Canon Annual Report 2009

Plain-text annual report

CANON ANNUAL REPORT 2009 Fiscal Year Ended December 31, 2009 (cid:68)(cid:66)(cid:79)(cid:80)(cid:79)(cid:34)(cid:51)(cid:64)(cid:36)(cid:18)(cid:14)(cid:36)(cid:21)(cid:64)(cid:74)(cid:81)(cid:68)(cid:64)(cid:39)(cid:52)(cid:36)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:18)(cid:14)(cid:19) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:18)(cid:17)(cid:27)(cid:22)(cid:19)(cid:27)(cid:22)(cid:19)(cid:1)(cid:34)(cid:46) FINANCIAL HIGHLIGHTS Net sales Operating proﬁ t Income before income taxes Net income attributable to Canon Inc. Net income attributable to Canon Inc. stockholders per share: -Basic -Diluted Total assets Millions of yen (except per share amounts) Thousands of U.S. dollars (except per share amounts) 2009 2008 Change (%) 2009 ¥3,209,201 ¥ 4,094,161 -21.6 $ 34,882,620 217,055 219,355 131,647 496,074 481,147 309,148 -56.2 -54.4 -57.4 2,359,293 2,384,293 1,430,946 ¥ 106.64 ¥ 246.21 -56.7 $ 106.64 246.20 -56.7 1.16 1.16 ¥ 3,847,557 ¥ 3,969,934 -3.1 $ 41,821,272 Canon Inc. stockholders’ equity ¥ 2,688,109 ¥ 2,659,792 1.1 $ 29,218,576 Notes: 1. Canon’s consolidated ﬁ nancial statements are prepared in accordance with U.S. generally accepted accounting principles. 2. Canon adopted new guidance for noncontrolling interests in consolidated ﬁ nancial statements in the ﬁ scal year beginning January 1, 2009. In accordance with the adoption of this guidance, “income before income taxes and minority interests” is now referred to as “income before income taxes”(cid:1)and “net income” is now referred to as “net income attributable to Canon Inc.” 3. U.S. dollar amounts are translated from yen at the rate of JPY92=U.S.$1, the approximate exchange rate on the Tokyo Foreign Exchange Market as of December 30, 2009, solely for the convenience of the reader. Net Sales (Millions of yen) 5,000,000 6 4 3 , 1 8 4 , 4 9 5 7 , 6 5 1 , 4 1 6 1 , 4 9 0 , 4 4,000,000 1 9 1 , 4 5 7 , 3 3,000,000 1 0 2 , 9 0 2 , 3 2,000,000 1,000,000 Net Income Attributable to Canon Inc. (Millions of yen) Net Income Attributable to Canon Inc. Stockholders per Share (Yen) ROE/ROA (%) Basic Diluted ROE ROA 2 3 3 , 8 8 4 5 2 3 , 5 5 4 6 9 0 , 4 8 3 500,000 400,000 300,000 200,000 100,000 8 4 1 , 9 0 3 7 4 6 , 1 3 1 400.00 300.00 200.00 100.00 9 5 . 7 7 3 3 5 . 7 7 3 5 9 . 1 4 3 4 8 . 1 4 3 3 6 6 3 . . 8 8 2 8 8 2 1 2 0 2 . . 6 4 2 6 4 2 4 6 4 6 . . 6 0 1 6 0 1 20.0 15.0 10.0 5.0 0 16.5 16.0 16.3 11.1 10.8 10.6 10.1 7.3 4.9 3.4 05 06 07 08 09 0 05 06 07 08 09 0 05 06 07 08 09 0.00 05 06 07 08 09 (cid:68)(cid:66)(cid:79)(cid:80)(cid:79)(cid:34)(cid:51)(cid:64)(cid:36)(cid:18)(cid:14)(cid:36)(cid:21)(cid:64)(cid:74)(cid:81)(cid:68)(cid:64)(cid:39)(cid:52)(cid:36)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:20)(cid:14)(cid:21) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:18)(cid:17)(cid:27)(cid:22)(cid:25)(cid:27)(cid:21)(cid:20)(cid:1)(cid:34)(cid:46) CORPORATE PROFILE CONTENTS 1 Canon develops, manufactures and markets a growing lineup of copying machines, printers, cameras, optical and other products that meet a diverse range of customer needs. The Canon brand is well recognized and trusted throughout the world by the individuals, families, ofﬁ ces and industries that use Canon products. (cid:1) In 1996, Canon launched its Excellent Global Corporation Plan with the aim of becoming a corporation worthy of admiration and respect the world over. To this end, the Company is promoting “cross-media imaging”—wherein a high level of collaboration is realized among input and output devices—and the solutions business—through which it not only develops and markets hardware and software but also proposes ways for users to optimize convenience. In addition, Canon is working to fulﬁ ll its duties to investors and society, emphasizing sound corporate TO OUR STOCKHOLDERS ............................ 2 MESSAGE FROM THE PRESIDENT ............... 6 CORPORATE GOVERNANCE ........................ 8 STRATEGIES AND ACTIVITIES ..................... 12 EXCELLENT GLOBAL CORPORATION PLAN IMPROVING THE QUALITY OF MANAGEMENT RESEARCH & DEVELOPMENT PRODUCTION governance and stepping up the implementation of activities that con- SALES & MARKETING tribute to environmental and social sustainability. CORPORATE PHILOSOPHY: Kyosei The corporate philosophy of Canon is kyosei. A concise deﬁ nition of this word would be “Living and working together for the common good,” but Canon’s deﬁ nition is broader: “All people, regardless of CORPORATE SOCIAL RESPONSIBILITY BUSINESS UNITS .......................................... 30 OFFICE BUSINESS UNIT CONSUMER BUSINESS UNIT INDUSTRY AND OTHERS BUSINESS UNIT FINANCIAL SECTION .................................... 43 race, religion or culture, harmoniously living and working together into TRANSFER AND REGISTRAR’S OFFICE ....... 104 the future.” Unfortunately, the presence of imbalances in the world in such areas as trade, income levels and the environment hinders the achievement of kyosei. Addressing these imbalances is an ongoing mission, and Canon is doing its part by actively pursuing kyosei. True global companies must foster good relations, not only with their customers and the communities in which they operate, but also with nations and the environment. They must also bear the responsibility for the impact of their activities on society. For this reason, Canon’s goal is to contribute to global prosperity and people’s well-being, which will lead to continuing growth and bring the world closer to achieving kyosei. CORPORATE GOAL Canon sees itself growing and prospering over the next 100, even 200, years. To realize this goal, the Company is implementing its Excellent Global Corporation Plan. Building on ﬁ nancial strengths that it has continuously reinforced through the implementation of this plan, Canon aims to attain the status of being among the global top 100 companies in terms of key performance indicators. STOCKHOLDER INFORMATION .................. 104 MAJOR CONSOLIDATED SUBSIDIARIES ..... 105 Cover Photo: The imageRUNNER ADVANCE series (above: imageRUN- NER ADVANCE C5051) of multifunction devices (MFDs) was developed under a totally new concept with the aim of providing wide-ranging ofﬁ ce solutions that meet diverse customer needs. (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:34)(cid:51)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:2102)(cid:1997)(cid:3821)(cid:864)(cid:64)(cid:74)(cid:81)(cid:68)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:18) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:18)(cid:27)(cid:21)(cid:24)(cid:1)(cid:49)(cid:46) 2 CANON ANNUAL REPORT 2009 TO OUR STOCKHOLDERS Achieving a a New Era (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:34)(cid:51)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:2102)(cid:1997)(cid:3821)(cid:864)(cid:64)(cid:74)(cid:81)(cid:68)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:19) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:18)(cid:27)(cid:21)(cid:25)(cid:1)(cid:49)(cid:46) 3 Turnaround in the First Year of of Growth through Improved Management Quality and Global Management >> In 2009, due to the negative effects of the economic recession, Canon posted declines in sales and proﬁ t. We were, however, able to maintain sound balance sheets through various efforts, including reducing inventories. >> Canon, aiming to become one of the world’s top 100 companies, views 2010 as the ﬁ rst year in a new era of growth. >> In 2010, we will further improve management quality by re-establishing a proﬁ t-earning structure through IT reforms and other innovations aimed at further reducing inventories and optimizing management resources. (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:34)(cid:51)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:2102)(cid:1997)(cid:3821)(cid:864)(cid:64)(cid:74)(cid:81)(cid:68)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:20) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:18)(cid:27)(cid:22)(cid:17)(cid:1)(cid:49)(cid:46) 4 CANON ANNUAL REPORT 2009 Achieving a Turnaround in the First Year of Improved Management Quality Overview of Fiscal 2009 Early in 2009, during what was being called the worst global billion, accounting for 9.5% of net sales. Net income attributable to Canon Inc. was down 57.4% to ¥131.6 billion, while net in- recession in 100 years, it was difﬁ cult to predict the future course come attributable to Canon Inc. stockholders per share came to of the global economy. Today, looking back at the year, we see ¥106.64, in both basic and diluted terms. that conditions faced by each region were as follows. Unfavorable currency exchange rates added to the severity of In the United States drastic measures taken to stimulate the the business environment in 2009. Although the start of the year economy appeared to have had some success from the third saw the yen-dollar rate in the low nineties, and for a time it quarter of 2009, including positive GDP growth. Nonetheless, new seemed headed to top ¥100, it instead went in the other direction, housing starts and new car sales failed to maintain hoped-for appreciating an annual average of ¥10 in 2009. The yen also appre- momentum targeted by government stimulus measures. ciated against the euro for the year by an average of over ¥21. Europe also saw a rise in GDP during the same period. Driving As for returning proﬁ ts to stockholders, Canon emphasizes growth were measures taken to stimulate individual consumption, the stable return of free cash ﬂ ow to stockholders, and intends to including automobile-buyback programs and public works invest- pay a full-year dividend per share of ¥110, the same amount paid ment. Delays in resolving bad debt and high unemployment, in the previous ﬁ scal year. however, continued to have a negative effect on the real economy. * Segment sales include intersegment sales. In Asia, primarily China, measures taken to stimulate consump- tion in rural areas were successful, kick-starting an early recovery. Japan, at long last, began showing signs of emerging from a Accomplishments amid Adversity As we had set out to do, we improved our management quality to period of intense economic stagnation. This was the result of ride out the storm under our own power. Speciﬁ cally, reductions increased exports and manufacturing owing to growth in China in inventories and other actions taken enabled the Company to and emerging markets. Economic indicators, however, have yet to expand cash ﬂ ows, steer its way toward signiﬁ cantly increased regain the levels seen prior to the ﬁ nancial crisis. Fiscal 2009 Performance Results In 2009, Canon’s consolidated net sales declined 21.6% to stockholders’ equity, and maintain a sound ﬁ nancial condition. The Ofﬁ ce Business Unit positioned itself for action in antici- (cid:1) pation of an economic turnaround in the near future. Speciﬁ c initiatives included the launch of a new ofﬁ ce equipment series, ¥3,209.2 billion and the gross proﬁ t ratio dipped 2.8 percentage the strengthening of our solutions business, and the reinforcement points to 44.5%. Operating proﬁ t fell 56.2% to ¥217.1 billion of our direct-sales network in the United States. Also, in March compared with the previous ﬁ scal year. By segment,* in the Ofﬁ ce Business Unit, sales declined 26.8% to ¥1,645.1 billion, and operating proﬁ t dropped 49.8% to ¥229.4 billion. Within the Consumer Business Unit, sales decreased 10.6% to ¥1,301.2 2010, Canon turned Océ N.V., a major Netherlands-based printing company, into a consolidated subsidiary. In the Consumer Business Unit, we were able to improve the proﬁ tability of our camera business. This upturn was attributable billion and operating proﬁ t declined 17.8% to ¥183.5 billion. In to the launching of attractive new products in a timely manner the Industry and Others Business Unit, sales fell 31.5% to ¥358.0 and the optimizing of inventory management. billion and the operating loss deteriorated from ¥47.9 billion to ¥76.0 billion. By geographic area, sales in Europe fell 25.8% to Through the Industry and Others Business Unit, Canon (cid:1) restructured its semiconductor equipment business. All these ¥995.2 billion, as was also the case in the Americas, where sales strategic initiatives taken in individual business units empowered declined 22.6% to ¥894.2 billion. In Japan, sales slipped 19.1% to Canon to further improve management quality throughout 2009, ¥702.3 billion, and elsewhere in Asia and Oceania sales decreased a year of unprecedented economic turbulence. 15.4% to ¥617.5 billion. Turning to operating expenses, Canon’s selling, general and administrative expenses declined 15.2% year on year to ¥905.7 Measures for a New Era of Growth In the course of nurturing new growth in 2010, we will work to billion. The Company’s R&D expenses decreased 18.6% to ¥304.6 further improve management soundness so as to be able to look (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:34)(cid:51)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:2102)(cid:1997)(cid:3821)(cid:864)(cid:64)(cid:74)(cid:81)(cid:68)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:21) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:18)(cid:27)(cid:22)(cid:17)(cid:1)(cid:49)(cid:46) 5 a New Era of Growth through and Global Management back on 2010 as a turning point on the path toward renewed collaborative framework will underpin activities that lead to growth. We must make this year one in which we begin trans- sustainable growth. forming from being a company only capable of swiftly adapting to a changing environment to an imaging company that is an over- Furthermore, while steadily pursuing the environmental (cid:1) vision we announced in 2009 and increasing our focus on thor- whelming market leader. Advancing into a new era of growth, Canon aims to revamp (cid:1) its proﬁ t structure, gain a presence in Asian markets, and set up ough compliance, we will work to ensure that our corporate DNA continues to be passed on to the next generation of managers throughout the Canon Group. new businesses. To accomplish these goals, the Company is implementing such priority measures as those described below. In closing, I would like to thank everyone for their continued (cid:1) understanding and support. Fujio Mitarai Chairman and CEO Canon Inc. In the Ofﬁ ce Business Unit, we are constantly strengthening (cid:1) our solutions and service offerings as well as the performance and product lineups of our ofﬁ ce equipment. We will bolster the digital production system business by leveraging the capabilities of newly consolidated subsidiary Océ while reinforcing our direct-sales structure and human resources. Moreover, the Company will pursue other M&A opportunities and promote alliances with HP and other companies to expand business. In the Consumer Business Unit, we will also improve our proﬁ tability by launching attractive products. The Industry and Others Business Unit will further its restructuring efforts to raise earnings power. With the aim of gaining a presence in Asian markets, we will (cid:1) accelerate the implementation of region-speciﬁ c strategies. In accordance with these strategies, the Company will study, estab- lish and execute business models that are exclusively applicable in Asian markets. In order to set up new businesses that will support sustain- (cid:1) able growth, we will speed up the pace at which we cultivate such next-generation domains as equipment and solutions in the medical imaging ﬁ eld and intelligent robots. In support of this, we will actively work with third-party businesses, research institutions, and other personnel resources. Toward Realizing Sustainable Growth as a Global Corporation Canon continues to solidify its foundations so as to keep prosper- ing over the next 100 years and beyond. To this end, we are working to establish the global Three Regional Headquarters management system. Under this system, each of our three head- quarters will strive to create unique technologies and products developed to meet speciﬁ c requirements in target markets in each region. Then, they will share each other’s technologies and prod- ucts through import and export to bolster their business. This (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:34)(cid:51)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:2102)(cid:1997)(cid:3821)(cid:864)(cid:64)(cid:74)(cid:81)(cid:68)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:22) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:18)(cid:27)(cid:22)(cid:18)(cid:1)(cid:49)(cid:46) 6 CANON ANNUAL REPORT 2009 MESSAGE FROM THE PRESIDENT As we begin to see light on the horizon for the global economy, we are steadily imple- menting our “cross-media imaging” strate- gy and IT reforms toward a new era of growth. Strategies for the First Year in a New Era of Growth Viewing 2010 as the ﬁ rst year in a new era of growth, Canon is business drivers, we will strengthen our solutions business through alliances with IT industry leaders and Managed Print Services (MPS). In addition, Canon will focus on emerging once again aiming to achieve sound growth, pursuing record economies by introducing a large number of products designed sales and proﬁ t supported by enhanced management quality. exclusively for these markets while establishing and bolstering During 2009, Canon continued to promote “cross-media (cid:1) imaging,” a strategy to create new services and business models business bases in each target country. We are also working to expand our commercial printing business through the merger based on advanced synergies between Canon imaging devices. with Océ N.V. as well as the Company’s digital production We believe that cross-media imaging is a key strategy for real- systems and large-format inkjet printers. izing sound growth. Toward this goal, we will offer solutions and expanded services through cross-divisional collaboration. To In the Consumer Business Unit, Canon is expecting further (cid:1) market growth for digital cameras in view of the rapid evolution reinforce our solutions and services offerings, we are moving of high-value-added products and the growth potential of ahead with the further strengthening of our infrastructure emerging economies. We will also focus our energies on devel- company-wide, including preparing for the coming age of cloud oping innovative technologies for inkjet printers. computing. Furthermore, as part of our cross-media imaging strategy, (cid:1) we will continue to develop even more advanced input and In the Industry and Others Business Unit, we consolidated (cid:1) Canon Marketing Japan Inc.’s semiconductor equipment business into that of Canon Inc., bolstering our business structure in this output devices through color management technology, which domain to enable customer needs to be more effectively incor- enables uniﬁ ed color performance across devices, as well as porated into product development as we work to restructure the wireless technologies. Based on such input and output devices, business toward restoring it to proﬁ tability. In addition, we will the Company will work to create new products and services