment in Note 21 of the Notes to Consolidated Financial Statements.

Canon’s sales by segment are summarized as follows:

 

     2014       Change       2013  
     (Millions of yen, except percentage data)  

Office

   ¥ 2,078,732       +3.9 %   ¥ 2,000,073   

Imaging System

     1,343,194       -7.3        1,448,938   

Industry and Others

     398,765       +6.4       374,870   

Eliminations

     (93,439            (92,501
  

 

 

   

 

 

   

 

 

 

Total

   ¥ 3,727,252       -0.1   ¥ 3,731,380   
  

 

 

   

 

 

   

 

 

 

Within the Office Business Unit, office MFDs sales increased steadily from the year-ago period, led by healthy demand for new imageRUNNER ADVANCE C350/C250-series models, Canon’s first color A4 (letter and legal-sized)-model imageRUNNER ADVANCE machines, and the imagePRESS C800/C700, Canon’s first color models targeting the light production market, along with the A3 (12” x 18”)-model imageRUNNER ADVANCE C5200 series, which continues to be well accepted in the market. The Océ ColorStream 3000 series of high-speed continuous-feed printers continued to enjoy solid sales growth from the previous year. Among laser printers, although color models and multifunction models recorded sales growth, total sales volume decreased slightly from the year-ago period owing to the decrease in demand for monochrome models in European and other markets that have suffered prolonged economic stagnation. As a result, coupled with the positive effects of favorable currency exchange rates, sales for the business unit totaled ¥2,078.7 billion, a year-on-year increase of 3.9%, while operating profit totaled ¥292.1 billion, an increase of 9.4%.

Within the Imaging System Business Unit, although sales volume of interchangeable-lens digital cameras declined owing to the shrinking market—in Japan as a result of the reaction following the rush in demand prior to the consumption tax increase, and in Europe and other markets due to worsening economic conditions—the advanced-amateur-model EOS 7D Mark II achieved healthy growth, enabling Canon to maintain the market’s top

 

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share. Despite a decline in total sales volume for digital compact cameras, sales of high-added-value models featuring high image quality and high-magnification zoom capabilities, such as the PowerShot G7 X and PowerShot SX60 HS/SX700 HS, recorded solid growth, contributing to an improvement in profitability. Inkjet printer hardware sales increased for the fourth quarter from the year-ago period thanks to the introduction of new products for the year-end shopping season and marketing tailored to geographical characteristics, but sales volume for the year decreased due to economic sluggishness in Asia and Europe. Sales of consumable supplies increased from the previous year owing to the steady accumulation of printer units currently operating in the market. As a result, including the positive effect of favorable currency change rates, sales for the business unit decreased by 7.3% to ¥1,343.2 billion year on year, while operating profit declined 4.5% to ¥194.6 billion.

In the Industry and Others Business Unit, ongoing investment following the recovery in the second half of the previous year by memory device manufacturers led to increased unit sales of semiconductor lithography equipment for memory devices and image sensors. Amid increasing market demand for higher definition tools, lithography systems for the creation of high-definition mid- and small-size panels, in addition to a model introduced in the second half of the previous year for large panels, recorded healthy growth, contributing to the boosting of both sales volume and market share. In medical equipment, sales volume of new digital radiography systems, including wireless static-image models and models capable of capturing dynamic images, grew steadily, fueling sales growth. Consequently, sales for the business unit totaled ¥398.8 billion, an increase of 6.4% year on year, while operating profit, although showing an improvement from the previous year, recorded a loss of ¥21.8 billion owing to investment, including R&D expenses, into next-generation technologies.

Intersegment sales of ¥93,439 million, representing 2.5% of total sales, are eliminated from total sales for the three segments, and are described as “Eliminations”.

Sales by geographic area

Please refer to the table of sales by geographic area in Note 21 of the Notes to Consolidated Financial Statements.

A summary of net sales by geographic area in 2014 and 2013 is provided below:

 

     2014        Change       2013  
     (Millions of yen, except percentage data)  

Japan

   ¥ 724,317        +1.2 %   ¥ 715,863   

Americas

     1,036,500        -2.2        1,059,501   

Europe

     1,090,484        -3.1        1,124,929   

Asia and Oceania

     875,951        +5.4       831,087   
  

 

 

    

 

 

   

 

 

 

Total

   ¥ 3,727,252        -0.1   ¥ 3,731,380   
  

 

 

    

 

 

   

 

 

 

 

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 2014 are summarized as follows.

In Japan, although sales volume of digital compact cameras declined, net sales increased by 1.2% from the previous year due to solid growth in office MFDs.

In the Americas, despite the favorable effect from depreciation of the yen against U.S. dollar and solid demand for inkjet printers, net sales decreased by 2.2% from the previous year owing to the decline of compact digital camera market.

Despite the favorable effect from depreciation of the yen against euros and solid demand for office MFDs in sluggish economic condition, net sales decreased by 3.1% from the previous year due to the price reduction of interchangeable-lens digital cameras and shrinking of digital compact camera market in Europe.

 

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In Asia and Oceania, although sales volume of interchangeable-lens digital cameras and digital compact cameras declined, net sales increased by 5.4% from the previous year due to solid demand for office MFDs coupled with the positive effects of depreciation of the yen.

Operating profit by segment

Please refer to the table of segment information in Note 21 of the Notes to Consolidated Financial Statements.

Operating profit for the Office Business Unit in 2014 increased by 9.4% to ¥292,057 million, resulting from the sales increase including the positive effects of favorable currency exchange rates.

Despite operating profit for the Imaging System Business Unit in 2014 decreased by 4.5% to ¥194,601 million, in response to the sales decline, operating profit ratio increased from previous year, owing to the improvement in profitability from the sales shift to high-added-value models in camera, along with the positive effects of favorable currency exchange rates.

Operating profit for the Industry and Others Business Unit in 2014, despite an improvement from the previous year resulted from sales increase, recorded a loss of ¥21,801 million owing to investment, including R&D expenses, into next-generation technologies.

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.

 

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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.

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.

 

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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, FPD (Flat panel display) 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.

Sales by segment

Please refer to the table of sales by segment in Note 21 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%.

 

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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”.

Sales by geographic area

Please refer to the table of sales by geographic area in Note 21 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.

 

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Operating profit by segment

Please refer to the table of segment information in Note 21 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.

Foreign operations and foreign currency transactions

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

The operating profit on foreign operation sales is usually lower than that from domestic operations because foreign operations consist mainly of marketing activities. Marketing activities are generally less profitable than production activities, which are mainly conducted by the Company and its domestic subsidiaries. Please refer to the table of geographic information in Note 21 of the Notes to Consolidated Financial Statements.

B. Liquidity and capital resources

Cash and cash equivalents increased by ¥55,671 million to ¥844,580 million in fiscal 2014 compared to the previous year. Canon’s cash and cash equivalents are typically denominated in Japanese yen and in U.S. dollars, with the remainder denominated in other currencies.

Net cash provided by operating activities increased by ¥76,285 million to ¥583,927 million in fiscal 2014 compared to the previous year. The major component of Canon’s cash inflow is cash received from customers, and the major components of Canon’s cash outflow are payments for parts and materials, selling, general and administrative expenses, R&D expenses and income taxes.

For fiscal 2014, cash inflow from operating activities increased, due to the increasing profit as well as an improvement in working capital. There were no significant changes in Canon’s collection rates. Cash outflow for payments for parts and materials decreased, as a result of decreased inventory level. Cash outflow for income taxes increased due to an increase in taxable income.

Net cash used in investing activities increased by ¥19,086 million to ¥269,298 million in fiscal 2014. This reflects the acquisition of Milestone Systems, to enhance Canon’s network camera business, and several other companies. Purchases of fixed assets were focused on items relevant to new products.