for also reinforce the independent businesses of Group companies. ofﬁ ces, households, production companies, medical institutions and many other customer environments. With regard to new next-generation domains as well, (cid:1) Canon is pursuing medical imaging that contributes to the Canon will also focus on achieving the overwhelming No. 1 (cid:1) position worldwide in all current core businesses. In the Ofﬁ ce ultra-early detection of diseases, intelligent production robots that employ super machine vision technology, and display Business Unit, promoting attractive new products as core development. (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:34)(cid:51)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:2102)(cid:1997)(cid:3821)(cid:864)(cid:64)(cid:74)(cid:81)(cid:68)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:23) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:18)(cid:27)(cid:22)(cid:18)(cid:1)(cid:49)(cid:46) 7 Promoting Total Optimization Also important are our efforts to realize total optimization. operations. We are also concentrating our efforts on the devel- opment of human resources, particularly in the areas of man- Toward this end, we must continue to implement IT reforms with agement skills and technological capabilities, with the aim of the aim of realizing not just operational efﬁ ciency, but also becoming a key player in the global market. Underpinning these improving management speed and quality. In 2010, we will efforts will be the further consolidation of our corporate struc- standardize 3D-CAD information throughout the Company and ture to guarantee the Company’s success against the competi- put in place an integrated support system for processes ranging tion into the future. from development through material procurement, production, sales and servicing. These changes are expected to lead to major Building on the sound management structure we have (cid:1) established to date, we will pool the resources of the Canon management advancements by making possible the prompt and Group as we continue working to switch to a new growth track efﬁ cient utilization of information across organizational boundar- at the earliest possible opportunity. Along the way, we look ies. Additionally, we will introduce in our other businesses speedy forward to your continued understanding and support. Tsuneji Uchida President and COO Canon Inc. supply chain management (SCM) systems, that are based on daily sales and inventory information and have led to solid achievements in our digital camera business. Product quality control is another issue that Canon must (cid:1) decisively tackle company-wide. The occurrence of one serious quality problem could signiﬁ cantly damage the Canon brand and, consequently, place the Company’s very existence at risk. Furthermore, product quality-related issues, with a direct impact on proﬁ ts, are the biggest source of waste. Accordingly, through such initiatives as the introduction of a comprehensive product quality management system covering the entire process from design to mass-production, the Canon Group works as one to continuously strengthen and maintain the structure necessary for preventing product quality problems. Becoming a Truly Excellent Corporation The year 2010 marks the ﬁ nal year of Phase III of our Excellent Global Corporation Plan. As we work to solidify our business foundation toward becoming a truly excellent corporation, the Canon Group also strives to further strengthen compliance. In addition to thorough compliance with laws and regulations, each individual in the Canon Group acts in accordance with the norms and rules of society in the course of our daily business (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:34)(cid:51)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:2102)(cid:1997)(cid:3821)(cid:864)(cid:64)(cid:74)(cid:81)(cid:68)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:24) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:18)(cid:27)(cid:22)(cid:19)(cid:1)(cid:49)(cid:46) 8 CANON ANNUAL REPORT 2009 CORPORATE GOVERNANCE In pursuit of becoming a truly excellent global corporation, Canon continues to bolster corporate governance through its daily operations. Basic Policy and Corporate Governance Structure Canon recognizes that strengthening management supervision functions and maintaining management transparency are vital to improving its corporate governance structure and further raising corporate value. Canon’s basic governance structure comprises the General Meeting of Shareholders, the Board of Directors and the Board of Corporate Auditors. Furthermore, the Executive Commit- tee and management committees are dedicated to addressing key issues. All of these bodies work together to ensure the appropriate management of the Group through an independent internal auditing structure centered on the Corporate Audit Center and an information disclosure system for management activities. Board of Directors Important business matters are discussed and ratiﬁ ed during meetings of the Board of Directors and Executive Committee, which are attended, in principle, by all directors. As of December 31, 2009, the board consisted of 25 directors. In order to facilitate more practical and efﬁ cient decision making, the board is entirely composed of internal directors who have well-developed knowl- edge of the Company’s affairs. Also, the board is supported by various management committees that address important manage- ment issues in their speciﬁ c ﬁ elds. These committees complement the Company’s operational structure, facilitate efﬁ cient decision making and realize a mutual supervisory function for such matters as compliance and ethics. Governance Structure (as of December 31, 2009) Canon Inc. General Meeting of Shareholders Executive Ofﬁ cer System Canon is endeavoring to realize more ﬂ exible and efﬁ cient man- agement operations by maintaining an appropriately sized organi- zation of directors and promoting capable human resources with accumulated executive knowledge across speciﬁ c business areas. Executive ofﬁ cers are appointed and dismissed by the Board of (cid:1) Directors and have a term of ofﬁ ce of one year. The number of executive ofﬁ cers was 11 as of December 31, 2009. Auditing System Canon has ﬁ ve corporate auditors, including three outside auditors who have no personal or business afﬁ liations with the Company. Corporate auditors’ duties include attending meetings of the Board of Directors, Executive Committee and various management com- mittees, listening to business reports from directors, carefully exam- ining documents related to important decisions and conducting strict audits of the Group’s business and assets. Corporate auditors also work closely with accounting auditors and the Corporate Audit Center, which is in charge of monitoring the Company’s compli- ance, risk management and internal control systems in addition to providing assessments and recommendations as required. Internal Control Committee In response to the Sarbanes-Oxley Act, including Section 404, which came into force during 2006, Canon continues to reinforce internal control systems and implement appropriate measures. The Board of Directors Representative Directors Chairman & CEO President & COO Executive Vice President & CFO Executive Officers Board of Corporate Auditors Executive Committee Corporate Audit Center Management Strategy Committee New Business Development Committee Headquarters Administrative Divisions Corporate Ethics and Compliance Committee Subsidiaries & Subsidiaries & Affiliates Affiliates Internal Control Committee Disclosure Committee Office Business Unit Consumer Business Unit Industry and Others Business Unit Marketing Subsidiaries & Affiliates Manufacturing Subsidiaries & Affiliates R&D Subsidiaries & Affiliates (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:34)(cid:51)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:2102)(cid:1997)(cid:3821)(cid:864)(cid:64)(cid:74)(cid:81)(cid:68)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:25) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:18)(cid:27)(cid:22)(cid:20)(cid:1)(cid:49)(cid:46) 9 Internal Control Committee is responsible for Group-wide internal controls, including those pertaining to ﬁ nancial reporting. In order to strengthen internal controls, Canon conducts com- (cid:1) prehensive evaluations of internal controls across areas that include accounting, management oversight, legal compliance, IT systems and the promotion of corporate ethics. As of December 31, 2009, internal control over ﬁ nancial reporting has been assessed as effective by the management and the independent registered public accounting ﬁ rm. (Please refer to pages 101 and 103.) Other Corporate Governance Committees The Corporate Ethics and Compliance Committee, in addition to the Disclosure Committee, is the key body of Canon’s management committees. The Corporate Ethics and Compliance Committee discusses and approves corporate ethics and compliance policies while monitoring the implementation of these policies. The Disclo- sure Committee works to ensure strict compliance with disclosure regulations as prescribed by stock exchanges. Compliance Shortly after its founding, Canon established the San-Ji, or “Three Selfs” spirit, namely “self-motivation,” or taking the initiative and being proactive in all things; “self-management,” or conducting oneself responsibly and being accountable for all one’s actions; and Compliance program at Canon (Suzhou) Inc. All Canon Group employees carry the Compliance Card. Directors & Corporate Auditors (as of December 31, 2009) Chairman & CEO Fujio Mitarai President & COO Tsuneji Uchida Executive Vice President & CFO Toshizo Tanaka Senior General Manager, Policy & Economy Research Center Executive Vice President & CTO Toshiaki Ikoma Group Executive, Corporate R&D Headquarters Chief Executive, Optical Products Operations Senior Managing Directors Nobuyoshi Tanaka Group Executive, Corporate Intellectual Property & Legal Headquarters Junji Ichikawa Chairman & CEO, President & COO, Canon ANELVA Corporation Akiyoshi Moroe Group Executive, External Relations Headquarters Group Executive, Human Resources Management & Organization Headquarters Kunio Watanabe Group Executive, Corporate Planning Development Headquarters Yoroku Adachi President & CEO, Canon U.S.A., Inc. Yasuo Mitsuhashi Chief Executive, Peripheral Products Operations Chief Executive, Chemical Products Operations Managing Directors Tomonori Iwashita Group Executive, Environment Headquarters Group Executive, Quality Management Headquarters Masahiro Osawa Group Executive, Finance & Accounting Headquarters Shigeyuki Matsumoto Group Executive, Device Technology Development Headquarters Katsuichi Shimizu Chief Executive, Inkjet Products Operations Ryoichi Bamba President & CEO, Canon Europa N.V. President & CEO, Canon Europe Ltd. Toshio Homma Chief Executive, L Printer Products Operations Masaki Nakaoka Chief Executive, Ofﬁ ce Imaging Products Operations Haruhisa Honda Group Executive, Production Engineering Headquarters Directors Toshiyuki Komatsu Deputy Group Executive, Corporate Planning Development Headquarters Tetsuro Tahara Group Executive, Global Manufacturing & Logistics Headquarters Seijiro Sekine Shunji Onda Group Executive, Global Procurement Headquarters Kazunori Fukuma President & CEO, SED Inc. Hideki Ozawa President & CEO, Canon (China) Co., Ltd. Masaya Maeda Chief Executive, Image Communication Products Operations Corporate Auditors Keijiro Yamazaki Kunihiro Nagata (Outside) Tadashi Ohe Yoshinobu Shimizu Minoru Shishikura (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:34)(cid:51)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:2102)(cid:1997)(cid:3821)(cid:864)(cid:64)(cid:74)(cid:81)(cid:69)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:26) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:26)(cid:1)(cid:1)(cid:1)(cid:22)(cid:27)(cid:19)(cid:23)(cid:27)(cid:17)(cid:24)(cid:1)(cid:49)(cid:46) 10 CANON ANNUAL REPORT 2009 “self-awareness,” or understanding one’s situation and role in it. These principles remain the basis for employee education and provide the platform for the Canon Group Code of Conduct. Recognizing the importance of safeguarding personal informa- (cid:1) tion, Canon does its utmost to protect this valuable form of infor- mation asset in the course of fulﬁ lling its social responsibilities. With the aim of keeping its employees informed and aware, the Company conducts e-learning sessions as part of its personal information protection education programs every year. Disclosure Canon makes every effort to disclose information on its manage- ment and business strategies as well as its performance results to all stakeholders in an accurate, fair and timely manner. To this end, Canon holds regular brieﬁ ngs and posts the latest information on its website together with a broad range of disclosure materials. Canon has formulated its own Disclosure Guidelines and (cid:1) established the Disclosure Committee, which makes decisions regarding information disclosure, including necessity, content and timing. The Disclosure Committee makes such decisions after receiving reports on information that it might be necessary to disclose from the person in charge of the disclosure working group at each headquarters. Countering Antisocial Forces Canon has formulated a basic policy stipulating that no Canon Group companies shall maintain relationships of any kind with antisocial forces that represent a threat to social order and security. To uphold this basic policy, Canon has established a department dedicated to activities aimed at countering such parties while reinforcing cooperative ties with applicable public authorities. In addition, Canon’s Employment Regulations include a clause prohib- iting such relationships, and the Company continues to step up efforts to ensure strict employee adherence. Risk Management As Canon pursues business expansion in various ﬁ elds on a global scale, the business and other risks to which it may be exposed continue to diversify. With the goal of eliminating such risks alto- gether while honoring the trust placed in it by its stakeholders, Canon works diligently to avoid or minimize its exposure, to this end assigning speciﬁ cally designated management committees to address key issues. In particular, the Executive Committee and other management (cid:1) committees engage in careful discussions regarding signiﬁ cant risk factors. The Corporate Audit Center preemptively identiﬁ es risk factors through audit activities. Also, Canon formulates in-house rules to guard against those risks and, in accordance with the policies formulated by the Internal Control Committee, strives to identify and assess relevant risks associated with individual business processes. Signiﬁ cant Differences in Corporate Governance Prac- tices between Canon and U.S. Companies Listed on the NYSE Section 303A of the New York Stock Exchange (the “NYSE”) Listed Company Manual (the “Manual”) provides that companies listed on the NYSE must comply with certain corporate governance stan- dards. However, foreign private issuers whose shares have been listed on the NYSE, such as Canon Inc. (the “Company”), are permitted, with certain exceptions, to follow the laws and practices of their home country in place of the corporate governance prac- tices stipulated under the Manual. In such circumstances, the foreign private issuer is required to disclose the signiﬁ cant differences between the corporate governance practices under Section 303A of the Manual and those required in Japan. A summary of these differences as they apply to the Company is provided below. 1. Directors Currently, the Company’s board of directors does not have any director who could be regarded as an “independent director” under the NYSE Corporate Governance Rules for U.S. listed companies. Unlike the NYSE Corporate Governance Rules, the Corporation Law of Japan (the “Corporation Law”) does not require Japanese companies with a board of corporate auditors such as the Company, to appoint independent directors as members of the board of directors. The NYSE Corporate Gover- nance Rules require non-management directors of U.S. listed companies to meet at regularly scheduled executive sessions without the presence of management. Unlike the NYSE Corpo- rate Governance Rules, however, the Corporation Law does not require companies to implement an internal corporate organ or committee comprised solely of independent directors. Thus, the Company’s board of directors currently does not include any non- management directors. 2. Committees Under the Corporation Law, the Company may choose to: (i) have an audit committee, nomination committee and compen- sation committee and abolish the post of corporate auditors; or (ii) have a board of corporate auditors. The Company has elected to have a board of corporate auditors, whose duties include monitoring and reviewing the management and reporting the results of these activities to the shareholders or board of directors of the Company. While the NYSE Corporate (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:34)(cid:51)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:2102)(cid:1997)(cid:3821)(cid:864)(cid:64)(cid:74)(cid:81)(cid:68)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:18)(cid:17) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:18)(cid:27)(cid:22)(cid:22)(cid:1)(cid:49)(cid:46) 11 Governance Rules provide that U.S. listed companies must have an reports and may veto a proposal for the nomination of corporate audit committee, nominating committee and compensation com- auditors, accounting auditors and the determination of the amount mittee, each composed entirely of independent directors, the of compensation for the accounting auditors put forward by the Corporation Law does not require companies to have speciﬁ ed board of directors. committees, including those that are responsible for director nomi- Under the Corporation Law, the half or more of a company’s nation, corporate governance and executive compensation. corporate auditors must be “outside” corporate auditors. These The Company’s board of directors nominates candidates for are individuals who are prohibited to have ever been a director, directorships and submits a proposal at the general meeting of executive ofﬁ cer, manager, or employee of the Company or its shareholders for shareholder approval. Pursuant to the Corpora- subsidiaries. The Company’s current corporate auditor system tion Law, the shareholders then vote to elect directors at the meets these requirements. Among the ﬁ ve members on the meeting. The Corporation Law requires that the total amount or Company’s board of auditors, three are outside corporate auditors. calculation method of compensation for directors and corporate The qualiﬁ cations for an “outside” corporate auditor under the auditors be determined by a resolution of the general meeting of Corporation Law are different from the audit committee indepen- shareholders respectively, unless the amount or calculation dence requirement under the NYSE Corporate Governance Rules. method is provided under the Articles of Incorporation. As the Articles of Incorporation of the Company do not provide an amount or calculation method, the amount of compensation 4. Shareholder Approval of Equity Compensation Plans The NYSE Corporate Governance Rules require that shareholders for the directors and corporate auditors of the Company is be given the opportunity to vote on all equity compensation plans determined by a resolution of the general meeting of share- and any material revisions of such plans, with certain limited holders. The allotment of compensation for each director from exceptions. Under the Corporation Law, a Company is required to the total amount of compensation is determined by the Com- obtain shareholder approval regarding the stock options to be pany’s board of directors, and the allotment of compensation to issued to directors and corporate auditors as part of remuneration each corporate auditor is determined by consultation among of directors and corporate auditors. the Company’s corporate auditors. 3. Audit Committee The Company avails itself of paragraph (c)(3) of Rule 10A-3 of the Security Exchange Act, which provides that a foreign private issuer which has established a board of corporate auditors shall be exempt from the audit committee requirements, subject to certain requirements which continue to be applicable under Rule 10A-3. Pursuant to the requirements of the Corporation Law, the shareholders elect the corporate auditors by resolution of a general meeting of shareholders. The Company currently has ﬁ ve corporate auditors, although the minimum number of corporate auditors required pursuant to the Corporation Law is three. Unlike the NYSE Corporate Governance Rules, Japanese laws and regulations, including the Corporation Law, do not require corporate auditors to be experts in accounting or to have any other area of expertise. Under the Corporation Law, a board of corporate auditors may determine the auditing policies and methods for investigating the business and assets of a Company, and may resolve other matters concerning the execution of the corporate auditor’s duties. The board of corporate auditors prepares auditors’ (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:34)(cid:51)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:2102)(cid:1997)(cid:3821)(cid:864)(cid:64)(cid:74)(cid:81)(cid:68)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:18)(cid:18) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:18)(cid:27)(cid:22)(cid:22)(cid:1)(cid:49)(cid:46) 12 CANON ANNUAL REPORT 2009 12 CANON ANNUAL REPORT 2009 STRATEGIES AND ACTIVITIES (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:34)(cid:51)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:2102)(cid:1997)(cid:3821)(cid:864)(cid:64)(cid:74)(cid:81)(cid:68)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:18)(cid:19) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:18)(cid:27)(cid:22)(cid:22)(cid:1)(cid:49)(cid:46) 13 13 EXCELLENT GLOBAL CORPORATION PLAN ....... 14 IMPROVING THE QUALITY OF MANAGEMENT ....................................................... 16 RESEARCH & DEVELOPMENT ............................... 20 PRODUCTION........................................................... 22 SALES & MARKETING ............................................ 24 CORPORATE SOCIAL RESPONSIBILITY ............... 26 Photo: Canon introduced an extensive range of solutions based on the combination of various input and output devices at the Pro Photo Solutions exhibition held in the United Kingdom. (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:34)(cid:51)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:2102)(cid:1997)(cid:3821)(cid:864)(cid:64)(cid:74)(cid:81)(cid:68)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:18)(cid:20) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:19)(cid:27)(cid:17)(cid:17)(cid:1)(cid:49)(cid:46) 14 CANON ANNUAL REPORT 2009 >> EXCELLENT GLOBAL CORPORATION PLAN Canon launched the initial phase of its medium- and long-term Excellent Global Corporation Plan in 1996. With this and each subsequent ﬁ ve-year phase of the plan incorporating speciﬁ c, distinct strategies and targets, ﬁ scal 2009 marked the penulti- mate year of Phase III. The Excellent Global Corporation Plan is founded upon a single 100 companies in terms of key performance indicators. To that overarching goal: “In accordance with the philosophy of kyosei, end, under Phase I of the Excellent Global Corporation Plan, the Canon will continue contributing to society through technological Company placed an emphasis on strengthening its ﬁ nancial innovation, aiming to be a corporation worthy of admiration and health with a raft of wide-ranging business reforms. Speciﬁ cally, respect worldwide.” Instrumental in keeping this goal ﬁ rmly in all-out efforts were made to entrench such policies as “total the Company’s sights are the ﬁ ve key strategies for Phase III set optimization” and “focus on proﬁ t” in conjunction with a busi- out below. Having concentrated on keeping the goal in constant focus in ness selection and concentration process. In Phase II, Canon used the robust ﬁ nancial health secured (cid:1) through the initiatives adopted in Phase I to act as a springboard its corporate viewﬁ nder while promoting the key strategies, en route to becoming No.1 in all its major areas of business. Canon has tirelessly striven to enter the ranks of world’s top Reﬂ ecting these efforts, sales and proﬁ t grew steadily each year. 5 Key Strategies >> >> >> >> >> 1. Achieving the overwhelming No.1 position worldwide in all current core businesses 2. Expanding business operations through diversiﬁ cation 3. Identifying new business domains and accumulating required technologies 4. Establishing new production systems to sustain international competitiveness 5. Nurturing truly autonomous individuals and promoting effective corporate reforms Digital SLR camera Laser printer (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:34)(cid:51)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:2102)(cid:1997)(cid:3821)(cid:864)(cid:64)(cid:74)(cid:81)(cid:68)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:18)(cid:21) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:19)(cid:27)(cid:17)(cid:20)(cid:1)(cid:49)(cid:46) 15 External Rankings • Financial Times Global 500 (May 30/31, 2009 issue) Market value ranking: 104 (9th in the Technology Hardware & Equipment sector) • FORTUNE Global 500 (July 20, 2009 issue) Revenues ranking: 190 (5th in the Computers, Ofﬁ ce Equipment category) Proﬁ ts ranking: 131 (3rd in the Computers, Ofﬁ ce Equipment category) • BusinessWeek “Best Global Brands” of 2009 (September 28, 2009 issue) Ranking: 33 (4th among all Japanese companies) Océ’s headquarters in Venlo, the Netherlands Under Phase III Canon embarked on a course intended to FORTUNE Global 500 is a registered trademark of FORTUNE Magazine, a bring about sound growth by reinforcing established businesses division of Time Inc. in the United States of America. and championing new ventures. However, changes in worldwide ﬁ nancial and economic markets dating back to 2008 caused the Company to make a major change in course from the pursuit of move expands Canon’s worldwide customer base by giving it sound growth to the securing of improved management quality. access to the large number of outstanding global companies that Canon is continuing to make steady progress in improving its (cid:1) management quality. In March 2010, Canon made Netherlands- based Océ N.V. a consolidated subsidiary, aiming to garner the are Océ clients. In 2010, the ﬁ nal year of Phase III and one we have deﬁ ned as (cid:1) the “ﬁ rst year in a new era of growth,” we will continue to overall No.1 presence in the printing industry. The respective improve the quality of our management while promoting growth businesses of Canon and Océ effectively complement each other’s strategies aimed at overcoming the difﬁ culties of the current product portfolio, and this combination will enable both to recession. capitalize on an excellent ﬁ t with regard to product range, chan- nel mix and R&D projects not to mention a superior lineup of solutions spanning the entire printing industry. In addition, this Excellent Global Corporation Plan—Phase(cid:1)III (2006-2010) Sound Growth Improvement of the Quality of Management Reinventing Ourselves for Sound Growth (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:34)(cid:51)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:2102)(cid:1997)(cid:3821)(cid:864)(cid:64)(cid:74)(cid:81)(cid:68)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:18)(cid:22) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:20)(cid:27)(cid:21)(cid:21)(cid:27)(cid:20)(cid:23)(cid:1)(cid:49)(cid:46) 16 CANON ANNUAL REPORT 2009 >> IMPROVING THE QUALITY OF MANAGEMENT Canon gained a foothold in 2009 in improving its management quality and will con- tinue to improve it, aiming to achieve renewed sound growth. Having experienced periods of extremely difﬁ cult market conditions intermediate inefﬁ ciencies throughout the process, from develop- in the past, Canon has come to fully understand the necessity of ment to sales and marketing. In other words, if Canon utilizes becoming a corporation with a ﬁ rm structure capable of responding efﬁ cient SCM, it will be able to minimize lead times, prevent stagna- rapidly and ﬂ exibly to any changes in external conditions. This tion in parts and product distribution and directly connect production understanding acted as a catalyst for our success to date in improv- and sales activities. The realization of such sophisticated SCM will ing the quality of management. come through the reinforcement of Canon’s purchase order-oriented Improving management quality is synonymous with developing (cid:1) the capability to realize real-time management, that is, reinforcing production system, cell production and logistics capabilities. the Company’s comprehensive capabilities to make decisions accu- rately and agilely and translating those decisions into swift action Realizing IT Reforms Canon is very much aware that IT reforms hold the key to improve- even amid dynamic ﬂ uctuations in market conditions. Through the ments in SCM and, ultimately, management quality. Such IT reforms achievement of sophisticated SCM, IT reforms and an optimal global will enable Canon to centralize the information management of all production structure, Canon aims to realize real-time management. its business processes, which will, in turn, empower it in the achieve- Establishing Sophisticated SCM Canon aims to realize sophisticated SCM that considers not only ment of sophisticated SCM. By effectively using information through IT, the Company aims to integrate the outcomes of the management reforms that it has undertaken to date, thereby enhancing the procurement and production processes but also the design process. efﬁ ciency of its management and operations. Consequently, SCM To remain successful amid major market changes, Canon must will allow us to meet changes in market conditions more efﬁ ciently continue to expeditiously launch competitive new products in an and effectively as well as to strategize our production and marketing efﬁ cient manner. This cannot be achieved through product planning activities more ﬂ exibly. and development capabilities alone. We will realize more sophisti- cated SCM in order to facilitate the timely and efﬁ cient launch and supply of our products. From Development to Production In Canon’s upstream IT reforms, the utmost priority has been given to (cid:1) Sophisticated SCM will be based on the concept of eliminating the standardization and integration of the 3D-CAD systems used for IT Reform Quality Information Product Planning Development/ Mass-Production Design Trial Procurement Production Sales & Marketing Service 3D Information Purchase Order Information Prompt Optimization of Inventories, Capital Expenditures and SG&A Value Chain In connection with Group-wide 3D-CAD system standardization and integration, the introduction of a PDM system will enable centralized technical information management throughout the design, procurement, prototyping and production processes, thereby shortening development times. Supply Chain With procurement and production operations sharing the purchase-order information managed by sales and marketing, Canon will be able to optimize its control of inventories, facility utilization and costs in sync with market fluctuations. This approach will allow the Company to establish sophisticated SCM. (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:34)(cid:51)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:2102)(cid:1997)(cid:3821)(cid:864)(cid:64)(cid:74)(cid:81)(cid:68)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:18)(cid:23) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:19)(cid:27)(cid:17)(cid:22)(cid:1)(cid:49)(cid:46) 17 Through IT reforms, including the Group-wide standardization of 3D-CAD systems, Canon is working to realize sophisticated SCM, thereby bolstering its corporate structure to agilely respond to changes in management conditions. product development. And, ﬁ nally, in 2010 Canon expects to com- Inc., at 25 production facilities. This system will not only standardize plete and launch a Group-wide system based on 3D-CAD systems for our production management systems, it will allow us to link produc- centralizing design information management and supporting the tion management with the information gathered by our design entire process from development to procurement and production. divisions as well as the sales information collected by our marketing In conjunction with 3D-CAD system standardization and integra- (cid:1) tion, Canon plans to introduce an integrated product data manage- ment (PDM) system in 2010. This will enable the centralized manage- front lines. (cid:1) More recently, Oita Canon introduced a purchase order-oriented production system. This lean system involves production based on ment of technical information accumulated throughout the entire the information provided by sales companies and conﬁ rmed by process, from design to procurement, prototyping and production. Canon’s production divisions. To enable the optimized management After the uniﬁ cation of 3D-CAD systems and the PDM system of inventories, the Company has to develop a supply chain system introduction, the Company will possess a platform for “prototype- that makes full use of information provided by sales companies and less” product development, which will consequently enable the implement this system on a Group-wide scale. If these sales compa- Company to make development times shorter. nies place purchase orders closely linked with real demand in the The main advantage offered by IT reforms lies in the resulting (cid:1) ability to make simultaneous progress across all business processes. market and we manufacture our products strictly based on those purchase orders, our production and sales will be completely syn- Fully implemented, this unrivalled system may, for example, enable chronized, which will, in turn, eliminate excessive inventories. Canon the scheduled completion of product design to coincide with that of plans to introduce this system at all its plants within the Group. mold and production equipment design. Also, Canon is accelerating the establishment of a next-generation (cid:1) logistics system. This logistics system will synchronize production and From Production to Sales and Marketing By February 2010, Canon completed the introduction of a new shipments based on the Company’s marketing strategies. More speciﬁ cally, Canon will be able to ship out its products directly from its production system, which initially had been launched by Oita Canon plants to sales companies based on their purchase orders and, as a (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:34)(cid:51)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:2102)(cid:1997)(cid:3821)(cid:864)(cid:64)(cid:74)(cid:81)(cid:68)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:18)(cid:24) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:19)(cid:27)(cid:17)(cid:23)(cid:1)(cid:49)(cid:46) 18 CANON ANNUAL REPORT 2009 Cell production at Oita Canon result, shorten its shipping lead times. This means that we will be able to maintain our inventories at a minimum level. Bringing innovation to Beneﬁ ts of IT Reforms What these IT reforms will do is synchronize the operations of multiple global logistics supports reviews of transportation modes and distribu- divisions and departments. When successfully synchronized, divisions tion routes. Canon will reduce both its logistics costs and the environ- and departments involved in a business or product will collectively mental burden of its logistics operations. produce signiﬁ cant outcomes, including reduced costs, shortened lead times and improved product quality. As these expectations show, we Product Quality In 2010, Canon plans to begin the practical application of a propri- are working diligently to realize ideal operational conditions through IT reforms and thereby eliminate inefﬁ ciencies while putting a great deal etary product quality management system. This system will allow for of effort into improving the quality of our management. the centralized management of Group-wide product quality informa- tion. In addition to swift and appropriate responses in matters concerning product quality, the system will enable the Company to Optimal Global Production Structure Based on the aforementioned strategies, Canon is promoting the preemptively identify the possibility of quality issues and estimate establishment of an optimal global production structure. Canon’s these issues’ impact on its production activities in each of the design, optimal global production structure will take into consideration such prototyping and mass-production stages. Also incorporating servicing factors as the environment, product quality, costs, logistics, consumer information, this system will doubtlessly facilitate total optimization. markets, human resources and parts procurement. One way the Inventories and Turnover Measured in Days (Billions of yen) Inventories Turnover Measured in Days (Days) 60 Increase in(cid:1)Property, Plant and Equipment and Depreciation (Billions of yen) Increase in Property, Plant and Equipment Depreciation 600 500 400 300 200 0 47 2 . 0 1 5 45 44 47 1 . 9 3 5 5 . 3 6 5 9 . 6 0 5 39 2 . 3 7 3 05 06 07 08 09 50 40 30 20 0 500 400 300 200 100 0 8 . 3 8 3 7 . 9 7 3 8 . 5 3 2 7 . 5 0 2 5 . 8 2 4 8 . 9 0 3 0 . 2 6 3 6 . 4 0 3 4 . 7 7 1 2 . 