Canon defines “free cash flow” as cash flows from operating activities less cash flows from investing activities. For fiscal 2014, free cash flow totaled ¥314,629 million as compared with ¥257,430 million for fiscal 2013. 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 has also commenced a public tender offer for all of the issued shares of Axis AB on March 3, 2015, in order to further ensure its goal of becoming the world leader in network surveillance camera systems for consideration of a maximum amount of approximately

 

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23.6 billion Swedish krona (approximately ¥333.7 billion with translation at the rate of ¥14.13 = 1 Swedish krona). Canon’s management seeks to meet its capital requirements, including the acquisition of Axis AB, with generating cash flow principally from its operating activities. Therefore, its capital resources are primarily sourced from internally generated funds. Accordingly, Canon includes information with regard to free cash flow as management frequently monitors this indicator, and believes that such indicator is beneficial to an investor’s understanding. Furthermore, Canon’s management believes that this indicator is significant in understanding Canon’s current liquidity and the alternatives of use in financing activities because it takes into consideration its operating and investing activities. Canon refers to this indicator together with relevant U.S. GAAP financial measures shown in its consolidated statements of cash flows and consolidated balance sheets for cash availability analysis.

Net cash used in financing activities totaled ¥300,886 million in fiscal 2014, mainly resulting from repurchase of treasury stock of ¥149,813 million, and dividends of ¥145,790 million. The Company paid dividends in fiscal 2014 of ¥130.00 per share.

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

Short-term loans (including the current portion of long-term debt) amounted to ¥1,018 million at December 31, 2014 compared with ¥1,299 million at December 31, 2013. Long-term debt (excluding the current portion) amounted to ¥1,148 million at December 31, 2014 compared with ¥1,448 million at December 31, 2013.

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 13, 2015, 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.

Canon’s management policy 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 50, 52, and 57 days at the end of the fiscal years 2014, 2013, and 2012, respectively and the improvements 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 2014 amounted to ¥182,343 million compared with ¥188,826 million in 2013 and ¥270,457 million in 2012. For 2015, Canon projects its increase in property, plant and equipment will be approximately ¥205,000 million.

Employer contributions to Canon’s worldwide defined benefit pension plans were ¥22,146 million in 2014, ¥48,515 million in 2013 and ¥30,421 million in 2012. Employer contributions to Canon’s worldwide defined

 

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contribution pension plans were ¥15,077 million in 2014, ¥14,383 million in 2013, and ¥13,021 million in 2012. In addition, employer contributions to the multiemployer pension plan in which certain subsidiaries in Netherlands participated were ¥2,815 million in 2014.

Working capital in 2014 increased by ¥32,919 million to ¥1,470,554 million, compared with ¥1,437,635 million in 2013 and ¥1,237,821 million in 2012. 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 2014 was 2.60 compared to 2.69 for 2013 and to 2.47 for 2012.

Return on assets (net income attributable to Canon Inc. divided by the average of total assets) was 5.9% in 2014, compared to 5.6% in 2013 and 5.7% in 2012.

Return on Canon Inc. stockholders’ equity (net income attributable to Canon Inc. divided by the average of total Canon Inc. stockholders’ equity) was 8.7% in 2014 compared with 8.4% in 2013 and 8.7% in 2012.

The debt to total assets ratio was 0.0%, 0.1% and 0.1% as of December 31, 2014, 2013 and 2012, respectively. Canon had short-term loans and long-term debt of ¥2,166 million as of December 31, 2014, ¥2,747 million as of December 31, 2013 and ¥3,983 million as of December 31, 2012.

C. Research and development, patents and licenses

Year 2014 marks the fourth year of the Excellent Global Corporation Plan, Canon’s 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 medical imaging sector, industrial equipment sector and network camera 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-conserving, resource-saving, and recycling technologies to create products with the highest environmental performance.

Canon is pursuing collaboration among government, industry and academia. Canon’s collaboration effort can be seen in various activities such as fundamental research and development of leading-edge technologies with top universities and research institutes around the world, including Tokyo University, Kyoto University, Tokyo Institute of Technology, Tohoku University, Stanford University, and the University of Arizona, and also participation in the “ImPACT” (Impulsing Paradigm Change through Disruptive Technologies) program led by

 

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the Japanese government where Canon’s physically-noninvasive and -nondestructive imaging technology is selected as one of twelve R&D programs. Additionally, Canon is currently working on 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 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 ¥308,979 million in 2014, ¥306,324 million in 2013 and ¥296,464 million in 2012. The ratios of R&D expenses to the consolidated total net sales for 2014, 2013 and 2012 were 8.3%, 8.2% and 8.5%, respectively.

Canon believes that new products protected by patents will not easily allow competitors to compete with them, and will give them an advantage in establishing standards in the market and industry.

Canon obtained the third greatest number of private sector patents in 2014, according to the United States patent annual list, released by IFI CLAIMS® Patent Services.

D. Trend information

As for the future of the global economy, although challenging conditions are expected to remain for some time in certain countries and regions, Canon anticipates sustained economic growth in countries such as the U.S. among developed countries, and India and ASEAN countries among emerging markets. Overall, the global economy is expected to gradually move toward stable growth.

In the businesses in which Canon operates, demand for MFDs is projected to continue to expand moderately, mainly for color models, while demand in the laser printer market is expected to remain at the same level as the previous year. As for the digital camera market, although projections indicate continued market contraction mainly for low-priced compact models, demand for interchangeable-lens digital cameras is expected to recover gradually. Looking at inkjet printers, with Asian markets gradually recovering following their extended period of stagnation, demand is expected to remain in line with the previous year. As for the industrial equipment market, with manufacturers expected to continue making capital outlays for semiconductor lithography equipment in response to increasing demand for memory devices and image sensors, demand is expected to remain at the same level as the previous year. And as for FPD lithography equipment, demand is projected to increase as device manufacturers boost capital investment amid growing panel demand projected for 4K televisions and mobile devices.

Amid these conditions, 2015 is the final year of Phase IV of the Excellent Global Corporation Plan and the year in which the Canon EXPO will be held as the culmination of the efforts carried out during Phase IV. In addition to returning to a path of growth, Canon aims to bring Phase IV to a successful close, further reinforcing its business foundation to enable great strides beginning from next year. Toward this objective, Canon will undertake the following various measures.

 

   

Reinforcing Existing Businesses Through the Introduction of Innovative Products and Services

For MFDs and other office products, in addition to improving hardware performance, efforts will be made to build a framework that will enable the Company to service as a one-stop shop that provides a broad range of high-quality services. For cameras, efforts will be made to comprehensively raise aspects such as image-quality,

 

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visual expression, and operability. At the same time, Canon will work to further strengthen the network capabilities of these products. Additionally, to facilitate the Company’s aim of becoming the all around leader in printing, it will leverage its strength, derived from having prepared a broad lineup, spanning consumer printers to industrial printing. In the Industrial equipment area, Canon will devise and execute concrete plans to concentrate technologies and strengthen the competitiveness of Canon Group companies.

 

   

Expanding New and Future Businesses and Further Cultivating Technologies that will Pave the Way to the Future

Canon aims to produce next-generation lithography equipment in volume by strengthening nanoimprint technology that realizes further reduction in process geometries. In the area of network camera systems, Canon will work to enhance its product lineup and develop solutions that address customer needs. With regard to the MR (Mixed Reality) System, Canon will identify industries that can leverage the strength of this system, and will strive to make the system the de facto standard design tool in those industries. In the medical field, the Company will accelerating develop, focusing on promising themes such as photoacoustic tomography, which facilitates the viewing of vascular conditions in 3D. The Company will work to expand and steadily cultivate new businesses mainly targeting the B2B field, such as Super Machine Vision, a system capable of high-accuracy three-dimensional recognition of objects for potential use in production sites, and 4K reference displays.

 

   

Strengthening Global Marketing Capabilities Through Unified Effort Between Product Operations and Sales Companies

In developed countries, Canon aims to gain share in both consumer and office segments. In the consumer segment, Canon will address the popularity of online shopping and other trends that are contributing to the diversification of sales channels. In the office segment, Canon will strengthen its response towards centralized procurement of office equipment by global corporations. In emerging markets, Canon will promote enhancement of its various sales networks and product lineup, in line with situations in each country and region.

 

   

Accelerating a New Dimension of Cost-reduction Activities

In the area of procurement, Canon aims to reduce total costs, further deploying measures focused on reducing costs from the stage of product development. In the prototyping process, Canon will create next-generation development methodologies, through such means as expanding the application of simulation technologies as well as employing 3D printing. In production, Canon will realize further cost reduction by expanding the application of automation equipment and through measures aimed at the in-house production of molded parts and production equipment.