6 1 2 05 06 07 08 09 (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:34)(cid:51)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:2102)(cid:1997)(cid:3821)(cid:864)(cid:64)(cid:74)(cid:81)(cid:68)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:18)(cid:25) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:19)(cid:27)(cid:17)(cid:25)(cid:1)(cid:49)(cid:46) 19 never-ending challenge of maximizing investment efﬁ ciency, we will work to reserve sufﬁ cient free cash ﬂ ows and limit our depreciation expense burden, thereby constructing a proﬁ t-focused, resilient corporate structure. As part of these ongoing efforts, Canon thoroughly examined (cid:1) each expense item to optimize SG&A expenses in 2009. As a result, we were able to decrease SG&A expenses 15.2% year on year to ¥905.7 billion. We aim to establish a structure under which we can lower our cost to sales ratio, even after we have once more returned to a growth path. Canon similarly reduced its R&D expenses 18.6% year on year to (cid:1) ¥304.6 billion. The ratio of R&D expenses to net sales, however, rose to 9.5% from 9.1% in 2008. The increase in the ratio represents our determination to maintain our technological competitiveness even Warehouse Management System (WMS) for optimal inventory control Company is building such a structure is through localized production. amid difﬁ cult operating conditions. For instance, in 2010, our new plant at Canon Virginia, Inc. in the United States will start automated production and establish a supply As explained above, Canon has advanced real-time management (cid:1) and steadily improved management quality. The Company will chain that handles the entirety of toner cartridge processing—from accelerate management quality-focused initiatives in 2010, which it production to recycling—locally within the U.S. market, the very recognizes as the “ﬁ rst year in a new era of growth.” At the same point of consumption for the company’s products. time, by implementing growth strategies for 2010 onward aimed at fending off the current recession, Canon aims to return to and remain on the path to sound growth. Achievements in Management Quality Improvements In addition to efforts to establish sophisticated SCM, realize IT reforms and build an optimal global production structure, the entire Canon Group has endeavored to improve its management quality. In 2009, Canon worked to optimize inventory management, the increase in property, plant and equipment and depreciation while reducing such costs as SG&A expenses and R&D expenses. Having already made progress in inventory optimization, Canon was able to reduce its inventories 26.4% compared with December 31, 2008 to ¥373.2 billion. In 2009, Canon lowered its increase in property, plant and (cid:1) equipment 40.3% year on year to ¥216.1 billion while also lower- ing its depreciation expenses 8.9% to ¥277.4 billion. Through a selection-and-concentration approach, the Company continued to minimize capital investment while maximizing results. Facing the New plant at Canon Virginia Selling, General and Administrative Expenses R&D Expenses and Sales Ratio (Billions of yen) (Billions of yen) 1,500 1,200 900 600 300 0 1 . 5 4 0 , 1 5 . 9 4 9 0 . 2 2 1 , 1 9 . 7 6 0 , 1 7 . 5 0 9 05 06 07 08 09 400 300 200 100 0 R&D Expenses Sales Ratio 8.2 3 . 8 6 3 9.1 0 . 4 7 3 9.5 6 . 4 0 3 7.6 7.4 5 . 6 8 2 3 . 8 0 3 05 06 07 08 09 (%) 10.0 7.5 5.0 2.5 0 (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:34)(cid:51)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:2102)(cid:1997)(cid:3821)(cid:864)(cid:64)(cid:74)(cid:81)(cid:68)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:18)(cid:26) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:19)(cid:27)(cid:17)(cid:26)(cid:1)(cid:49)(cid:46) 20 CANON ANNUAL REPORT 2009 >> RESEARCH & DEVELOPMENT By prioritizing R&D even in times of extreme economic adversity, Canon is strategically laying out stepping-stones toward renewed, sound growth. creating differentiated technologies to be applied in existing and next-generation businesses. The Corporate R&D Headquarters is tasked with vertically integrating Canon’s R&D activities to encom- pass the entire range of ﬁ elds—from materials to systems and software—and to develop cross-divisional functions. Underpinned by stringent adherence to PDCA cycles in each R&D process, such a structure will empower Canon to facilitate selection and concentra- tion for greater R&D efﬁ ciency, reinforce its upstream technological research and, ultimately, nurture new businesses. The Frontier Research Center, under the Corporate R&D Head- (cid:1) quarters, is strengthening upstream technological research. The center focuses on research into optical, precision and other existing core technologies. The Frontier Research Center is committed to contribut- Canon-Kyoto University Joint Research Project (CK Project) in the medical imaging ﬁ eld ing to Canon’s renewed, sound growth from a long-term perspective. R&D Expenses and Patents Despite harsh market conditions in 2009, Canon continued to make aggressive investments in R&D to better prepare itself for Canon has adhered to an approach whereby all development is (cid:1) carried out in-house. However, with due consideration given to technological maturity today (a macro-level factor) as well as to a future growth. R&D expenses amounted to ¥304.6 billion, and the micro-level factor which dictates that it must create breakthrough ratio to net sales increased from 9.1% in ﬁ scal 2008 to 9.5% in technologies, Canon has recognized the increasing importance of ﬁ scal 2009. By segment, ¥78.9 billion, or 25.9% of the total expenses, was allocated to the Ofﬁ ce Business Unit; ¥74.1 billion, an open innovation approach—in other words, creating new technologies and products by combining its technologies with or 24.3%, to the Consumer Business Unit; ¥23.3 billion, or 7.7%, those of other companies and research institutions. This approach to the Industry and Others Business Unit; and ¥128.3 billion, or 42.1%, to Corporate R&D. Canon’s commitment to R&D has also contributed to its leading (cid:1) position in terms of intellectual property rights. In 2009, Canon was granted 2,204* patents in the United States. Cognizant that R&D is crucial to its renewed, sound growth, (cid:1) Canon will continue to place high priority on R&D expenses. * Source: U.S. Patent and Trademark Ofﬁ ce. Calculated based upon publicly disclosed weekly totals. Enhancing Our R&D Structure Canon is working to bolster its R&D capabilities as part of efforts to improve its management quality. With an eye to achieving renewed, sound growth, the Company has adopted a multifold approach, including the establishment of a new Corporate R&D Headquarters and the strengthening of frontier research through the adoption and encouragement of open innovation. Canon has established the Corporate R&D Headquarters with (cid:1) the aim of bolstering its future-oriented upstream technologies and will enable the Company to keep sharpening its competitiveness even in today’s extremely adverse conditions. One example of our open approach is the Canon-Kyoto University Joint Research Project (CK Project), through which Canon is studying medical imaging. More speciﬁ cally, we are advancing research into optical ultrasound mammography, a safer alternative to conventional X-ray mammog- raphy, and optical coherence tomography (OCT) systems. DIGIC 4 imaging processor, a key component of Canon digital cameras (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:34)(cid:51)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:2102)(cid:1997)(cid:3821)(cid:864)(cid:64)(cid:74)(cid:81)(cid:68)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:19)(cid:17) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:19)(cid:27)(cid:18)(cid:17)(cid:1)(cid:49)(cid:46) 21 Canon is advancing the development of Super Machine Vision—an imaging technology that goes beyond the capabilities of human vision. Bolstering Product Competitiveness To make its products stand out from those of its competitors, sion technologies—both of which are Canon core technologies— are applied in R&D in these ﬁ elds. Canon continuously strengthens the development of key compo- nents and devices. Underpinning these efforts are the Company’s Speciﬁ cally, in the medical imaging ﬁ eld, the Company is (cid:1) advancing part of the CK Project to realize the practical applications leading-edge technological offerings, including DigitalImagingIC of imaging technology in the ultra-early detection of diseases. (DIGIC) image processors and Complementary Metal Oxide Semi- conductor (CMOS) sensors, both of which are key components of In the robotics ﬁ eld, Canon is currently accumulating tangible (cid:1) results in the development of intelligent robots. Aiming to make a digital cameras, as well as Diffractive Optics (DO) lenses, which help productivity breakthrough that will cross industry boundaries in the realize smaller and lighter telephoto lenses, and organic photo future, we will continue to conduct extensive research and testing. conductor (OPC) drums employed in electrophotographic processes. Now, Canon is promoting cross-media imaging, which it (cid:1) deﬁ nes as achieving advanced synergies between imaging devices. In the displays ﬁ eld, Canon is steadily accumulating technologi- (cid:1) cal assets through the development of surface-conduction electron- emitter displays (SEDs). At the same time, it is promoting the Leveraging the imaging technologies developed from its core development of organic light-emitting diode (OLED) displays and technologies, which support various types of “creation,” “expres- small- and medium-sized liquid crystal displays (LCDs) to improve sion” and “presentation,” Canon is working to provide users with business proﬁ tability and product competitiveness. an all-new, rewarding and unique communication experience. Fostering New Core Businesses Canon is advancing the development of new core businesses. Speciﬁ c examples include the Company’s efforts in the ﬁ elds of medical imaging and robotics. Long-nurtured imaging and preci- These technological stepping-stones are helping to give Canon (cid:1) added impetus toward establishing new business domains. The Company aims to develop its operations in these domains into next-generation core businesses. (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:34)(cid:51)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:2102)(cid:1997)(cid:3821)(cid:864)(cid:64)(cid:74)(cid:81)(cid:68)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:19)(cid:18) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:19)(cid:27)(cid:18)(cid:18)(cid:1)(cid:49)(cid:46) 22 CANON ANNUAL REPORT 2009 >> PRODUCTION Canon is accelerating toward establishing completely lean SCM through the enhance- ment of production technologies, production structure and human resources. Canon has also expanded the scope of in-house production. (cid:1) Speciﬁ cally, Canon further promoted the in-house production of rubber functional components, circuit boards and plastic compo- nents, adding to the in-house production of molds as well as electrophotographic and optical key components. Meanwhile, the Kawasaki Ofﬁ ce began the in-house production of semiconductor devices, including image sensors for digital SLR cameras, in 2009. Canon is constantly exploring avenues to reinforce in-house pro- duction as a means of accumulating know-how and reducing costs. Developing an Optimal Global Production Structure Canon is reviewing its global production network to establish an optimal global production structure. The anticipated contraction of the workforce in Japan necessitates the establishment of a high- quality, ﬁ nely tuned production structure that facilitates the effective Automated production of toner cartridges Enhancing Production Technologies Canon is bringing its automated production to a new level. Canon use of automated production systems to raise productivity. Faced with this urgent issue, the Company recognizes as indispensable the continues to promote the automated production of certain con- identiﬁ cation of worldwide locations suitable for manufacturing sumables and components, gradually increasing the use of auto- individual products based on due consideration of all factors, includ- mated machinery. Also, steady efforts are being made in the ing the environment, product quality, costs, logistics, markets, development of purpose-built intelligent robots, speciﬁ cally, the human resources and materials and parts procurement. Company aims to enhance their manual dexterity and ability to Canon is accelerating the establishment of a production net- “see” and differentiate between objects. work with built-in ﬂ exibility to permit rapid adjustments to changes Image sensor production in Kawasaki, Japan (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:34)(cid:51)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:2102)(cid:1997)(cid:3821)(cid:864)(cid:64)(cid:74)(cid:81)(cid:68)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:19)(cid:19) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:21)(cid:27)(cid:19)(cid:25)(cid:27)(cid:18)(cid:24)(cid:1)(cid:49)(cid:46) 23 In China, Canon (Suzhou) Inc. conducts cell production of imageRUNNER ADVANCE models. in production volumes. The new plant constructed at Canon Virginia, Inc. in 2009 undertakes the production of toner cartridges In Japan, Canon opened its Oita Manufacturing Training Center (cid:1) in 2009. The center employs skilled Canon engineers who pass on as well as the recycling of used cartridges, effectively establishing the manufacturing expertise that the Company has accumulated closed-loop toner cartridge SCM within the United States. over its 70-year history to younger engineers. Canon will continue to do its part in honing the art of manufacturing and bequeathing it to future generations. Instilling True Craftsmanship, Group–wide Canon’s success in enhancing production technologies and devel- oping an optimal global production structure hinges on one key factor: the capabilities of its workforce. As a company committed to manufacturing, we have long recognized the value of develop- ing human resources, positioning as a priority management issue the nurturing of expert engineers and technicians. Canon addresses this aspect of its management on a Group- (cid:1) wide scale. In the United States, Canon Virginia works with a local community college and follows a jointly developed training curricu- lum to provide new recruits with the education and training need- ed for high-quality manufacturing. Also, by dispatching trainers to its production bases, particularly (cid:1) in Asia, Canon is providing training programs of the same quality as those provided by their counterparts in Japan. Furthermore, senior management candidates visit training centers in Japan for the further reﬁ nement of their managerial skills. Production technology training program (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:34)(cid:51)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:2102)(cid:1997)(cid:3821)(cid:864)(cid:64)(cid:74)(cid:81)(cid:68)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:19)(cid:20) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:19)(cid:27)(cid:18)(cid:22)(cid:1)(cid:49)(cid:46) 24 CANON ANNUAL REPORT 2009 >> SALES & MARKETING Canon continues to bolster its sales and marketing operations by accelerating the provision of its client needs-oriented solutions. of conﬁ dential information and enhanced operational productivity. The Americas In the year under review, Canon’s sales in this region totaled ¥894.2 billion, which accounted for 27.9% of consolidated net sales. Overall results were stagnant due to an economic slowdown in the United States, the Company’s core market in the Americas. However, Latin American nations continued to maintain their growth trends. Under such conditions, Canon bolstered its U.S. direct sales and (cid:1) service network to ensure greater customer satisfaction. Speciﬁ cally, we continued to expand the business bases of the direct sales and marketing company Canon Business Solutions, Inc. Meanwhile, Canon U.S.A., Inc. acquired Florida-based Virtual Imaging, Inc. to enhance the portfolio of medical imaging solutions and services. In Latin America, we are strengthening our business infrastructure Canon’s new European headquarters in London General Review Canon has long delivered to the market an extensive range of imaging products. Against the backdrop of rapid IT advances today, and providing servicing support, training and call center functions. machines are becoming increasingly networked. As a result, calls are heightening for more sophisticated services and productivity- enhancing solutions available in every aspect of both private life and business. In its ofﬁ ce equipment business, Canon aims to expand the (cid:1) contribution that solutions business sales make to total sales. Accordingly, we must set clear goals for product and business development in growth areas. In 2009, we launched Canon Managed Document Services (cid:1) (Canon MDS). Based on existing region- and market-speciﬁ c Managed Print Services (MPS), Canon MDS is designed to deliver high-quality, consistent services worldwide, particularly for enter- prises with global operations. Also in 2009, Canon and HP formed an alliance with a view to (cid:1) providing unmatched ofﬁ ce workﬂ ow solutions. Speciﬁ cally, the alliance will position the two companies to offer a new class of web-enabled solutions that combine Canon’s MFDs with HP’s leading-edge device manageability, IT integration and ofﬁ ce work- ﬂ ow capabilities. The two companies will collaborate closely to expand their presence in the ofﬁ ce solutions ﬁ eld. Furthermore, in the same year we entered into an alliance with (cid:1) Adobe Systems Incorporated. Based on a global agreement, Adobe digital security technologies are embedded in Canon’s imageRUNNER ADVANCE. The integration of both companies’ technologies offers various beneﬁ ts to users, including a reduced risk of unauthorized use Europe Canon’s sales in Europe amounted to ¥995.2 billion, which was approximately 31.0% of consolidated net sales. Market conditions varied depending on the country and region. Conditions were relatively steady in Germany and France, as well as in Northern Europe. Meanwhile, markets in the United Kingdom and Italy were weak due to deteriorated economic conditions. Conditions in emerging markets, despite stagnation in the ﬁ rst half, showed mild recovery in the second half. Call center of Canon Information Technology Services, Inc. in the United States (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:34)(cid:51)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:2102)(cid:1997)(cid:3821)(cid:864)(cid:64)(cid:74)(cid:81)(cid:68)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:19)(cid:21) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:19)(cid:27)(cid:18)(cid:24)(cid:1)(cid:49)(cid:46) 25 imagePRESS-based medical imaging solutions have been introduced at University MRI & Medical Imaging Centers in Florida, the United States. In response to these conditions, Canon has consolidated its (cid:1) European headquarters functions into Canon Europe Ltd. in other areas in Asia. As a new initiative in China, Canon pioneered new sales channels, including Internet marketing and local distribu- London, aiming to facilitate more efﬁ cient decision making and tors for certain products. We plan to expand our sales and servicing improve the quality of its regional sales and marketing activities. bases in China and other Asian markets. In line with ongoing efforts to enhance its solutions business, (cid:1) Canon Europa N.V. acquired a 17% stake in I.R.I.S. Group—a Belgian Canon Australia Pty. Ltd. is striving to expand its channel (cid:1) coverage, develop business in uncultivated markets and improve company boasting an extensive portfolio of scanning technologies. the efﬁ ciency of business processes. Asia and Oceania Remaining relatively stable, the Asian economy is showing potential for further growth. In Japan, sales totaled ¥702.3 billion, which accounted for 21.9% of consolidated net sales. In Asia and Ocea- nia excluding Japan, sales totaled ¥617.6 billion, 19.2% of consoli- dated net sales. (cid:1) Market conditions were extremely severe in Japan, particularly for B to B businesses. However, aiming to bolster its solutions business, Canon Marketing Japan Inc. continued to reorganize and reinforce Group operations in 2009. In such areas as China and India, sales soared despite the global (cid:1) recession. Canon secured proﬁ t and achieved growth in these countries by strengthening its brand power through enhanced communication. Canon’s business also grew steadily in various Quick Response and Repair Center (QRC) in Shanghai (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:34)(cid:51)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:2102)(cid:1997)(cid:3821)(cid:864)(cid:64)(cid:74)(cid:81)(cid:68)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:19)(cid:22) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:20)(cid:27)(cid:20)(cid:19)(cid:27)(cid:22)(cid:18)(cid:1)(cid:49)(cid:46) 26 CANON ANNUAL REPORT 2009 >> CORPORATE SOCIAL RESPONSIBILITY On its way toward becoming an excellent global corporation, Canon continues to contribute to the world’s sustainability. Canon’s Basic Approach to CSR Working to grow into a truly excellent global corporation under its corporate philosophy, kyosei, Canon aspires to a society in which all people—regardless of race, religion or culture—live and work together for the common good into the future. Environmental Activities Pursuant to “Action for Green,” the Canon Environmental Vision announced in 2009, we aim to balance corporate growth with environmental activities. Canon is working to realize technological innovation and, at the same time, improve its management quality, thereby enhancing product performance and functions and minimiz- ing the environmental burden of its products throughout their life cycles. In this way, the Company is contributing to the establishment CO2 emissions management at the imageRUNNER ADVANCE design stage of a society in which people enjoy afﬂ uent lifestyles in a sound global tion in toner ﬁ xing processes. environment. Environmental “Top Runner” imageRUNNER ADVANCE Canon considers environmental aspects throughout the entire life In addition to these environmental features, the series is the ﬁ rst (cid:1) family of Canon products for which CO2 management has been conducted from the product planning stage. Based on assessments made at the development stage, imageRUNNER ADVANCE’s life- cycle of individual products. The imageRUNNER ADVANCE series of cycle CO2 emissions have been reduced signiﬁ cantly. Meanwhile, color digital multifunction devices (MFDs) is packed with wide- Canon pioneered the commercial use of a bio-based plastic, co- ranging environmental technologies, including Canon’s proprietary developed with Toray Industries, Inc., featuring the highest-grade on-demand ﬁ xing technology, which helps reduce power consump- ﬂ ame retardance. The use of this plastic helps reduce CO2 emissions. CANON ENVIRONMENTAL VISION Also, standards in accordance with the RoHS Directive* have (cid:1) been applied to the imageRUNNER ADVANCE series. In fact, in line with its stricter in-house standards, Canon has refrained from using lead- and cadmium-containing materials that are allowed under Through technological innovation and improved management efﬁ ciency throughout all of its corporate activities, Canon aims to achieve sustainable corporate growth while also realizing a society that promotes both enriched lifestyles and the global environment. To this end, Canon offers greater value using fewer resources throughout the entire product lifecycle—Produce, Use, Recycle—to achieve highly functional products with minimal environmental burden. Canon continues to expand these activities with its customers and business partners. Canon will contribute to a future that promotes both enrichment and the environment through technological innovation. Returnable containers for imageRUNNER ADVANCE models (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:34)(cid:51)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:2102)(cid:1997)(cid:3821)(cid:864)(cid:64)(cid:74)(cid:81)(cid:68)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:19)(cid:23) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:19)(cid:27)(cid:19)(cid:17)(cid:1)(cid:49)(cid:46) 27 A reduced maintenance burden was a factor behind the explosive popularity of toner cartridges. Canon fully recycles the used toner cartridges it collects. RoHS exemption clauses. In addition, the series uses plastic components created through (cid:1) closed-loop recycling, where plastic materials are semi-permanently Environmental Activities at Operational Sites Canon practices thorough energy management at its operational sites, where it has introduced advanced energy-efﬁ cient equipment recycled and reused. Due to additives used in the melting process, and devices and makes every effort to cut greenhouse gas emis- these recycled components boast strength, durability and ﬂ ame sions. Speciﬁ c activities during 2009 included the close monitoring retardance on par with those of brand-new plastic components. of energy-consuming facilities, the optimization of facility utiliza- This innovative plastic recycling technology enables Canon to tion and the renewal and upgrading of energy-intensive facilities to improve its MFD’s eco-friendliness. facilities with improved energy-saving performance. * EU Directive on the restriction of the use of certain hazardous substances in electrical and electronic equipment (2002/95/EC) Toner Cartridges Recycling Program 2010 marks the 20th anniversary of the Canon Toner Cartridge Canon continued to reduce or eliminate hazardous chemical (cid:1) substances used in its production processes. For example, the Company promoted the use of advanced technologies for the in- house recycling of waste alcohol solvents. Recycling Program, a zero-landﬁ ll program in which every compo- nent of the used cartridges that the Company collects is reused, Contributing to Society Canon conducts social contribution activities in wide-ranging ﬁ elds. recycled or recovered. Taking advantage of our toner cartridges’ The following are examples of these activities. recycling-oriented designs, we have promoted closed-loop recycling, which facilitates the reuse of components and the recycling of plastic without compromising the quality of new cartridges made The WWF-Canon Polar Bear Tracker Project Canon Europe has been a Conservation Partner of the World Wide from used plastic. Today, Canon runs toner cartridge collection Fund for Nature (WWF) since 1998 in Europe, the Middle East and operations in 23 countries worldwide and to date has collected Africa by providing the organization with equipment and supplies approximately 250,000 metric tons of used cartridges. as well as technical assistance. A relatively recent initiative, the (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:34)(cid:51)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:2102)(cid:1997)(cid:3821)(cid:864)(cid:64)(cid:74)(cid:81)(cid:68)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:19)(cid:24) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:19)(cid:27)(cid:19)(cid:18)(cid:1)(cid:49)(cid:46) 28 CANON ANNUAL REPORT 2009 Through the WWF-Canon Polar Bear Tracker Project and in cooperation with the WWF, Canon has developed educa- tional materials. These materials have been adopted by elementary schools in Vienna, Austria. WWF-Canon Polar Bear Tracker Project features an environmental works almost indistinguishable from the originals. Reproduced works education section through which Canon Europe and WWF offer are donated to the museums, shrines and temples that own the an interesting package of teaching materials on environmental originals, while the owners use the reproduced works for public and subjects to schools free of charge. educational events, thus ensuring better storage conditions for the Also, through Canon Austria GmbH’s efforts, many Austrian originals. During the three-year period from 2007 to 2010, a total of elementary schools offered classes on various project topics during 15 historic items were reproduced and donated. 2009. Students at these schools enjoyed the opportunity to learn about the impact of climate change on polar bears while studying ways of reducing their own impact on the environment. The Canon Institute for Global Studies and the Canon Foundation In areas as diverse as macroeconomics, natural resources and Making Strides against Breast Cancer—The WALK For over a decade, Canon U.S.A. has supported the American energy, the environment, foreign affairs and national security, the Canon Institute for Global Studies investigates, analyzes and Cancer Society (ACS), which conducts extensive research, educa- studies political, economic and social issues from a global perspec- tion, advocacy and services for patients and their families aimed at tive and disseminates ﬁ ndings, information and policy proposals eliminating cancer as a major health concern. The company’s support has taken the form of fund and product donations to help the organization continue its research and services. The ACS organizes an annual “Making Strides against Breast Cancer” fund-raising campaign every October throughout the United States. Canon U.S.A. employees and their families and friends volunteer to participate in a walk that takes place in Jones Beach State Park, Long Island, New York. Canon is a ﬂ agship sponsor of this event. The Tsuzuri Project Canon and the Kyoto Culture Association (NPO) jointly promote the Tsuzuri Project aimed at preserving important Japanese cultural properties. Using Canon’s digital SLR cameras, large-format inkjet printers and color management technologies, skilled artisans produce 2009 Canon Green Volunteer Action (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:34)(cid:51)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:2102)(cid:1997)(cid:3821)(cid:864)(cid:64)(cid:74)(cid:81)(cid:68)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:19)(cid:25) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:19)(cid:27)(cid:19)(cid:20)(cid:1)(cid:49)(cid:46) 29 The Tsuzuri Project uses Canon technologies to reproduce signiﬁ cant cultural assets. (Above: reproducing Tawaraya Sotatsu’s “Waves at Matsushima”) worldwide to further global development. At the same time, to promote sustainable prosperity and human happiness, the Canon Nurturing Diverse Human Resources Aiming to become a truly excellent global corporation, Canon Foundation supports researchers, academics, and organizations effectively uses communication and education to motivate each working in various scientiﬁ c, technical and cultural ﬁ elds. employee to continue growing as an “excellent person.” In 2009, Canon opened new skill training facilities in the city 2009 Canon Green Volunteer Action in China Canon (China) Co., Ltd. undertook an environmental project in of Oita. Equipment includes board-mounting devices, lathes, milling machines, grinders for lens processing, plastic molding China in 2009. Aimed at promoting sustainable bio-diversity in machines, automated control devices and other manufacturing China, the project involved Chinese students from selected equipment. These facilities and other training venues are used to universities. At the East Dongting Lake National Nature Reserve in raise the baseline production capacity and skill levels of employees. Hunan, selected students working under the project conducted At such facilities, we provide courses related to production in research on current bio-diversity status, photographed animals and addition to training programs for board mounting, processing of all plants and, based on the ﬁ ndings, made reports and policy proposals types of parts and practical training using robots. To enhance the regarding the reserve’s future development. role of these facilities as hubs for regional contributions, we also take on trainees from educational institutions and other bodies “Canon—For the Next Generation” Program in Vietnam Canon is working to contribute to educational development in from outside the Group. One example of this initiative is the offering of internship opportunities to high school students. Vietnam under this charity program, which was announced in 2009. In addition, Canon is working to develop the capabilities of Speciﬁ c activities include the refurbishment of school buildings and executive personnel. Through a dedicated program, executive facilities, the improvement of peripheral environments by enhancing participants endeavor to strengthen their planning and analytical greenery and the donation of school materials. Canon Group employ- skills, become well-versed in Canon’s management principles and ees volunteer to visit applicable schools to conduct these activities. strategies and foster mutual understanding. (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:34)(cid:51)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:2102)(cid:1997)(cid:3821)(cid:864)(cid:64)(cid:74)(cid:81)(cid:68)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:19)(cid:26) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:20)(cid:27)(cid:21)(cid:21)(cid:27)(cid:22)(cid:25)(cid:1)(cid:49)(cid:46) 30 CANON ANNUAL REPORT 2009 30 CANON ANNUAL REPORT 2009 BUSINESS UNITS (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:34)(cid:51)(cid:64)(cid:2244)(cid:1728)(cid:3612)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:74)(cid:81)(cid:68)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:20)(cid:17) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:17)(cid:19)(cid:27)(cid:17)(cid:22)(cid:1)(cid:49)(cid:46) 31 31 31 OFFICE BUSINESS UNIT .......................................... 32 • Ofﬁ ce network digital multifunction devices (MFDs) • Color network digital MFDs • Ofﬁ ce copying machines • Personal-use copying machines • Full-color copying machines • Laser printers • Large format inkjet printers 51.3% CONSUMER BUSINESS UNIT ...................................36 • Digital SLR cameras • Compact digital cameras • Interchangeable lenses • Digital video camcorders • Inkjet multifunction peripherals • Single function inkjet printers • Image scanners • Broadcasting equipment 40.5% INDUSTRY AND OTHERS BUSINESS UNIT .............40 • Semiconductor production equipment • Mirror projection mask aligners for LCD panels • Medical equipment • Components • Computer information systems • Document scanners • Personal information products 11.2% Note: The percentage ﬁ gures for the three business units presented in the pie charts above do not add up to 100% because “Eliminations,” used in consolidated accounting, were not included in calculation considerations. Photo: All Canon digital cameras use the common component DIGIC, an innovative technology. The excellence of our digital cameras, digital SLR cameras in particular, has been recognized by camera users worldwide despite the stagnation of the global economy. (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:34)(cid:51)(cid:64)(cid:2244)(cid:1728)(cid:3612)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:74)(cid:81)(cid:68)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:20)(cid:18) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:17)(cid:19)(cid:27)(cid:18)(cid:17)(cid:1)(cid:49)(cid:46) 32 CANON ANNUAL REPORT 2009 BUSINESS UNITS OFFICE BUSINESS UNIT Photo: The imageRUNNER ADVANCE series (above: imageRUNNER ADVANCE C7065) incorporates the ideas from feedback accumulated by Canon’s sales network through the provision of solution proposals. One imageRUNNER ADVANCE feature based on such feedback is the customizable user interface: displays on the control panel can be customized to meet individual user preferences. (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:34)(cid:51)(cid:64)(cid:2244)(cid:1728)(cid:3612)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:74)(cid:81)(cid:68)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:20)(cid:19) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:17)(cid:19)(cid:27)(cid:18)(cid:21)(cid:1)(cid:49)(cid:46) 33 “ Taking advantage of the imageRUNNER ADVANCE series’ rapid rise in popularity since its release, in 2010 Canon will take the offensive and expand this competitive lineup based on a new platform.” Masaki Nakaoka Chief Executive, Ofﬁ ce Imaging Products Operations Canon’s Ofﬁ ce Business Unit, like all B to B businesses, faced ex- tremely severe operating conditions in 2009. With yen appreciation exacerbating the conditions, Canon’s sales and proﬁ ts both declined year on year. However, market conditions did show some recovery in the second half. In December, the European market even showed record unit sales for ofﬁ ce equipment with color capabilities. In such an environment, Canon released the new imageRUNNER ADVANCE series of ofﬁ ce network MFDs, a family of products that have been well-received by the market. The series boasts powerful IT system networkability, helps (cid:1) strengthen administrative processes and reduce the Total Cost of Ownership (TCO) while supporting the realization of an operational environment optimal for each user. In the lead-up to the development of the imageRUNNER ADVANCE platform, we listened closely to the feedback offered by Canon’s sales network. One of the features based on such feedback is the series’ server function: models equipped with large hard disk capacity can function as both servers and data storage units—a convenient feature for any type of corporation. From this point forward, Canon will accelerate the implementa- (cid:1) tion of two-pronged strategies underpinned by devices and solutions. imageRUNNER ADVANCE devices will be roughly divided into two lineup categories: high-value-added and compact. In 2010, Canon plans to expand the imageRUNNER ADVANCE lineup. It is not too much to say that Canon’s Ofﬁ ce Business Unit will be driven by the imageRUNNER ADVANCE series into the near future. B to B businesses are increasingly shifting away from hardware- oriented models, and companies are required more than ever before to pursue solutions-oriented business models. With the imageRUNNER ADVANCE series as a core driver, Canon will work to provide printing-related solutions tailored to industry-speciﬁ c needs, thereby contributing to the evolution of the solutions business sector. Our alliances with HP and Adobe will also play an important role in this regard. From a long-term perspective, we will accelerate preparations for the era of cloud computing, which is expected to arrive shortly. (cid:1) Meanwhile, the commercial digital printing market is undergoing a transition. Speciﬁ cally, printing capacity, which formerly had been concentrated among major printers, is being distributed throughout the industry. This shift will bring the expansion of the light/medium production market. Canon will target this promising market with competitive products and services. Digital production systems Laser printer (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:34)(cid:51)(cid:64)(cid:2244)(cid:1728)(cid:3612)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:74)(cid:81)(cid:68)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:20)(cid:20) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:17)(cid:19)(cid:27)(cid:18)(cid:24)(cid:1)(cid:49)(cid:46) 34 CANON ANNUAL REPORT 2009 Fiscal 2009 Review—OFFICE BUSINESS UNIT In 2009, net sales in the Ofﬁ ce Business Unit totaled ¥1,645.1 2009. In the color product billion, a decrease of 26.8% year on year. Global demand for category, which includes ofﬁ ce network MFDs—both color and monochrome prod- the imageRUNNER AD- ucts—decreased, even in Asia, where previously growth had VANCE series, the Color been rapid. Under such unfavorable conditions, Canon released imageRUNNER C2550 (iR the imageRUNNER ADVANCE series, which showed strong C2380i in some areas) saw sales in the fourth quarter. In addition to its environmental sales and market share features, the series seamlessly accommodates clients’ existing IT grow. In the A4-size color Color imageCLASS MF8050Cn (i-SENSYS MF8050Cn in some areas) environments while boasting improved performance and multifunction printer (MFP) category, the Color imageRUNNER operability. 