 

   

Building a Globally Optimized Production System

To maintain an optimized production system, Canon will take steps to revive domestic production, promoting measures such as automation and in-house production, while building new structural dimensions of cost reduction. At the same time, Canon will promote localized production through the use of automation equipment in the U.S. and Europe.

In addition to these measures, Canon will promote other initiatives such as product quality reforms to win top customer approval, information security improvement, and human resource development.

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

 

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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 5 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 ¥8,951 million at December 31, 2014. The carrying amounts of the liabilities recognized for Canon’s obligations as a guarantor under those guarantees at December 31, 2014 were insignificant.

F. Contractual obligations

The following summarizes Canon’s contractual obligations at December 31, 2014.

 

            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

   ¥ 2,018      ¥ 956      ¥ 808      ¥ 251      ¥ 3   

Other Long-Term Debt

     145        59        60        24        2   

Operating Lease Obligations

     85,719        26,450        34,508        14,528        10,233   

Purchase commitments for:

              

Property, Plant and Equipment

     52,668        52,668                        

Parts and Raw Materials

     76,984        76,984                        

Other long-term liabilities

              

Contribution to Defined Benefit Pension Plans

     26,257         26,257                           
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   ¥ 243,791      ¥ 183,374      ¥ 35,376      ¥ 14,803      ¥ 10,238   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

Canon provides warranties of generally less than one year against defects in materials and workmanship on most of its consumer products. Estimated product warranty related costs are established at the time revenue are recognized and are included in selling, general and administrative expenses. Estimates for accrued product warranty costs are primarily based on historical experience, and are affected by ongoing product failure rates, specific product class failures outside of the baseline experience, material usage and service delivery costs incurred in correcting a product failure. As of December 31, 2014, accrued product warranty costs amounted to ¥11,564 million.

At December 31, 2014, commitments outstanding for the purchase of property, plant and equipment were approximately ¥52,668 million, and commitments outstanding for the purchase of parts and raw materials were approximately ¥76,984 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.

 

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During 2015, Canon expects to contribute ¥14,674 million to its Japanese defined benefit pension plans and ¥11,583 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 27, 2015 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

(Group Executive of Finance & Accounting HQ,

Group Executive of Facilities Management HQ,

Group Executive of Human Resources Management & Organization HQ)

   4/1964    Entered the Company

(Oct. 8, 1940)

     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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Name

(Date of birth)

 

Position

(Group executive/function)

  

Date of
commencement

 

Business experience
(*current position/function)

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*
     4/2014   Chairman of Canon U.S.A., Inc.*

 

 

 

  

 

 

 

Shigeyuki Matsumoto

 

Senior Managing Director

(Group Executive of Device Technology Development HQ,

Group Executive of Corporate R&D)

   4/1977   Entered the Company

(Nov. 15, 1950)

     1/2002  

Group Executive of Device Technology Development HQ*

     3/2004   Director
     3/2007   Managing Director
     3/2011   Senior Managing Director*
     3/2015  

Group Executive of Corporate R&D*

 

 

 

  

 

 

 

Toshio Honma

(Mar. 10, 1949)

 

Senior Managing Director

(Group Executive of 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 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

 

Senior Managing Director

(Chief Executive of Image Communication Products Operations)

   4/1975   Entered the Company

(Oct. 17, 1952)

     1/2006  

Group Executive of Digital Imaging Business Group

     3/2007   Director
     4/2007  

Chief Executive of Image Communications Products Operations*

     3/2010   Managing Director
     3/2014   Senior Managing Director*

 

 

 

  

 

 

 

 

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Name

(Date of birth)

 

Position

(Group executive/function)

  

Date of
commencement

  

Business experience
(*current position/function)

Yasuhiro Tani

(Jul. 30, 1956)

 

Managing 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*

     3/2015   

Managing Director*

 

 

 

  

 

  

 

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*

 

 

 

  

 

  

 

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 Operations

     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*

 

 

 

  

 

  

 

 

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Name

(Date of birth)

 

Position

(Group executive/function)

  

Date of
commencement

  

Business experience
(*current position/function)

Akiyoshi Kimura

(Jul. 19, 1956)

 

Director

   4/1980   

Entered the Company

 

(Chief Executive of Office Imaging Products Operations)

   1/2009   

Group Executive of Office Imaging Products Production System Group

     4/2011   

Executive Officer

       

Deputy Chief Executive of Office Imaging Products Operations

     1/2013   

Group Executive of Office Imaging Products Corporate System Group

       

Group Executive of Office Imaging Products Development Group

     3/2014   

Director*

       

Chief Executive of Office Imaging Products Operations*

 

 

 

  

 

  

 

Eiji Osanai

(Feb. 17, 1959)

 

Director

   8/1983   

Entered the Company

 

(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*

 

 

 

  

 

  

 

Masaaki Nakamura

(Jul. 28, 1957)

 

Director

   4/1980   

Entered the Company

 

(Deputy Group Executive of Human Resources Management & Organization HQ)

   3/2014   

Deputy Group Executive of Human Resources

Management & Organization HQ*

     4/2014   

Executive Officer

     3/2015   

Director*

 

 

 

  

 

  

 

Kunitaro Saida

(May 4, 1943)

 

Director

   5/2006   

Qualified for attorney*

     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*

 

 

 

  

 

  

 

 

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Name

(Date of birth)

 

Position

(Group executive/function)

  

Date of
commencement

  

Business experience
(*current position/function)

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*

 

 

 

  

 

  

 

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*

 

 

 

  

 

  

 

Kazuto Ono

(Jul. 20, 1957)

 

Audit & Supervisory Board Member

   4/1980    Entered the Company
     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

     3/2015   

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*

     6/2004   

Audit & Supervisory Board Member of Marui Group Co., Ltd.*

     6/2011    Director of Jeco Corporation*

 

 

 

  

 

  

 

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 2015. The term of office of Audit & Supervisory Board Members is four years. The current term for Tadashi Ohe expires in March 2019, and the current term for Makoto Araki, Osami Yoshida and Kuniyoshi Kitamura who were elected in the general meeting of shareholders in March 2014, expires in March 2018, and the current term for Kazuto Ono who were elected in the general meeting of shareholders in March 2015, expires in March 2019.

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 17 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.

 

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

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

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. In addition, the Company may enter into contracts with outside directors 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. 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.

Canon established a standing committee, the Internal Control Committee in 2004, 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

 

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laws, regulations and internal controls. In 2015, with the aim of managing financial, compliance, and business risks from a comprehensive perspective, the Internal Control Committee was reorganized and renamed the Risk Management Committee which is tasked with performing this duty.

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

Executive Officer System

Canon adopted an Executive Officer System effective April 1, 2008. Executive Officers are appointed and discharged by the Board of Directors and have a term of office of one year. Taking into consideration growth in 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 28, 2015, whom are expected to take the assignment on April 1, 2015, 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

Yuichi Ishizuka

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

Seymour Liebman

   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 Operations

Kazuto Ogawa

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

Ryuichi Ebinuma

   Executive Officers    Deputy Group Executive of Corporate R&D

Kazuhiko Noguchi

   Executive Officers    Group Executive of External Relations HQ

Hiroaki Takeishi

   Executive Officers    Group Executive of Semiconductor Production Equipment Group

Nobutoshi Mizusawa

   Executive Officers    Deputy Group Executive of Corporate R&D

Yoichi Iwabuchi

   Executive Officers    General Manager of Digital Platform Technology Development Group

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    Senior General Manager of Global Legal administration Center

Takanobu Nakamasu

   Executive Officers   

Group Executive of Corporate Planning Development HQ

Soichi Hiramatsu

   Executive Officers    Deputy Group Executive of Global Procurement HQ

Toshihiko Kusumoto

   Executive Officers    Deputy Chief Executive of Office Imaging Products Operations

Shunsuke Inoue

   Executive Officers    Deputy Group Executive of Device Technology Development HQ

Takayuki Miyamoto

   Executive Officers    Chief Executive of Peripheral Products Operations

Akiko Tanaka

   Executive Officers    President of Canon BioMedical, Inc.