1022/1022i (iR C1021i in some areas) performed robustly. In line with such new product launches, Canon continued Through an alliance with HP announced in 2009, Canon has to enhance its business structure in this segment. Moreover, the reinforced proposals for client-speciﬁ c, optimal ofﬁ ce systems Company worked to bolster and expand its ofﬁ ce solutions that improve productivity and cost efﬁ ciency. In addition, business. Canon initiated Canon MDS, a common global service for By product category, although sales of ofﬁ ce network effectively managing customers’ document input-output digital MFDs remained low in all regions, A4-models continued environments and processes. to gain popularity and the number of users switching to color models increased. Reﬂ ecting the growing need for the optimal manage- ment and administration of document input and output, Canon released a range of new, competitive MFDs in Sales of laser printers declined year on year. As a means to improve its management quality, Canon strove to minimize its laser printer inventories. Furthermore, the Company launched new monochrome laser printers in the low-end range for use by individuals and SOHOs as well as new color laser printers, including the Color imageCLASS MF8050Cn/MF8350Cdn (i- SENSYS MF8050Cn/MF8350Cdn in some areas). Color imageRUNNER C2550 (iR C2380i in some areas) The light production market for commercial printers is expanding, particularly in the United States and Europe. In Focus—Environmentally Conscious imageRUNNER ADVANCE In addition to its superior functions and performance, the imageRUNNER ADVANCE series boasts eco-friendly features. The application of on-demand ﬁ xing technology has realized zero power consumption by the ﬁ xing unit when in standby mode. The use of ﬂ ame-retardant biomass plastics in exterior body parts not only reduces CO2 emissions over the series’ product lifecycles but also promotes environmental awareness among users. Moreover, having adopted the in-house standards stricter than the RoHS Directive,* Canon has minimized the use of lead- and cadmium- containing materials. Furthermore, Canon began shipping certain models in reusable boxes. Designed in tandem with the series’ units, these durable boxes are shaped to minimize dead space in transport containers. The use of the boxes thus helps reduce the environ- mental burden of shipping. * EU Directive on the restriction of the use of certain hazardous substances in electrical and electronic equipment (2002/95/EC) imageRUNNER ADVANCE C7065 (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:34)(cid:51)(cid:64)(cid:2244)(cid:1728)(cid:3612)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:74)(cid:81)(cid:68)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:20)(cid:21) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:21)(cid:27)(cid:21)(cid:26)(cid:27)(cid:17)(cid:24)(cid:1)(cid:49)(cid:46) 35 Sales Results (Millions of yen) 3,000,000 2,000,000 1,000,000 8 1 5 , 7 7 4 , 2 9 0 6 , 6 4 2 , 2 6 7 0 , 5 4 6 , 1 imageRUNNER ADVANCE C5035 imagePROGRAF iPF755 0 07 08 09 Canon’s full-ﬂ edged entry into this growing market came with Canon continued to enhance its business structure and sales the release of the imageRUNNER ADVANCE C9075/9065 PRO activities. Among Canon large-format inkjet printers, the series. Also, the newly launched imagePRESS 1135P/1125P/ imagePROGRAF iPF700 series, which boasts small footprints 1110P digital presses (imagePRESS 1135/1125/1110 in some and improved operability, was particularly well received by the areas) satisfy ever-diversifying customer needs. market, signiﬁ cantly contributing to Canon’s business perfor- Target industries for large-format inkjet printers scaled back mance in this product category. capital expenditures. Due to the negative impact of the yen’s rapid appreciation and lackluster market conditions, Canon’s con- solidated sales and unit sales in this business both decreased year on year. However, excluding the effect of yen appreciation, sales in 2009 stayed level with those of 2008. Placing priority on the Chinese market, imagePRESS 1135P (imagePRESS 1135 in some areas) In Focus—Merger with Netherlands-Based Océ N.V. Océ develops, produces and markets document and industrial-use printing systems and high-speed wide-format digital print systems. Océ has strengths in printers for commercial printing and industrial wide- format printers used for outdoor displays. The combination of these strengths with our own in copying machines and MFPs used by large corporations and SOHOs and in large-format printers aimed at businesses and design ﬁ rms will help us build a strong complementary ﬁ t from a technology and product perspective. Through expanded business and technology portfolios, we will provide printing solutions that are most sophisticated ever offered. Press conference announcing the merger plan (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:34)(cid:51)(cid:64)(cid:2244)(cid:1728)(cid:3612)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:74)(cid:81)(cid:68)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:20)(cid:22) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:17)(cid:19)(cid:27)(cid:19)(cid:18)(cid:1)(cid:49)(cid:46) 36 CANON ANNUAL REPORT 2009 BUSINESS UNITS CONSUMER BUSINESS UNIT Photo: Thanks to Canon’s built-in Dual DIGIC 4 image processors and 18.0-megapixel image sensor, the EOS 7D digital SLR camera boasts superior capabilities, including high-speed continuous shooting that comes close to that of pro-series EOS models. Satisfying the desire of advanced amateur users, the EOS 7D is leading the way in advances for digital SLR cameras. (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:34)(cid:51)(cid:64)(cid:2244)(cid:1728)(cid:3612)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:74)(cid:81)(cid:68)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:20)(cid:23) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:17)(cid:19)(cid:27)(cid:19)(cid:21)(cid:1)(cid:49)(cid:46) 37 “ Securing the leading position in global markets, Canon will continue to provide attractive products.” “ Leveraging its advanced technology, Canon will further introduce ‘real-deal’ products.” Masaya Maeda Katsuichi Shimizu Chief Executive, Image Communication Products Operations Chief Executive, Inkjet Products Operations Canon worked diligently to minimize the impact on its digital Although the sales volume in the global inkjet printer market largely camera business of the economic downturn that started in 2008. fell below that of the previous year due to worldwide recession, Although sales of compact digital cameras showed a decline from overall consumer-speciﬁ c market conditions slowed only slightly. the third quarter of 2008, the digital SLR camera business was Nevertheless, Canon recorded sales growth in terms of volume in affected only slightly. While emerging markets maintained their the Americas and Asia due to the high market evaluation of its solid growth throughout the year, developed markets—starting products. with Europe, including Russia—showed some signs of recovery in (cid:1) In 2009, with advanced product technologies and excellent the second half of 2009. As a result, during the ﬁ nal quarter of designs, Canon strove to expand sales channels, particularly in the 2009, both sales and proﬁ t in Canon’s digital camera business United States, despite severe economic conditions. Furthermore, exceeded those recorded in the corresponding period of 2008. amid rapid market changes, Canon further improved its SCM to (cid:1) Approaching the recession as an opportunity, Canon proac- signiﬁ cantly lower the inventory level. This was helped by the Com- tively aimed for the timely launch of strategic products while pany’s promotion of in-house production for product components. expanding its digital camera lineups. The Company focused on (cid:1) Furthermore, to improve competitiveness Canon became one reinforcing mid-range and high-end products, among which the of the ﬁ rst to adopt the image per minute (IPM) speed measuring EOS 5D Mark II, EOS 7D and PowerShot S90 bore fruit. One of method based on ISO global standards. This move is expected to Canon’s key strategies is to use a single platform packed with further strengthen Canon’s brand recognition among users and innovative technologies, such as DIGIC, and thereby ensure high dealers. product quality throughout its lineups. (cid:1) Also, Canon introduced high-value-added items to attract new (cid:1) Taking advantage of its in-house development and production high-volume production users. In the ﬁ rst half of 2009, the PIXMA capabilities, Canon will continue to launch innovative products, Pro9500 Mark II and PIXMA Pro9000 Mark II, both of which thereby pursuing greater growth in sales and proﬁ t. garnered high praise, particularly in the United States, were launched (cid:1) It has been only a decade since digital technologies began to for professional and advanced amateur photographers for use in take hold in the imaging market. With an eye on its further combination with EOS cameras. In the second half of 2009, Canon expansion, Canon commits itself to always being the technological renewed the consumer product forerunner while improving productivity through the effective use of sophisticated SCM. lineup with models to meet growing demand for wireless LAN printers. (cid:1) Focusing on speedy, high- quality printing, Canon will continue to pursue the power of innovation and thereby boost its market presence. Digital SLR camera, EOS-1D Mark IV Inkjet printer, PIXMA Pro9500 Mark II (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:34)(cid:51)(cid:64)(cid:2244)(cid:1728)(cid:3612)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:74)(cid:81)(cid:68)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:20)(cid:24) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:17)(cid:19)(cid:27)(cid:19)(cid:23)(cid:1)(cid:49)(cid:46) 38 CANON ANNUAL REPORT 2009 Fiscal 2009 Review—CONSUMER BUSINESS UNIT The Consumer Business Unit’s net sales fell 10.6% from the previous ﬁ scal year to ¥1,301.2 billion. This was mainly attribut- able to the negative impact of the strong yen and the worldwide recession. However, sales of digital SLR cameras remained healthy worldwide. On the other hand, the inkjet printer business faced weak market conditions. (cid:1) Against this backdrop, Canon strove to adjust its production PowerShot SD980 IS DIGITAL ELPH (DIGITAL IXUS 200 IS in some areas) and shift camera shake, gained popularity. (cid:1) Compact digital cameras saw sales negatively impacted by the stagnant global market, resulting in a sales volume drop. In and shipping operations in order to eliminate uneven inventories. response, Canon secured its leading position in the global market (cid:1) In digital SLR cameras, sales of the EOS 5D Mark II remained by introducing attractive products at fair prices in a timely healthy. The EOS 7D, another advanced-amateur model, has manner. In the United States, Canon released new products, earned great recognition since its release. Two low-end models—namely, the EOS Rebel T1i (EOS 500D in some areas) and the EOS Rebel Xsi (EOS 450D in some areas), also contributed to sales in the digital SLR camera business. (cid:1) In lenses for digital SLR cameras, sales of the new EF 100mm F2.8L Macro IS USM, which incorporates the Hybrid IS (Image Stabilizer) to including the PowerShot SD980 IS DIGITAL ELPH (DIGITAL IXUS 200 IS in some areas) and the PowerShot S90. In digital video camcorders, the Company introduced the VIXIA HF21 (LEGRIA HF21 in some areas), which contributed to sales thanks to a good reputation for high-quality images. In LCD projectors, Canon released the WUX10 Mark II and the SX80 Mark II with speciﬁ cations optimized for photography and medical use. EOS 5D Mark II Canon also strengthened its lineups of broadcast- ing lenses and network cameras. Despite such efforts, Canon marked decreased sales and proﬁ t due to currency REALiS WUX10 Mark II (XEED WUX10 Mark II in some areas) compensate for both angle EF100mm F2.8L Macro IS USM exchange ﬂ uctuations In Focus—EOS 7D Digital SLR Camera Made to be the tool of choice for advanced amateur users, EOS 7D debuted in 2009. Providing functions and performance nearing those of pro-series EOS cameras, this new digital SLR camera realizes superior photoshooting versatility. Featuring an all-new 18.0-megapixel image sensor and Dual DIGIC 4 Image Processors, the EOS 7D achieves extended ISO sensitivity of up to ISO 12800 and captures high-quality images at speeds of up to 8 fps.* The EOS 7D is also capable of capturing full HD video. By reinforcing the lineups of mid-range and high-end digital SLR cameras, Canon aims to stimulate and capture replacement demand among entry-model Canon users. * frames per second EOS 7D (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:34)(cid:51)(cid:64)(cid:2244)(cid:1728)(cid:3612)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:74)(cid:81)(cid:68)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:20)(cid:25) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:17)(cid:19)(cid:27)(cid:19)(cid:24)(cid:1)(cid:49)(cid:46) 39 Sales Results (Millions of yen) (Millions of yen) 2,000,000 1,500,000 1,000,000 500,000 0 2 5 9 , 7 8 5 , 1 5 7 0 , 6 5 4 , 1 0 6 1 , 1 0 3 , 1 07 08 09 VIXIA HF21 (LEGRIA HF21 in some areas) PIXMA MP640 and the economic recession. advanced amateur users in the ﬁ rst half of 2009. During the (cid:1) Amid the severe business environment, Canon’s inkjet printer second half of 2009, Canon refreshed the consumer product business enhanced its sales volume and reinforced its sales lineup by introducing the PIXMA MP990, PIXMA MP640 and network, building on the high market reputation of its advanced PIXMA MP560 with various excellent functions, including wire- product technologies based on FINE technology* as well as less LAN, which has seen growing market needs. excellent product design. (cid:1) The Company recorded a sales volume increase in the Americas and Asia. Canon released the PIXMA MX860 for ofﬁ ce use as well as the PIXMA Pro9500 Mark II and the PIXMA Pro9000 Mark II for professional and (cid:1) With regard to scanners, Canon released such new products as the CanoScan LiDE 700F while enhancing its sales and marketing activities. These efforts enabled the Company to accelerate global operations and thereby maintain the No. 1 position worldwide in this product category. PIXMA MP990 * Full-photolithography Inkjet Nozzle Engineering technology CanoScan LiDE 700F In Focus—Inkjet Printer Marketing Strategy in China To bolster sales and marketing activities and after-sales services related to its inkjet printers in China, Canon moved its Chinese inkjet printer business headquarters functions from Beijing to Shanghai on January 1, 2010. In line with the headquarters transfer, Canon is bolstering its sales and marketing operations in robustly developing coastal areas through the strengthening of operational resources. Speciﬁ cally, the Company is increasing its sales personnel and accelerating investment in sales promotion. Also, in an effort to expand its inkjet printer customer base, Canon is strengthening marketing activities targeted at commercial users. At the same time, the Company is working to improve the recognition of Canon-brand inkjet printers in the Chinese market through vigorous advertising and promotion activities. Canon is reinforcing its sales network in China. (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:34)(cid:51)(cid:64)(cid:2244)(cid:1728)(cid:3612)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:74)(cid:81)(cid:68)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:20)(cid:26) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:17)(cid:19)(cid:27)(cid:19)(cid:25)(cid:1)(cid:49)(cid:46) 40 CANON ANNUAL REPORT 2009 BUSINESS UNITS INDUSTRY AND OTHERS BUSINESS UNIT Photo: Measuring 9.0 m in width, 11.6 m in depth and 5.8 m in height, and weighing approximately 100 tons, Canon’s LCD lithography equipment can accommodate eighth-generation glass substrate sizes. Canon is currently undertaking technological development for lithography equipment to support substrate sizes of 10th- and future generations, achieve a higher resolution and realize compatibility with organic light-emitting diode devices and displays. (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:34)(cid:51)(cid:64)(cid:2244)(cid:1728)(cid:3612)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:74)(cid:81)(cid:68)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:21)(cid:17) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:17)(cid:19)(cid:27)(cid:20)(cid:17)(cid:1)(cid:49)(cid:46) 41 “Spurred by the progress of its structural reforms in the semicon- ductor lithography equipment business, Canon will pursue higher customer satisfaction while improving its advanced technologies.” Toshiaki Ikoma Chief Executive, Optical Products Operations Market conditions for semiconductor lithography and LCD lithogra- affected by sluggish market conditions during 2009. However, phy equipment were harsh in 2009 due to the suspension of Canon is expecting market recovery in 2010. Canon has been investment and manufacturers’ postponement of mass production contributing to customers’ operations through high productivity operations. Reﬂ ecting this, demand for LCD lithography equipment and the speedy launch of its products—efforts that have led to a halved and semiconductor lithography equipment saw sales shrink high rate of repeat orders. The Company is anticipating growth in one-third from 2008 levels. the Chinese market and therefore will make ongoing efforts to (cid:1) The semiconductor lithography equipment business was hit achieve a leading market position. Simultaneously, Canon will heavily and marked a large sales drop. In response, Canon strive to secure its competitiveness by developing lithography launched drastic structural reforms to optimize the scale of busi- equipment for 10th- and future generation panels as well as nesses in the face of market contraction. In January 2010, Canon higher deﬁ nition displays. Marketing Japan‘s semiconductor lithography equipment business Semiconductor lithography and LCD lithography equipment was transferred to Canon Inc. as the latter shifted to a style of continually require the latest technologies in the optical lens and business operation able to more promptly reﬂ ect customers‘ ultra-precision device design ﬁ elds. These technologies, along with opinions and requests in its products. the results of R&D in these ﬁ elds, are applicable in developing new (cid:1) Canon will ﬂ exibly meet increasingly diverse market needs optical and precision devices and triggering the creation of new through its i-line and KrF lithography equipment. In addition, the markets. In this sense, R&D efforts made in these businesses are Company will continue to pursue the further development of ArF driving technological advances for the entire Group. The Industry lithography equipment and next-generation lithography technologies. and Others Business Unit understands this important role and aims (cid:1) In LCD lithography equipment, the Company was negatively to fulﬁ ll it. Semiconductor lithography systems Ophthalmic equipment (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:34)(cid:51)(cid:64)(cid:2244)(cid:1728)(cid:3612)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:74)(cid:81)(cid:68)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:21)(cid:18) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:21)(cid:27)(cid:18)(cid:19)(cid:27)(cid:22)(cid:26)(cid:1)(cid:49)(cid:46) 42 CANON ANNUAL REPORT 2009 Fiscal 2009 Review—INDUSTRY AND OTHERS BUSINESS UNIT Sales Results (Millions of yen) (Millions of yen) Net sales of the Industry and Others Business Unit fell 31.5% year on year to ¥358.0 billion. Overall markets for semiconductor and LCD lithography equipment were negatively impacted by sluggish demand. In LCD lithography equipment, despite weak demand, Canon managed to maintain a strong market presence, backed by the MPAsp-H700 series for eighth-generation mirror projection aligners, while recording signiﬁ cant sales in South Korea. However, Canon experienced a signiﬁ - 600,000 500,000 400,000 300,000 200,000 100,000 0 3 8 9 , 9 4 5 5 0 4 , 2 2 5 8 9 9 , 7 5 3 07 08 09 LCD lithography equipment cant sales drop for semiconductor lithography equipment cameras, the Company introduced the CR-1 Mark II and during 2009, reﬂ ecting the suspension of capital investment marked relatively favorable results amid stagnant markets. and investment plans by device manufacturers. In digital radiography systems, Canon enjoyed brisk Despite the economic downturn, Canon’s medical sales in China and other Asian countries due to the intro- equipment business saw sales growth. In mydriatic/non- duction of the CXDI-50G/55G/55C, which boasts better mydriatic two-in-one digital retinal cameras, Canon re- operability and easier maintenance. Furthermore, address- leased the CX-1, the world‘s ﬁ rst digital retinal camera to ing needs in the growing dynamic incorporate a dedicated digital camera unit, to positive reviews. In non-mydriatic digital retinal X-ray imaging market, Canon launched a portable DR system that enables both the viewing of dynamic images and capturing of static images. MPAsp-H700 CXDI-55G In Focus—Consolidation of Poland-Based OPTOPOL Technology S.A. The OPTOPOL Group develops, manufactures and markets such innovative ophthalmic diagnostic equipment as Optical Coherence Tomography (OCT) systems and operates throughout Europe, the United States and Japan. In line with the aging of the global population, the number of people suffering from ophthalmic diseases is growing, and OCT plays a key role in fundus-examination devices using near-infrared light for retinal disorder diagnosis. To penetrate the promising OCT market, Canon made OPTOPOL a consolidated subsidiary, gaining access to a powerful product portfolio. OPTOPOL’s OCT systems, ultrasound scanners, corneal topographers and perimeters will complement Canon’s retinal cameras, refractors and tonom- eters. Also, technological collaboration will facilitate the creation of ground- breaking ophthalmic diagnostic tools. Through such actions, Canon aims for the world’s No. 1 position in the ophthalmic diagnostic equipment business. The OPTOPOL Group’s R&D activities (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:34)(cid:51)(cid:64)(cid:2244)(cid:1728)(cid:3612)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:74)(cid:81)(cid:68)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:21)(cid:19) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:17)(cid:19)(cid:27)(cid:20)(cid:24)(cid:1)(cid:49)(cid:46) FINANCIAL SECTION 43 TABLE OF CONTENTS FINANCIAL OVERVIEW ..................................................................................... 44 TEN-YEAR FINANCIAL SUMMARY ................................................................... 60 CONSOLIDATED BALANCE SHEETS .................................................................. 62 CONSOLIDATED STATEMENTS OF INCOME ..................................................... 63 CONSOLIDATED STATEMENTS OF EQUITY ...................................................... 64 CONSOLIDATED STATEMENTS OF CASH FLOWS ............................................. 66 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS .................................... 67 1 Basis of Presentation and Signiﬁ cant Accounting Policies 2 Basis of Financial Statement Translation ......................................... 72 3 Investments 4 Trade Receivables .............................................................................. 74 5 Inventories 6 Property, Plant and Equipment 7 Finance Receivables and Operating Leases ...................................... 75 8 Goodwill and Other Intangible Assets ............................................. 76 9 Short-Term Loans and Long-Term Debt ........................................... 77 10 Trade Payables 11 Employee Retirement and Severance Beneﬁ ts ............................... 78 12 Income Taxes ..................................................................................... 84 13 Common Stock .................................................................................. 86 14 Legal Reserve and Retained Earnings .............................................. 87 15 Other Comprehensive Income (Loss) 16 Stock-Based Compensation ................................................................ 89 17 Net Income Attributable to Canon Inc. Stockholders per Share .... 90 18 Derivatives and Hedging Activities 19 Commitments and Contingent Liabilities ........................................ 92 20 Disclosures about the Fair Value of Financial Instruments and Concentrations of Credit Risk ........................................................... 94 21 Fair Value Measurements ................................................................. 95 22 Segment Information ....................................................................... 97 23 Subsequent Events .......................................................................... 100 MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING ........................................................................ 101 REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ....... 102 (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:1)(cid:34)(cid:51)(cid:17)(cid:26)(cid:64)(cid:39)(cid:52)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:74)(cid:81)(cid:68)(cid:1)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:21)(cid:20) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:24)(cid:27)(cid:17)(cid:17)(cid:1)(cid:49)(cid:46) 44 CANON ANNUAL REPORT 2009 FINANCIAL OVERVIEW GENERAL The following discussion and analysis provides information that management believes to be relevant to understanding Canon’s consolidated ﬁ nancial condition and results of operations. References in this discussion to the “Company” are to Canon Inc. and, unless otherwise indicated, references to the ﬁ nancial condition or operating results of “Canon” refer to Canon Inc. and its consolidated subsidiaries. OVERVIEW Canon is one of the world’s leading manufacturers of copying machines, laser printers, inkjet printers, cameras, steppers and aligners. 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 pros- perity 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 Ofﬁ ce Business Unit, the Consumer Business Unit and the Industry and Others Business Unit. Economic environment Looking back at the global economy in ﬁ scal 2009, although the year began amid an unprecedentedly harsh business climate, economic stimulus measures implemented by different countries have started to yield results, leading to moderate recoveries as the second half of the year approached. Although countries such as China and India, whose economies have rapidly grown in prominence, maintained their stable growth largely owing to increased consumer spending, developed countries such as Japan, the United States and European nations all recorded neg- ative growth for the ﬁ rst time since the end of World War II, leading to negative growth overall around the globe. Market environment As for the markets in which Canon operates amid these condi- tions, within the ofﬁ ce equipment market, demand for both color and monochrome models of network digital multifunction devices (“MFDs”) decreased in each region. While sales for laser printers also remained weak, dropping below the year-ago level, the rate of decline gradually narrowed toward the second half of the year. As for the consumer products market, while demand for compact digital cameras remained sluggish and prices continued to decline, demand for digital single-lens reﬂ ex (“SLR”) cameras displayed solid growth especially in overseas markets. With regard to inkjet printers, although demand con- tinued to be slack, which led to a reduction in market size com- pared with the previous year, conditions started to improve toward the end of the year. In the industry and others market, demand for steppers, utilized in the production of semiconduc- tors, declined signiﬁ cantly while demand for aligners, used to produce liquid crystal display (“LCD”) panels, also slowed but showed signs of a recovery heading into the next ﬁ scal year. The average value of the yen during the year was ¥93.21 to the U.S. dollar, a year-on-year appreciation of approximately ¥10 or 10%, and ¥130.46 to the euro, a year-on-year appreciation of approximately ¥21 or 14%. Summary of operations Although the markets for consumer products such as cameras and inkjet printers are clearly bottoming out amid the signiﬁ - cantly stronger yen, which has had an impact on all of the Company’s businesses, net sales for the year totaled ¥3,209.2 billion (U.S.$34,883 million), a year-on-year decline of 21.6%, mainly due to the effects of reduced sales volumes of ofﬁ ce products throughout the year. Income before income taxes totaled ¥219.4 billion (U.S.$2,384 million), a year-on-year decline of 54.4%, while net income attributable to Canon Inc. also decreased by 57.4% to ¥131.6 billion (U.S.$1,431 million). 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 on page 45. Revenues As Canon pursues to become a truly excellent global company, one indicator upon which Canon’s management places strong emphasis is revenue. The following are some of the KPIs related to revenue that management considers to be important. Net sales is one such KPI. Canon derives net sales primarily from the sale of products and, to a much less extent, provision of services associated with its products. Sales vary depending on such factors as product demand, the number and size of trans- actions within the reporting period, product reputation for new products, and changes in sales prices. Other factors involved are market share and market environment. In addition, manage- ment considers the evaluation of net sales by product group to be important for the purpose of assessing Canon’s sales perfor- mance in various product groups, taking into account recent market trends. Gross proﬁ t ratio (ratio of gross proﬁ t to net sales) is another KPI for Canon. Through its reforms in 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 achieved cost reductions through enhancement of efﬁ ciency in its production. Canon believes that these achievements have contributed to improving Canon’s gross proﬁ t ratio, and will continue pursuing the curtail- ment of product development lead times and reductions in pro- duction costs. Operating proﬁ t ratio (ratio of operating proﬁ t to net sales) and research and development (“R&D”) expense to net sales ratio are considered to be KPIs by Canon. Canon is focusing on two areas for improvement. Canon strives to control and reduce its selling, general and administrative expenses as its ﬁ rst key point. Secondly, Canon’s R&D policy is designed to maintain a high level of spending in core technology to sustain Canon’s leading position in its current ﬁ elds of business and to seek pos- sibilities in other markets. Canon believes such investments will create the basis for future success in its business and operations. (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:1)(cid:34)(cid:51)(cid:17)(cid:26)(cid:64)(cid:39)(cid:52)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:74)(cid:81)(cid:68)(cid:1)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:21)(cid:21) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:24)(cid:27)(cid:17)(cid:17)(cid:1)(cid:49)(cid:46) 45 Cash ﬂ ow management Canon also places signiﬁ cant emphasis on cash ﬂ ow manage- ment. The following are the KPIs with regard to cash ﬂ ow man- agement that Canon’s management believes to be important. Inventory turnover measured in days is a KPI because it measures the adequacy of supply chain management. Inventories have inherent risks of becoming obsolete, physically ruined or otherwise decreasing signiﬁ cantly in value, which may adversely affect Canon’s operating results. To mitigate these risks, management believes that it is crucial to continue reducing inventories and decrease production lead times in order to promptly collect related product expenses by strengthening supply chain management. Canon’s management seeks to meet its liquidity and capital requirements primarily with cash ﬂ ow from operations. Management also seeks debt-free operations. For a manufacturing company like Canon, it generally takes considerable time to real- ize proﬁ t from a business as the process of R&D, manufacturing and sales has to be followed for success. Therefore, manage- ment believes that it is important to have sufﬁ cient ﬁ nancial strength so that the Company does not have to rely on external funds. Canon has continued to reduce its dependency on exter- nal funds for capital investments in favor of generating the nec- essary 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 good status or further improved the constitution to fund debt obligations and other unexpected expenses. In the long-term, Canon will be able to maintain a high level of stable investments for its future opera- tions and development. As Canon puts strong emphasis on its research and development activities, management believes that it is important to maintain a stable ﬁ nancial base and, accordingly, a high level of its stockholders’ equity to total assets ratio. KEY PERFORMANCE INDICATORS Net sales (Millions of yen) Gross proﬁ t to net sales ratio R&D expense to net sales ratio Operating proﬁ t to net sales ratio Inventory turnover measured in days Debt to total assets ratio Canon Inc. stockholders’ equity to total assets ratio 2009 ¥3,209,201 44.5% 9.5% 6.8% 39 days 0.3% 69.9% 2008 ¥4,094,161 47.3% 9.1% 12.1% 47 days 0.4% 67.0% 2007 ¥4,481,346 50.1% 8.2% 16.9% 44 days 0.6% 64.8% 2006 ¥4,156,759 49.6% 7.4% 17.0% 45 days 0.7% 66.0% 2005 ¥3,754,191 48.5% 7.6% 15.5% 47 days 0.8% 64.4% Note: Inventory turnover measured in days; Inventory divided by net sales for the previous six months, multiplied by 182.5. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The consolidated ﬁ nancial statements are prepared in accor- dance with U.S. generally accepted accounting principles (“GAAP”) and based on the selection and application of signiﬁ - cant accounting policies which require management to make signiﬁ cant 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 ﬁ nancial condi- tion and results of operations. Revenue recognition Canon generates revenue principally through the sale of con- sumer 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 ﬁ xed or determinable, and collectibility is probable. Revenue from sales of ofﬁ ce products, such as ofﬁ ce net- work digital multifunction devices and laser printers, and con- sumer products, such as digital cameras and inkjet multifunction peripherals, 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 steppers and aligners that are sold with customer acceptance provisions related to their functionality, is recognized when the equipment is installed at the customer site and the speciﬁ c criteria of the equipment functionality are successfully tested and demonstrat- ed by Canon. Service revenue is derived primarily from separate- ly 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 ofﬁ ce imaging products, for which the cus- tomer typically pays a stated base service fee plus a variable amount based on usage. Revenue from these service mainte- nance contracts is measured at the stated amount of the con- tract 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-ﬁ nancing leases is recognized over the life of each respective lease using the interest method. Leases not qualifying as sales-type leases or direct-ﬁ nancing leases are accounted for as operating leases and the related revenue is rec- ognized ratably over the lease term. When equipment leases are (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:1)(cid:34)(cid:51)(cid:17)(cid:26)(cid:64)(cid:39)(cid:52)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:74)(cid:81)(cid:68)(cid:1)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:21)(cid:22) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:24)(cid:27)(cid:17)(cid:17)(cid:1)(cid:49)(cid:46) 46 CANON ANNUAL REPORT 2009 bundled with product maintenance contracts, revenue is ﬁ rst 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, ﬁ nancing and executory costs, while non-lease deliverables gen- erally consist of product maintenance contracts and supplies. For all other arrangements with multiple elements, Canon allocates revenue to each element based on its relative fair value if such element meets the criteria for treatment as a separate unit of accounting. Otherwise, revenue is deferred until the undelivered elements are fulﬁ lled 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 in sales are based upon historical trends and other known factors at the time of sale. In addition, Canon provides price protection to certain resellers of its products, and records reductions to sales for the estimated impact of price protection obligations when announced. Estimated product warranty costs are recorded at the time revenue is recognized and are included in selling, general and administrative expenses. Estimates for accrued product warranty costs are based on historical experience, and are affected by ongoing product failure rates, speciﬁ c product class failures out- side of the baseline experience, material usage and service deliv- ery costs incurred in correcting a product failure. Allowance for doubtful receivables Allowance for doubtful receivables is determined using a combi- nation of factors to ensure that Canon’s trade and ﬁ nancing receivables are not overstated due to uncollectibility. Canon maintains an allowance for doubtful receivables for all custom- ers based on a variety of factors, including the length of time receivables are past due, trends in the overall weighted average risk rating of the total portfolio, macroeconomic conditions, sig- niﬁ cant one-time events and historical experience. Also, Canon records speciﬁ c reserves for individual accounts when Canon becomes aware of a customer’s inability to meet its ﬁ nancial obligations to Canon, such as in the case of bankruptcy ﬁ lings or deterioration in the customer’s operating results or ﬁ nancial position. If circumstances related to customers change, esti- mates of the recoverability of receivables would be further adjusted. Valuation of inventories Inventories are stated at the lower of cost or market value. Cost is determined by the average method for domestic inventories and principally the ﬁ rst-in, ﬁ rst-out method for overseas invento- ries. 