 

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B. Compensation

In the fiscal year ended December 31, 2014, Canon pays an aggregate of approximately ¥1,586 million to its directors and Audit & Supervisory Board Members. This amount includes bonuses.

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 2014.

 

Name

(Position)

   Company      Category of remuneration  
      Basic Compensation      Bonus      Total  

Fujio Mitarai (Director)

     Canon Inc.       ¥ 249       ¥ 39       ¥ 288   

Toshizo Tanaka (Director)

     Canon Inc.         115         22         137   

Toshiaki Ikoma (Director)

     Canon Inc.         108         20         128   

Notes:

(1) Bonus amounts represent the increased portion of accrued directors’ bonuses in fiscal year 2014.

The following two elements comprise remuneration to directors:

 

   

Basic Compensation: compensation for executing of business operations

   

Bonus: bonus links to business results of current fiscal year

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

The determination methods of remuneration are as follows:

Basic Compensation

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

Bonus

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

Stock Options

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

The Company has three 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 108th, 109th and

 

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110th Business Term of the Company, pursuant to Articles 236, 238 and 239 of the Corporation Law of Japan, held on, 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 27, 2009

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

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

2. Grantees of Share Options

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

3. Number of Share Options

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

4. Cash Payment for Share Options

No cash payment will be required for the share options.

5. Exercise Price

The exercise price is ¥3,287 per share.

6. Features of Share Options

The features of share options are as follows:

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

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

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

Allotted Number of Shares after Adjustment

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

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

 

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(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.

(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.

 

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(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 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.

 

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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 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.

 

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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.

(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

 

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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.

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.

 

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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, 2014, 2013 and 2012.

 

     Total      Japan      Americas      Europe      Asia and Oceania  

December 31, 2014

              

Office

     109,294         33,714         15,461         19,990         40,129   

Imaging System

     56,556         14,771         2,212         1,553         38,020   

Industry and Others

     15,993         10,893         356         748         3,996   

Corporate

     10,046         9,823                 65         158   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     191,889        69,201         18,029        22,356         82,303   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Basically, the Company and its subsidiaries have their own independent labor union. The Company believes that the relationship between Canon and its labor union is good.

 

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E. Share ownership

The following table shows the numbers of shares owned by the directors and Audit & Supervisory Board Members of the Company as of March 27, 2015. The total is 347,963 shares, constituting 0.03% of all outstanding shares.

 

Name

  

Position

   Number of shares  

Fujio Mitarai

   Chairman & CEO      117,723   

Toshizo Tanaka

   Executive Vice President & CFO      21,710   

Yoroku Adachi

   Senior Managing Director      25,097   

Shigeyuki Matsumoto

   Senior Managing Director      24,652   

Toshio Honma

   Senior Managing Director      35,152   

Hideki Ozawa

   Senior Managing Director      17,550   

Masaya Maeda

   Senior Managing Director      12,500   

Yasuhiro Tani

   Managing Director      7,400   

Kenichi Nagasawa

   Director      3,200   

Naoji Otsuka

   Director      6,500   

Masanori Yamada

   Director      7,000   

Aitake Wakiya

   Director      5,400   

Akiyoshi Kimura

   Director      3,300   

Eiji Osanai

   Director      2,600   

Masaaki Nakamura

   Director      1,279   

Kunitaro Saida

   Director      400   

Haruhiko Kato

   Director      0   

Makoto Araki

   Audit & Supervisory Board Member      8,100   

Kazuto Ono

   Audit & Supervisory Board Member      3,700   

Tadashi Ohe

   Audit & Supervisory Board Member      41,400   

Osami Yoshida

   Audit & Supervisory Board Member      700   

Kuniyoshi Kitamura

   Audit & Supervisory Board Member      2,600   
     

 

 

 
   Total      347,963   
     

 

 

 

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 shareholders on March 27, 2009 is 189,000 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 shareholders on March 30, 2010 is 236,000 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.

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 shareholders on March 30, 2011 is 263,000 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.

 

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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, 2014:

 

Name of major shareholder

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

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

     58,306,900         4.4

Japan Trustee Services Bank, Ltd. (Trust Account)

     48,346,700         3.6

The Dai-Ichi Mutual Life Insurance Company, Limited

     37,416,380         2.8

Barclays Capital

     30,228,586         2.3

Moxley and Co.

     26,572,812         2.0

Mizuho Bank, Ltd.

     22,558,173         1.7

State Street Bank and Trust Company

     20,146,784         1.5

Nomura Securities CO., LTD.

     19,622,777         1.5

Sompo Japan Nipponkoa Insurance Inc.

     17,439,987         1.3

State Street Bank and Trust Company

     16,565,115                             1.2

Notes:

  1: Moxley and Co. is a nominee of JPMorgan Chase Bank, which is the depositary of Canon’s ADRs (American Depositary Receipts).
  2: Apart from the above shares, The Dai-Ichi Mutual Life Insurance Company, Limited held 6,180,000 shares contributed to a trust fund for its retirement and severance plans.
  3: Apart from the above shares, the Company owns 241,931,637 shares (18.14% of total issued shares) of treasury stock.
  4: Apart from the above shares, Mizuho Bank, Ltd. 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, 2014, 13.6% of the issued shares of common stock, including the Company’s treasury stock, were held of record by 253 residents of the United States of America.

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

B. Related party transactions

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

 

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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 27, 2015.

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 7 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, 2014 and 2013 and for each of the three years in the period ended December 31, 2014 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, 2012, 2013, and 2014 have been audited by Ernst & Young ShinNihon LLC, and their audit report covering each of the periods is included in Item 18 of this report.

Refer to Item 18 “Financial Statements.”

Legal proceedings

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

Dividend policy

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

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 2014, the business environment remained challenging, characterized by, among other factors, prolonged global economic weakness. Thanks, however, to efforts to strengthen product competitiveness and the Company’s financial position through a management focus on profitability and cash flow, Canon was able to generate ample cash reserves. Taking this into consideration while seeking to actively provide a stable return to shareholders, Canon has decided to distribute a full-year dividend of ¥150 per share, (interim dividend of ¥65 per share already distributed, and year-end dividend of ¥85), which represents a ¥20 increase from the previous year’s dividend.

 

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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      

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 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   

2014 1(st) quarter

     3,330         2,889         1,308.08        1,139.27        16,164.01         13,995.86   

         2(nd) quarter

     3,446         3,093         1,273.80         1,121.50        15,442.67         13,885.11   

         3(rd) quarter

     3,628         3,255         1,346.43         1,224.85        16,374.14         14,753.84   

         4(th) quarter

     4,045         3,172         1,454.22         1,177.22        18,030.83         14,529.03   

2014 Year

     4,045         2,889         1,454.22         1,121.50        18,030.83         13,885.11   
     TSE
(Canon Inc.)
     TOPIX
(Reference data)
     Nikkei Stock Average
(Reference data)
 
     (Japanese yen)      (Points)      (Japanese yen)  

Period

       High              Low              High              Low              High              Low      

2014 July

   ¥ 3,432      ¥ 3,255         1,300.53        1,247.66       ¥ 15,759.66      ¥ 15,101.49   

         August

     3,432        3,295         1,296.02        1,224.85        15,628.78        14,753.84   

         September

     3,628        3,372         1,346.43        1,279.52        16,374.14        15,440.99   

         October

     3,596        3,172         1,338.35        1,177.22        16,533.91        14,529.03   

         November

     3,804        3,454         1,413.27        1,353.42        17,520.54        16,713.37   

         December

     4,045        3,733         1,454.22        1,346.37        18,030.83        16,672.94   

2015 January

     3,950        3,664         1,433.35        1,343.29        17,850.59        16,592.57   

         February

     3,897        3,654         1,529.20        1,387.38        18,865.39        17,271.87   

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

 

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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  

2010 Year

   $ 52.150       $ 36.800   

2011 Year

     52.300         41.700   

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   

2014 1(st) quarter

     31.950         28.670   

         2(nd) quarter

     33.820         30.580   

         3(rd) quarter

     33.960         32.000   

         4(th) quarter

     33.530         29.600   

2014 Year

     33.960         28.670   

 

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

Period

   High      Low  

2014 July

   $ 33.960       $ 32.000   

         August

     33.390         32.630   

         September

     33.370         32.510   

         October

     32.560         29.600   

         November

     32.070         30.540   

         December

     33.530         31.570   

2015 January

     33.320         30.780   

         February

     32.710         31.330   

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.

 

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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.

 

(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.

 

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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, 2014. 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 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.

 

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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;

“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

 

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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;

(b) the amount of consideration for the treasury stock disposed of by the Company after the end of the last fiscal year; and

(c) certain other amounts set forth in the ordinances of the Ministry of Justice, including (if the sum of one-half of goodwill and the deferred assets exceeds the total of stated capital, additional paid-in capital and legal reserve, each such amount that is appearing on the non-consolidated balance sheet as of the end of the last fiscal year) all or certain part of such exceeding amount as calculated in accordance with the ordinances of the Ministry of Justice.

If the Company has become at its option a company with respect to which consolidated balance sheets should also be taken into consideration in the calculation of the Distributable Amount (renketsu haito kisei tekiyo kaisha), it will be required to further deduct from the amount of Surplus the excess amount (if the amount is zero or below zero) of (x) the total amount of shareholders’ equity appearing on its non-consolidated balance sheet as of the end of the last fiscal year and certain other amounts set forth in the ordinances of the Ministry of Justice over (y) the total amount of shareholders’ equity and certain amounts set forth in the ordinances of the Ministry of Justice appearing on its consolidated balance sheets as of the end of the last fiscal year.

If the Company has prepared interim financial statements as described below, and if such interim financial statements have been approved (unless exempted by the Corporation Law of Japan) by a general meeting of shareholders, the Distributable Amount must be adjusted to take into account the amount of profit or loss, and the amount of consideration for the treasury stock disposed of by the Company, during the period in respect of which such interim financial statements have been prepared. The Company may prepare non-consolidated interim financial statements consisting of a balance sheet as of any date subsequent to the end of the last fiscal year and an income statement for the period from the first day of the current fiscal year to the date of such balance sheet. Interim financial statements so prepared by the Company must be approved by the board of directors and audited by its independent auditors, as required by the ordinances of the Ministry of Justice.

Stock Splits

The Corporation Law of Japan permits the Company, by resolution of its Board of Directors, to make stock splits, regardless of the value of net assets (as appearing in its latest non-consolidated balance sheet) per share. In addition, by resolution of the Company’s Board of Directors, the Company may increase the authorized shares up to the number reflecting the rate of stock splits and amend its Articles of Incorporation to this effect without the approval of a shareholders’ meeting. For example, if each share became three shares by way of a stock split, the Company may increase the authorized shares from the current 3,000,000,000 shares to 9,000,000,000 shares.

Under the Book-Entry Law, the Company must give notice to JASDEC regarding a stock split at least two weeks prior to the relevant record date. On the effective date of the stock split, the numbers of shares recorded in all accounts held by the Company’s shareholders at account management institutions or JASDEC will be increased in accordance with the applicable ratio.

 

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Japanese Unit Share System

The Company’s Articles of Incorporation provided that 100 shares of common stock constitute one “unit”. The Corporation Law of Japan permits the Company, by resolution of its Board of Directors, to reduce the number of shares which constitutes one unit or abolish the unit share system, and amend its Articles of Incorporation to this effect without the approval of a shareholders’ meeting.

Transferability of Shares Representing Less than One Unit

Under the new clearing system, shares constituting less than one unit are transferable. However, because shares constituting less than one unit do not comprise a trading unit, such shares may not be sold on the Japanese stock exchanges under the rules of the Japanese stock exchanges.

Right of a Holder of Shares Representing Less than One Unit to Require the Company to Purchase Its Shares

A holder of shares representing less than one unit may at any time require the Company to purchase its shares through the account management institutions and JASDEC; provided, however, that the Company is not obliged to do so if the Company does not own its own shares in the number which it is requested to sell. These shares will be purchased at (a) the closing price of the shares reported by the TSE on the day when the request to purchase is made or (b) if no sale takes place on the TSE on that day, then the price at which sale of shares is effected on such stock exchange immediately thereafter.

Right of a Holder of Shares Representing Less than One Unit to Purchase from the Company its Shares up to a Whole Unit

The Articles of Incorporation of the Company provide that a holder of shares representing less than one unit may require the Company to sell its shares to such holder so that the holder can raise its fractional ownership to a whole unit; provided, however, that the Company is not obliged to do so if the Company does not own its own shares in the number which it is requested to sell. Such a request shall be made through the account management institutions and JASDEC. These shares will be sold at (a) the closing price of the shares reported by the TSE on the day when the request to sell becomes effective or (b) if no sale has taken place on the TSE on that day, then the price at which sale of shares is effected on such stock exchange immediately thereafter.

Voting Rights of a Holder of Shares Representing Less than One Unit

A holder of shares representing less than one unit cannot exercise any voting rights pertaining to those shares. In calculating the quorum for various voting purposes, the aggregate number of shares representing less than one unit will be excluded from the number of outstanding shares. A holder of shares representing one or more whole units will have one vote for each whole unit represented.

A holder of shares representing less than one unit does not have any rights relating to voting, such as the right to participate in a demand for the resignation of a director, the right to participate in a demand for the convocation of a general meeting of shareholders and the right to join with other shareholders to propose an agenda item to be addressed at a general meeting of shareholders.

However, a holder of shares constituting less than one unit has all other rights of a shareholder in respect of those shares, including the following rights:

 

   

to receive annual and interim dividends,

   

to receive cash or other assets in case of consolidation or split of shares, exchange or transfer of shares or corporate merger,

   

to be allotted rights to subscribe for free for new shares when such rights are granted to shareholders, and

   

to participate in any distribution of surplus assets upon liquidation.

 

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Ordinary and Extraordinary General Meeting of Shareholders

The Company normally holds its ordinary general meeting of shareholders in March of each year in Ohta-ku, Tokyo or in a neighboring area. In addition, the Company may hold an extraordinary general meeting of shareholders whenever necessary by giving at least two weeks advance notice. Under the Corporation Law of Japan, notice of any shareholders’ meeting must be given to each shareholder having voting rights or, in the case of a non-resident shareholder, to his resident proxy or mailing address in Japan in accordance with the Company’s Regulations for Handling of Shares, at least two weeks prior to the date of the meeting.

Voting Rights

A shareholder is generally entitled to one vote per one unit of shares as described in this paragraph and under “Japanese Unit Share System” above. In general, under the Corporation Law of Japan, a resolution can be adopted at a general meeting of shareholders by a majority of the shares having voting rights represented at the meeting. The Corporation Law of Japan and the Company’s Articles of Incorporation require a quorum for the election of directors and Audit & Supervisory Board Members of not less than one-third of the total number of outstanding shares having voting rights. The Company’s shareholders are not entitled to cumulative voting in the election of Directors. A corporate shareholder whose outstanding shares are in turn more than one-quarter directly or indirectly owned by the Company does not have voting rights. Shareholders may exercise their voting rights through proxies, provided that those proxies are also shareholders who have voting rights.

Pursuant to the Corporation Law of Japan and the Company’s Articles of Incorporation, a quorum of not less than one-third of the outstanding shares with voting rights must be present at a shareholders’ meeting to approve any material corporate actions such as:

 

   

a reduction of stated capital,

   

amendment of the Articles of Incorporation (except amendments which the Board of Directors are authorized to make under the Corporation Law of Japan as described in “Stock Splits” and “Japanese Unit Share System” above),

   

the removal of a director or Audit & Supervisory Board Member,

   

establishment of a 100% parent-subsidiary relationship by way of share exchange or share transfer,

   

a dissolution, merger or consolidation,

   

a corporate separation,

   

the transfer of the whole or an important part of the Company’s business,

   

the taking over of the whole of the business of any other corporation,

   

any issuance of new shares at a “specially favorable” price, stock acquisition rights (shinkabu yoyakuken) with “specially favorable” conditions or bonds with stock acquisition rights (shinkabu yoyakuken-tsuki shasai) with “specially favorable” conditions to persons other than shareholders,

   

release of part of Directors’ or Audit & Supervisory Board Members’ liabilities to the Company,

   

distribution of Surplus in kind with respect to which shareholders are not granted the right to require the Company to make such distribution in cash instead of in kind,

   

purchase of shares by the Company from a specific shareholder other than its subsidiaries,

   

consolidation of shares, and

   

discharge of a portion of liabilities of Directors, Audit & Supervisory Board Members or independent auditors that are owed to the Company.

At least two-thirds of the outstanding shares having voting rights present at the meeting is required to approve these actions.

The voting rights of holders of ADSs are exercised by the depositary based on instructions from those holders.

 

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Subscription Rights

Holders of shares have no pre-emptive rights. Authorized but unissued shares may be issued at such times and upon such terms as the board of directors determines, subject to the limitations as to the issue of new shares at a “specially favorable” price mentioned in “Voting Rights” above. The board of directors may, however, determine that shareholders be given subscription rights to new shares, in which case they must be given on uniform terms to all shareholders as of a record date with not less than two weeks prior public notice. Each of the shareholders to whom such rights are given must also be given at least two weeks prior notice of the date on which such rights will expire.

Stock Acquisition Rights

The Company may issue stock acquisition rights or bonds with stock acquisition rights (in relation to which the stock acquisition rights are undetachable). Except where the issue would be on “specially favorable” conditions mentioned in “Voting Rights” above, the issue of stock acquisition rights or bonds with stock acquisition rights may be authorized by a resolution of the board of directors. Subject to the terms and conditions thereof, holders of stock acquisition rights may acquire a prescribed number of shares by exercising their stock acquisition rights and paying the exercise price at any time during the exercise period thereof. Upon exercise of stock acquisition rights, the Company will be obliged to either issue the relevant number of new shares or transfer the necessary number of existing shares held by it as treasury stock to the holder. The entitlements accorded to stock acquisition rights attached to bonds are substantially similar to those accorded to stock acquisition rights issued without being attached to bonds, provided that, if so determined by the board of directors at the time of its resolution authorizing the issue of the relevant bonds with stock acquisition rights, then, upon exercise of the stock acquisition rights, their exercise price will be deemed to have been paid by the holder thereof to the Company in lieu of the Company redeeming the relevant bonds.

Liquidation Rights

In the event of liquidation, the assets remaining after payment of all debts, liquidation expenses and taxes will be distributed among the shareholders in proportion to the number of shares they own.

Liability to Further Calls or Assessments

All of the Company’s currently outstanding shares, including shares represented by the ADSs, are fully paid and nonassessable.

Share Registrar

Mizuho Trust & Banking Co., Ltd. (“Mizuho Trust”) is the share registrar for the Company’s shares. Mizuho Trust’s office is located at 2-1, Yaesu 1-chome, Chuo-ku, Tokyo, Japan. Under the clearing system, Mizuho Trust maintains the Company’s register of shareholders and records transfers of record ownership upon the Company’s receipt of necessary information from JASDEC and other information in the register of shareholders, as described under “Record Date” below.

Record Date

The close of business on December 31 is the record date for the Company’s year-end dividends, if paid. June 30 is the record date for interim dividends, if paid. A holder of shares constituting one or more whole units who is registered as a holder on the Company’s register of shareholders at the close of business as of December 31 is also entitled to exercise shareholders’ voting rights at the ordinary general meeting of shareholders with respect to the fiscal year ending on December 31. In addition, the Company may set a record date for determining the shareholders entitled to other rights and for other purposes by giving at least two weeks prior public notice.

 

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Under the Book-Entry Law, the Company is required to give notice of each record date to JASDEC at least two weeks prior to such record date. JASDEC is required to promptly give the Company notice of the names and addresses of the Company’s shareholders, the numbers of shares held by them and other relevant information as of such record date.

The shares generally trade ex-dividend or ex-rights in the Japanese stock exchanges on the second business day before a record date (or if the record date is not a business day, the third business day prior thereto), for the purpose of dividends or rights offerings.

Repurchase by the Company of Shares

Under the Corporation Law of Japan, the Company may acquire its shares (i) by soliciting all shareholders to offer to sell its shares held by them (in this case, the certain terms of such acquisition, such as the total number of the shares to be purchased and the total amount of the consideration, shall be set by an ordinary resolution of a general meeting of shareholders in advance, and acquisition shall be effected pursuant to a resolution of the board of directors), (ii) from a specific shareholder other than any of the Company’s subsidiaries (pursuant to a special resolution of a general meeting of shareholders), (iii) from any of the Company’s subsidiaries (pursuant to a resolution of the board of directors), or (iv) by way of purchase on any Japanese stock exchange on which the Company’s shares are listed by way of tender offer (in either case pursuant to a resolution of the board directors). In the case of (ii) above, if the purchase price or any other consideration to be received by the relevant specific shareholder exceeds the then market price of the Company’s shares calculated in a manner set forth in the ordinances of the Ministry of Justice, any other shareholder may make a request to a representative director to be included as a seller in the proposed acquisition by the Company.

The total amount of the purchase price of the Company’s shares may not exceed the Distributable Amount, as described in “Restriction on Distributions of Surplus” above.

In addition, the Company may acquire its shares by means of repurchase of any number of shares constituting less than one unit upon the request of the holder of those shares, as described under “Japanese Unit Share System” above.

C. Material contracts

All contracts entered into by Company during the two years preceding the date of this annual report were entered into in the ordinary course of business.

D. Exchange controls

(a) Information with respect to Japanese exchange regulations affecting the Company’s security holders is as follows:

The Foreign Exchange and Foreign Trade Law of Japan and the cabinet orders and ministerial ordinances thereunder (the “Foreign Exchange Regulations”) govern certain aspects relating to the issuance of securities by the Company and the acquisition and holding of such securities by “non-residents of Japan” and by “foreign investors”, as hereinafter defined.

“Non-residents of Japan” are defined as individuals who are not resident in Japan and corporations whose principal offices are located outside Japan. Generally, branches and other offices of Japanese corporations located outside Japan are regarded as non-residents of Japan, while branches and other offices located within Japan of non-resident corporations are regarded as residents of Japan. “Foreign investors” are defined to be (i) individuals not resident in Japan, (ii) corporations which are organized under the laws of foreign countries or whose principal offices are located outside Japan, (iii) corporations of which 50% or more of the shares are held

 

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by (i) and / or (ii) above and (iv) corporations in respect of which (a) a majority of the officers are non-resident individuals or (b) a majority of the officers having the power to represent the corporation are non-resident individuals.

Issuance of Securities by the Company

Under the Foreign Exchange Regulations, the issue of securities outside Japan by the Company is, in principle, not subject to a prior notification requirement, but subject to a post reporting requirement of the Minister of Finance. Under the Foreign Exchange Regulations as currently in effect, payments of principal, premium and interest in respect of securities and any additional amounts payable pursuant to the terms thereof may in general be paid when made without any restrictions under the Foreign Exchange Regulations.

Acquisition of Shares

In general, the acquisition of shares of stock of a Japanese company listed on any Japanese stock exchange by a non-resident of Japan from a resident of Japan is not subject to a prior notification requirement, but subject to a post reporting requirement of the Minister of Finance by such resident.

In the case where a foreign investor intends to acquire listed shares (whether from a resident or a non-resident of Japan, from another foreign investor or from or through a designated securities company) and as a result of such acquisition the number of shares held, directly or indirectly, by such foreign investor (if there are other foreign investors with whom the foreign investor has a special relationship, the shares held by such other foreign investors will be included in the number) would become 10% or more of the total outstanding shares of the company, the foreign investor must generally report such acquisition to the Minister of Finance and other Ministers having jurisdiction over the business of the subject company by the 15th day of the immediately following month in the date of acquisition falls. In certain exceptional cases, a prior notification is required in respect of such acquisition.

Acquisition of Shares upon Exercise of Rights for Subscription of Shares

The acquisition by a non-resident of Japan of shares upon exercise of his rights for subscription of shares is exempted from the notification and reporting requirements described under “Acquisition of Shares” above.

Dividends and Proceeds of Sales

Under the Foreign Exchange Regulations currently in effect, dividends paid on, and the proceeds of sale in Japan of, the shares held by non-residents of Japan may be converted into any foreign currency and repatriated abroad. The acquisition of shares by non-resident shareholders by way of stock splits is not subject to any of the aforesaid notification requirements.

(b) Reporting of Substantial Shareholdings:

The Financial Instruments and Exchange Law of Japan requires any person who has become, beneficially and solely or jointly, a holder of more than 5% of the total outstanding voting shares of capital stock of a company listed on any Japanese stock exchange to file with the relevant Local Finance Bureau of the Minister of Finance within five business days a report concerning such share ownership. A similar report must also be made in respect of any subsequent change of 1% or more in any such holding. Copies of any such report must also be furnished to the issuer of such shares and all Japanese stock exchanges on which the shares are listed. For this purpose, shares with exercisable rights for subscription of shares held by such holder are taken into account in determining both the size of a holding and a company’s total outstanding share capital.

 

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E. Taxation

1. Taxation in Japan

Generally, a non-resident of Japan or non-Japanese corporation (a “Non-Resident Holder”) is subject to Japanese withholding tax on dividends paid by Japanese corporations. Stock splits are not subject to Japanese income tax. A conversion of retained earnings or legal reserve (but, not additional paid-in capital, in general) into stated capital (whether made in connection with a stock split or otherwise) is not treated as a deemed dividend payment to shareholders for Japanese tax purposes. Thus, such a conversion does not trigger Japanese withholding taxation. (Article 2 (16) of the Japanese Corporation Tax Law and Article 8 (1) (xiii) of the Japanese Corporation Tax Law Enforcement Order).

Pursuant to the Convention Between the Government of the United States of America and the Government of Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (the “Treaty”), dividend payments made by a Japanese corporation to a U.S. resident or corporation, unless the recipient of the dividend has a “permanent establishment” in Japan and the shares or ADSs with respect to which such dividends are paid are effectively connected with such “permanent establishment,” will be subject to a withholding tax at rate of: (1) 10% for portfolio investors who are qualified U.S. residents eligible for benefits of the Treaty; and (2) 0% (i.e., no withholding) for pension funds which are qualified U.S. residents eligible for benefits of the Treaty, provided that the dividends are not derived from the carrying on of a business, directly or indirectly, by such pension funds. Japan is a party to a number of income tax treaties, conventions and agreements, (collectively “Tax Treaties”), whereby the maximum withholding tax rate for dividend payments is set at, in most cases, 15% for portfolio investors who are Non-Resident Holders. Specific countries with which such Tax Treaties have been entered into include Belgium, Canada, Denmark, Finland, Germany, Ireland, Italy, Luxembourg, New Zealand, Norway, Singapore, Spain, and Sweden. Japan’s income tax treaties with Australia, France, The Netherlands, Switzerland and the United Kingdom have been amended to generally reduce the maximum withholding tax rate to 10%.

On the other hand, unless one of the applicable Tax Treaties reducing the maximum rate of withholding tax applies, the standard tax rate applicable to dividends paid with respect to listed shares, such as those paid by the Company on shares or ADSs, to Non-Resident Holders after January 1, 2014 is 15% under the Japanese Income Tax Law except for dividends paid to any individual shareholder who holds 3% or more of the issued shares, in which case the applicable rate is 20% (Please refer to Article 182(2) of the Japanese Income Tax Law and Article 9-3(1)(i) of the Japanese Special Tax Measures Law including its relevant temporary provision for these withholding rates). On December 2, 2011, the “Special measures act to secure the financial resources required to implement policy on restoration of the East Japan Earthquake” (Act No. 117 of 2011) was promulgated and special surtax measures on income tax and withholding tax were introduced thereafter to fund the restoration effort for the earthquake. Income tax and withholding tax payers will need to pay a surtax, calculated by multiplying the standard tax rate by 2.1% for 25 years starting from January 1, 2013 (“Surtax”). As a result, the withholding tax rate applicable to dividends paid with respect to listed shares to Non-Resident Holders increased to 15.315% (“Withholding Tax Rate”) which is applicable for the period from January 1, 2014 until December 31, 2037.

Taking this Withholding Tax Rate into account, the treaty rates such as the 15% rate (or 10% for eligible U.S. residents subject to the Treaty and/or eligible residents subject to other similarly renewed treaties mentioned above) will apply, in general, except for dividends paid to any individual holder who holds 3% or more of the total issued shares, in which case the applicable rate is 20.42% (standard tax rate of 20% imposed by Surtax). The treaty rate normally overrides the domestic rate, but due to the so-called “preservation doctrine” under Article 1(2) of the Treaty, and/or due to Article 3-2 of the Special Measures Law for the Income Tax Law, Corporation Tax Law and Local Taxes Law with respect to the Implementation of Tax Treaties, if the tax rate under the domestic tax law is lower than that promulgated under the applicable income tax treaty, then the domestic tax rate is still applicable. Due to the abolishment of the lower tax rate, such as the 7.147% rate under the domestic tax law as of December 31, 2013, the tax rate under the applicable tax treaty will normally be lower

 

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than that under the domestic tax law and, if so, the treaty override treatment will apply. As such, the tax rate under the Treaty will normally apply for most holders of shares or ADSs who are U.S. residents or corporations. In the case where the treaty rate is applicable, no Surtax is imposed, but in order to enjoy the lower treaty rate, the taxpayer must file a treaty application in advance with the Company. Gains derived from the sale outside Japan of Japanese corporations’ shares or ADSs by Non-Resident Holders, or from the sale of Japanese corporations’ shares or ADSs within Japan by a non-resident of Japan as an occasional transaction or by a non-Japanese corporation not having a permanent establishment in Japan, are generally not subject to Japanese income or corporation taxes, provided that the seller is a portfolio investor. Japanese inheritance and gift taxes at progressive rates may apply to an individual who has acquired Japanese corporations’ shares or ADSs as a distributee, legatee or donee.

2. Taxation in the United States

The following is a discussion of the material U.S. federal income tax consequences of owning and disposing of the Company shares or ADSs to the U.S. holders described below, but it does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a particular person’s decision to acquire, hold or dispose of such securities. The discussion does not address the potential application of the provisions of the Internal Revenue Code of 1986, as amended (the “Code”), known as the “Medicare contribution tax.” The discussion applies only if a U.S. holder holds the Company shares or ADSs as capital assets for U.S. federal income tax purposes and it does not address special classes of holders, such as:

 

   

certain financial institutions;

   

insurance companies;

   

dealers and traders in securities or foreign currencies;

   

persons holding the Company shares or ADSs as part of a straddle, conversion, other integrated transaction or other similar transaction;

   

persons whose functional currency for U.S. federal income tax purposes is not the U.S. dollar;

   

partnerships or other entities classified as partnerships for U.S. federal income tax purposes;

   

persons liable for the alternative minimum tax;

   

tax-exempt entities;

   

persons holding the Company shares or ADSs that own or are deemed to own 10% or more of any class of the Company stock;

   

persons who acquired the Company shares or ADSs pursuant to the exercise of any employee stock option or otherwise as compensation; or

   

persons holding shares in connection with trade or business conducted outside of the United States.

This discussion is based on the Code, administrative pronouncements, judicial decisions, final, temporary and proposed Treasury regulations and the Treaty, all as of the date hereof. These laws are subject to change, possibly on a retroactive basis. It is also based in part on representations by the depositary and assumes that each obligation under the deposit agreement and any related agreement will be performed in accordance with its terms. An investor should consult its own tax advisers concerning the U.S. federal, state, local and foreign tax consequences, owning and disposing of the Company shares or ADSs in its particular circumstances.

As used herein, a “U.S. holder” is a beneficial owner of the Company shares or ADSs that is eligible for the benefits of the Treaty and is, for U.S. federal tax purposes:

 

   

a citizen or individual resident of the United States;

   

a corporation, or other entity taxable as a corporation, created or organized in or under the laws of the United States, any state thereof or the District of Columbia; or

   

an estate or trust the income of which is subject to U.S. federal income taxation regardless of its source.

If an entity that is classified as a partnership for U.S. federal income tax purposes holds the Company shares or ADSs, the U.S. federal income tax treatment of a partner will generally depend on the status of the partner and

 

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the activities of the partnership. Partnerships holding the Company shares or ADSs and partners in such partnerships should consult their tax advisers as to the particular U.S. federal income tax consequences of holding and disposing of the Company shares or ADSs.

In general, if a U.S. holder owns ADSs, it will be treated for U.S. federal income tax purposes as the owner of the underlying shares represented by those ADSs. Accordingly, no gain or loss will be recognized if a U.S. holder exchanges ADSs for the underlying shares represented by those ADSs.

The U.S. Treasury has expressed concerns that parties to whom American depositary shares are released before shares are delivered to the depositary (“pre-released”), or intermediaries in the chain of ownership between the holder and the issuer of the security underlying the American depositary shares, may be taking actions that are inconsistent with the claiming of foreign tax credits by holders of American depositary shares. Such actions would also be inconsistent with the claiming of the reduced rate of tax applicable to dividends received by certain non-corporate U.S. holders. Accordingly, the analysis of the creditability of Japanese taxes and the reduced rates of taxation applicable to dividends received by certain non-corporate U.S. holders, both as described below, could be affected by actions that may be taken by parties to whom ADSs are pre-released or by intermediaries.

This discussion assumes that the Company was not a passive foreign investment company for 2014, as described below.

Taxation of Distributions

Distributions paid on the Company shares or ADSs, other than certain pro rata distributions of common shares, to the extent paid out of the Company’s current or accumulated earnings and profits (as determined under U.S. federal income tax principles) will be treated as dividends. Because the Company does not maintain calculations of its earnings and profits under U.S. federal income tax principles, it is expected that distributions will be reported to U.S. holders as dividends. The amount of a dividend will include any amounts withheld by the Company or its paying agent in respect of Japanese taxes. The amount of the dividend will be treated as foreign-source dividend income and will not be eligible for the dividends-received deduction generally allowed to U.S. corporations. Subject to applicable limitations that may vary depending upon a U.S. holder’s individual circumstances and the concerns of the U.S. Treasury described above, dividends paid to certain non-corporate U.S. holders will be taxable at the favorable rates applicable to long-term capital gains. Non-corporate U.S. holders should consult their own tax advisers to determine whether they are subject to any special rules that limit their ability to be taxed at these favorable rates.

Dividends paid in Japanese yen will be included in a U.S. holder’s income in a U.S. dollar amount calculated by reference to the exchange rate in effect on the date of receipt of the dividend by the U.S. holder, in the case of the Company shares, or by the depositary, in the case of ADSs, regardless of whether the payment is in fact converted into U.S. dollars at that time. If the dividend is converted into U.S. dollars on the date of receipt, a U.S. holder generally should not be required to recognize foreign currency gain or loss in respect of the dividend income. A U.S. holder may have foreign currency gain or loss if the dividend is converted into U.S. dollars after the date of receipt.

Japanese income taxes withheld from cash dividends on the Company shares or ADSs at a rate not exceeding the rate provided by the Treaty will be creditable against a U.S. holder’s U.S. federal income tax liability, subject to applicable limitations that may vary depending upon a U.S. holder’s circumstances and the concerns expressed by the U.S. Treasury described above. The rules governing foreign tax credits are complex, and a U.S. holder should consult its own tax adviser regarding the availability of foreign tax credits in its particular circumstances. Instead of claiming a credit, a U.S. holder may, at its election, deduct such Japanese taxes in computing its income, subject to generally applicable limitations under U.S. federal income tax law.

 

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Sale or Other Disposition of the Company Shares or ADSs

For U.S. federal income tax purposes, gain or loss a U.S. holder realizes on the sale or other disposition of the Company shares or ADSs will be capital gain or loss, and will be long-term capital gain or loss if such holder held the Company shares or ADSs for more than one year. The amount of a U.S. holder’s gain or loss will be equal to the difference between the U.S. dollar amount realized on the disposition and the U.S. holder’s U.S. dollar tax basis in the Company shares or ADSs that were disposed of. Such gain or loss will generally be U.S.-source gain or loss for foreign tax credit purposes. The deductibility of capital losses is subject to limitation.

Passive Foreign Investment Company Rules

The Company believes that it was not a passive foreign investment company (“PFIC”) for U.S. federal income tax purposes for its 2014 fiscal year. However, since PFIC status depends upon the composition of the Company’s income and assets and the market value of its assets (including, among others, goodwill and equity investments in less than 25% owned entities) from time to time, there can be no assurance that the Company will not be considered a PFIC for any taxable year. If the Company were treated as a PFIC for any taxable year during which a U.S. holder owned the Company shares or ADSs, certain adverse tax consequences could apply to such U.S. holder.

If the Company were treated as a PFIC for any taxable year during which a U.S. holder owned the Company shares or ADSs, gain recognized by a U.S. holder on the sale or other disposition including certain pledges of the Company shares or ADSs would be allocated ratably over its holding period for such securities. The amounts allocated to the taxable year of the sale or other disposition and to any year before the Company became a PFIC would be taxed as ordinary income. The amount allocated to each other taxable year would be subject to tax at the highest rate in effect in such taxable year for individuals or corporations, as appropriate, and an interest charge would be imposed on the tax liability attributable to such allocated amounts. Further, any distribution in respect of the Company shares or ADSs in excess of 125% of the average of the annual distributions on such securities received by a U.S. holder during the preceding three years or its holding period, whichever is shorter, would be subject to taxation as described immediately above. Certain elections (including a mark-to-market election) may be available to a U.S. holder that would result in alternative tax treatments.

In addition, if the Company were a PFIC or with respect to a particular U.S. holder, were treated as a PFIC in a taxable year in which it pays a dividend or the prior taxable year, the favorable tax rates discussed above with respect to dividends paid to certain non-corporate U.S. holders would not apply.

If the Company were a PFIC for any taxable year during which a U.S. holder owned the Company shares or ADSs, the U.S. holder would generally be required to file IRS Form 8621 with its annual U.S. federal income tax return, subject to certain exceptions.

Information Reporting and Backup Withholding

Payments of dividends and sales proceeds that are made within the United States or through certain U.S.-related financial intermediaries generally are subject to information reporting and may be subject to backup withholding unless the U.S. holder is a corporation or other exempt recipient or, in the case of backup withholding, the U.S. holder provides a correct taxpayer identification number and certifies that it is not subject to backup withholding.

Backup withholding is not an additional tax. The amount of any backup withholding from a payment to a U.S. holder will be allowed as a credit against such holder’s U.S. federal income tax liability and may entitle it to a refund, provided that the required information is timely furnished to the Internal Revenue Service.

Certain U.S. holders who are individuals may be required to report information relating to stock of a non-U.S. person, generally on IRS Form 8938, subject to certain exceptions (including an exception for stock held in custodial accounts maintained by a U.S. financial institution). U.S. holders are urged to consult their tax advisers regarding the effect, if any, of this requirement on their tax reporting obligations.

 

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F. Dividends and paying agents

Not applicable.

G. Statement by experts

Not applicable.

H. Documents on display

Under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company is subject to requirements information disclosure. The Company files various reports and other information, including Form 20-F and Annual Reports, with the Securities Exchange Commission and the NYSE. These reports may be inspected at the following sites.

Securities Exchange Commission (Public Reference Room):

100 F Street, N.E., Washington D.C. 20549

New York Stock Exchange, Inc.:

20 Broad Street, New York, New York 10005

Form 20-F is also available at the Electronic Data Gathering, Analysis, Retrieval system (“EDGAR”) website which is maintained by the Securities Exchange Commission.

Securities Exchange Commission Home Page:

http://www.sec.gov

I. Subsidiary information

Not applicable.

Item 11. Quantitative and Qualitative Disclosures about Market Risk

Market risk exposures

Canon is exposed to market risks, including changes in foreign currency exchange rates, interest rates and prices of marketable securities and investments. In order to hedge the risks of changes in foreign currency exchange rates, Canon uses derivative financial instruments.

Equity price risk

Canon holds marketable securities included in current assets, which consist generally of highly-liquid and low-risk instruments. Investments included in noncurrent assets are held as long-term investments. Canon does not hold marketable securities and investments for trading purposes.

Maturities and fair values of such marketable securities and investments with original maturities of more than three months, all of which were classified as available-for-sale securities, were as follows at December 31, 2014.