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 invento- ries, Canon considers the age of the inventories and the likeli- hood 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 indi- cate that the carrying amount of an asset may not be recover- able. If the carrying amount of the asset exceeds its estimated undiscounted future cash ﬂ ows, an impairment charge is recog- nized 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. 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 reason- able, actual future results may differ from these 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. Income taxes 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 ﬁ nancial statements. Valuation of deferred tax assets Canon currently has signiﬁ cant 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 judg- ments regarding future proﬁ tability 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 sig- niﬁ cant 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 beneﬁ t plans Canon has signiﬁ cant employee retirement and severance bene- ﬁ t obligations that are recognized based on actuarial valuations. Inherent in these valuations are key assumptions, including dis- count 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, mortal- ity rate, and withdrawal rate. Changes in these assumptions inherent in the valuation are reasonably likely to occur from peri- od 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 (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:1)(cid:34)(cid:51)(cid:17)(cid:26)(cid:64)(cid:39)(cid:52)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:74)(cid:81)(cid:68)(cid:1)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:21)(cid:23) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:24)(cid:27)(cid:17)(cid:18)(cid:1)(cid:49)(cid:46) 47 assets would cause a change of approximately ¥2,661 million in net periodic beneﬁ t 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 beneﬁ t obligations) of its pension plans in its consolidated balance sheets, with a corresponding adjustment to accumulated other comprehensive income (loss), net of tax. Effective January 1, 2007, the Company and certain of its domestic subsidiaries amended their funded deﬁ ned beneﬁ t pension plans. Under these funded deﬁ ned beneﬁ t pension plans, the lifetime pension beneﬁ t is based upon amounts pay- able during an initial period after retirement (the “guarantee period”) and the subsequent period lasting for the remainder of the retiree’s lifetime (the “post-guarantee period”). The Company and certain of its domestic subsidiaries amended these plans to increase the duration of this guarantee period from 15 years to 20 years to reﬂ ect an increase in the average lifespan of their employees, resulting in reduced amounts pay- able during each of the guarantee and post-guarantee periods. As a result of these changes, the projected beneﬁ t obligation decreased by ¥101,620 million as of January 1, 2007. In con- junction with these plan changes, the Company and certain of its domestic subsidiaries also have implemented an unfunded retirement and severance plan and a deﬁ ned contribution pen- sion plan for certain future pension beneﬁ ts attributable to employees’ future services. believes that the assumptions used are appropriate, the differ- ences may affect employee retirement and severance beneﬁ t costs in the future. In preparing its ﬁ nancial statements for ﬁ scal 2009, Canon estimated a weighted-average discount rate of 2.4% for Japanese plans and 5.3% for foreign plans and a weighted- average expected long-term rate of return on plan assets of 3.7% for Japanese plans and 6.2% for foreign plans. In estimat- ing the discount rate, Canon uses available information about rates of return on high-quality ﬁ xed-income governmental and corporate bonds currently available and expected to be available during the period to the maturity of the pension beneﬁ ts. 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 pen- sion beneﬁ t 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. A decrease of 50 basis points in the discount rate increases the projected beneﬁ t obligation by approximately 9%. 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 beneﬁ t 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 fol- lowing years, and vice versa. For ﬁ scal 2010, a change of 50 basis points in the expected long-term rate of return on plan CONSOLIDATED RESULTS OF OPERATIONS SUMMARY OF OPERATIONS Net sales Operating proﬁ t Income before income taxes Net income attributable to Canon Inc. Millions of yen 2009 change ¥3,209,201 –21.6% ¥4,094,161 2008 217,055 –56.2 219,355 –54.4 131,647 –57.4 Thousands of U.S. dollars 2009 2007 change –8.6% ¥4,481,346 $34,882,620 2,359,293 2,384,293 1,430,946 756,673 768,388 488,332 496,074 –34.4 481,147 –37.4 309,148 –36.7 (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:1)(cid:34)(cid:51)(cid:17)(cid:26)(cid:64)(cid:39)(cid:52)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:74)(cid:81)(cid:68)(cid:1)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:21)(cid:24) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:24)(cid:27)(cid:17)(cid:18)(cid:1)(cid:49)(cid:46) 48 CANON ANNUAL REPORT 2009 Sales Canon’s consolidated net sales in ﬁ scal 2009 totaled ¥3,209,201 million (U.S.$34,883 million), representing a 21.6% decrease from the previous ﬁ scal year. Although the markets for such consumer products as cameras and inkjet printers are clearly bottoming out amid the signiﬁ cantly stronger yen, which has had an impact on all of the Company’s businesses, the decrease in sales mainly reﬂ ected the effects of reduced sales volumes of ofﬁ ce products throughout the year. Overseas operations are signiﬁ cant to Canon’s operating results and generated approximately 78% of total net sales in ﬁ scal 2009. Such sales are denominated in the applicable local currency and are subject to ﬂ uctuations in the value of the yen to those currencies. Despite efforts to reduce the impact of cur- rency ﬂ uctuations on operating results, including localization of manufacturing in some regions along with procuring parts and materials from overseas suppliers, Canon believes such ﬂ uctua- tions have had and will continue to have a signiﬁ cant effect on its results of operations. The average value of the yen in ﬁ scal 2009 was ¥93.21 to the U.S. dollar, and ¥130.46 to the euro, representing an appre- ciation of about ¥10 or 10% to the U.S. dollar, and a signiﬁ cant appreciation of approximately ¥21 or 14% against the euro, compared with the previous year. The effects of foreign exchange rate ﬂ uctuations negatively impacted net sales by approximately ¥249,500 million in 2009. This unfavorable impact was comprised of approximately ¥116,800 million for U. S. dollar denominated sales, ¥114,800 million for euro denomi- nated sales and ¥17,900 million for other foreign currency denominated sales. Cost of sales Cost of sales principally reﬂ ects 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 sub- ject to ﬂ uctuations in world market prices accompanied by ﬂ uctu- ations in exchange rates that may affect Canon’s cost of sales. Other components of cost of sales include depreciation expenses from plants, maintenance expenses, light and fuel expenses along with rent expenses. The ratio of cost of sales to net sales for ﬁ scal 2009 and 2008 was 55.5% and 52.7%, respectively. Gross proﬁ t Canon’s gross proﬁ t in ﬁ scal 2009 decreased by 26.3% to ¥1,427,393 million (U.S.$15,515 million) from ﬁ scal 2008. The gross proﬁ t ratio deteriorated by 2.8 points year on year to 44.5%. Despite the launch of new products and ongoing cost- reduction efforts aimed at an improved gross proﬁ t ratio, the impact of such factors as the substantial appreciation of the yen and the drop in sales value led to the decline in the ratio. Operating expenses The major components of operating expenses are payroll, R&D, advertising expenses and other marketing expenses. Continued Group-wide efforts to thoroughly cut spending contributed to a decline in total operating expenses of 16.1% for ﬁ scal 2009. Operating proﬁ t Operating proﬁ t in ﬁ scal 2009 dropped 56.2% to a total of ¥217,055 million (U.S.$2,359 million) from ﬁ scal 2008, record- ing 6.8% to net sales. Other income (deductions) Other income (deductions) for ﬁ scal 2009 improved by ¥17,227 million (U.S.$187 million). Although net interest and dividends decreased, foreign currency exchange gains and losses improved by ¥13,054 million (U.S.$142 million). Income before income taxes Income before income taxes in ﬁ scal 2009 was ¥219,355 million (U.S.$2,384 million), a decline of 54.4% from ﬁ scal 2008, and constituted 6.8% of net sales. Income taxes Provision for income taxes in ﬁ scal 2009 decreased by ¥76,666 million (U.S.$833 million) from ﬁ scal 2008, primarily as a result of the decline in income before income taxes. The effective tax rate during ﬁ scal 2009 rose by 4.9% compared with ﬁ scal 2008. This was mainly due to an increase in valuation allowances on deferred tax assets. Net income attributable to Canon Inc. As a result, net income attributable to Canon Inc. in ﬁ scal 2009 decreased by 57.4% to ¥131,647 million (U.S.$1,431 million), which represents a 4.1% return on net sales. Return on Sales (%) 15 12 9 6 3 0 11.0 10.9 10.2 7.6 4.1 05 06 07 08 09 (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:1)(cid:34)(cid:51)(cid:17)(cid:26)(cid:64)(cid:39)(cid:52)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:74)(cid:81)(cid:68)(cid:1)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:21)(cid:25) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:24)(cid:27)(cid:17)(cid:18)(cid:1)(cid:49)(cid:46) 49 Segment information The Company adopted guidance for segment reporting in accor- dance with U.S. GAAP in the year ending December 31, 2009. See Note 22 of the Notes to Consolidated Financial Statements for further details. Canon divides its businesses into three segments: the Ofﬁ ce Business Unit, the Consumer Business Unit and the Industry and Others Business Unit. • The Ofﬁ ce Business Unit mainly includes ofﬁ ce network dig- ital MFDs, color network digital MFDs, ofﬁ ce copying machines, personal-use copying machines, full-color copying machines, laser printers and large format inkjet printers. • The Consumer Business Unit mainly includes digital SLR cameras, compact digital cameras, interchangeable lenses, digital video camcorders, inkjet multifunction peripherals, single function inkjet printers, image scanners and broadcast- ing equipment. • The Industry and Others Business Unit mainly includes semiconductor production equipment, mirror projection mask aligners for LCD panels, medical equipment, components, computer information systems, document scanners and per- sonal information products. Sales by segment Please refer to the table of sales by segment in Note 22 of the Notes to Consolidated Financial Statements. Canon’s sales by segment are summarized as follows: SALES BY SEGMENT Ofﬁ ce Consumer Industry and Others Eliminations Total Millions of yen 2009 2008 change change –9.3% ¥2,477,518 ¥1,645,076 –26.8% ¥2,246,609 1,587,952 –8.3 1,456,075 522,405 549,983 –5.0 (134,107) (130,928) — –8.6% ¥4,481,346 1,301,160 –10.6 357,998 –31.5 (95,033) — ¥3,209,201 –21.6% ¥4,094,161 2007 Thousands of U.S. dollars 2009 $17,881,261 14,143,043 3,891,283 (1,032,967) $34,882,620 Sales by Segment (Millions of yen) Office Business Unit Consumer Business Unit Industry and Others Business Unit Eliminations 5,000,000 Sales by Geographic Area (Millions of yen) Japan Americas Europe Other areas 5,000,000 4,481,346 4,156,759 4,094,161 4,481,346 4,156,759 4,094,161 4,000,000 3,754,191 4,000,000 3,754,191 3,209,201 3,209,201 3,000,000 2,000,000 1,000,000 0 3,000,000 2,000,000 1,000,000 0 05 06 07 08 09 05 06 07 08 09 (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:1)(cid:34)(cid:51)(cid:17)(cid:26)(cid:64)(cid:39)(cid:52)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:74)(cid:81)(cid:68)(cid:1)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:21)(cid:26) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:24)(cid:27)(cid:17)(cid:18)(cid:1)(cid:49)(cid:46) 50 CANON ANNUAL REPORT 2009 Sales of the Ofﬁ ce Business Unit, constituting 51.3% of con- solidated net sales, decreased by 26.8% to ¥1,645,076 million (U.S.$17,881 million) in ﬁ scal 2009, due to the decreased demand for ofﬁ ce equipment overall amid the deterioration of economic conditions, along with the impact of the strong yen. Sales of network digital MFDs remained low in all regions while demand for laser printers decreased substantially compared with the previous year despite the optimization of inventory levels being in sight. Sales of the Consumer Business Unit declined by 10.6% in ﬁ scal 2009, totaling ¥1,301,160 million (U.S.$14,143 million), due to the signiﬁ cant impact of the yen’s appreciation. Sales vol- umes, however, of such new products as the competitively priced EOS Rebel T1i (EOS 500D) and advanced-amateur model EOS 7D digital SLR cameras recorded solid growth. As for com- pact digital cameras, although stagnant market conditions led to a contraction in sales volume, the Company reinforced its prod- uct lineup through the launch of six new ELPH (IXUS)-series models and nine new PowerShot-series models. As for inkjet printers, although the market overall remained sluggish, sales in the Americas and Asia displayed healthy growth, contributing to a year-on-year increase in sales volume. Sales of the Consumer Business Unit constituted 40.5% of consolidated net sales in ﬁ scal 2009. Sales of the Industry and Others Business Unit decreased by 31.5% in ﬁ scal 2009, to ¥357,998 million (U.S.$3,891 million). Within this segment, sales of steppers remained sluggish amid worsening market conditions for memory chips, while sales of aligners dropped due to restrained capital investment by LCD panel manufacturers. Sales of the Industry and Others Business Unit constituted 11.2% of consolidated net sales in ﬁ scal 2009. Intersegment sales of ¥95,033 million (U.S.$1,033 million), rep- resenting 3.0% of total sales, are eliminated from the total sales of the three segments, and are described as “Eliminations”. Sales by geographic area Please refer to the table of sales by geographic area in Note 22 of the Notes to Consolidated Financial Statements. A geographical analysis indicates that net sales in ﬁ scal 2009 decreased in each of the major geographic areas. SALES BY GEOGRAPHIC AREA In Japan, sales decreased by 19.1% in ﬁ scal 2009 mainly due to weakened sales of monochrome and color models of net- work digital MFDs within the Ofﬁ ce Business Unit, along with steppers. In the Americas, net sales declined by 14.9% on a local cur- rency basis in ﬁ scal 2009, mainly due to reduced sales of such products as monochrome network MFDs and laser printers. On a yen basis, net sales in the Americas declined by 22.6% in ﬁ scal 2009 as the yen strengthened to the U.S. dollar. In Europe, net sales fell by 15.4% on a local currency basis in ﬁ scal 2009, mainly due to reduced sales of such products as laser printers and monochrome network MFDs. On a yen basis, net sales in Europe dropped by 25.8% in ﬁ scal 2009 resulting from the impact of the substantial appreciation of the yen to the euro. Sales in other areas decreased by 15.4% on a yen basis in ﬁ scal 2009, largely due to the stagnant sales of steppers and aligners. A summary of net sales by geographic area is provided below. Operating proﬁ t by segment Please refer to the table of segment information in Note 22 of the Notes to Consolidated Financial Statements. Operating proﬁ t for the Ofﬁ ce Business Unit in ﬁ scal 2009 decreased by ¥227,950 million (U.S.$2,478 million) to ¥229,396 million (U.S.$2,493 million). This decline resulted primarily from the decrease in gross proﬁ t led by the signiﬁ cant reduction in sales. Operating proﬁ t for the Consumer Business Unit in ﬁ scal 2009 declined by ¥39,632 million (U.S.$431 million) to ¥183,492 million (U.S.$1,994 million) as a result of the decrease in gross proﬁ t arising from the reduction in sales. Operating proﬁ t for the Industry and Others Business Unit in ﬁ scal 2009 decreased by ¥28,080 million (U.S.$305 million) to an operating loss of ¥75,956 million (U.S.$826 million) as a result of a signiﬁ cant drop in sales along with impairment losses related to semiconductor production equipment, totaling ¥15,390 million (U.S.$167 million), arising from a fundamental reassessment of the business structure for steppers. Japan Americas Europe Other areas Total Millions of yen 2009 change ¥ 702,344 –19.1% ¥ 868,280 2008 894,154 –22.6 995,150 –25.8 617,553 –15.4 1,154,571 –13.6 1,341,400 –10.5 729,910 +4.5 ¥3,209,201 –21.6% ¥4,094,161 2007 change –8.4% ¥ 947,587 1,336,168 1,499,286 698,305 –8.6% ¥4,481,346 Thousands of U.S. dollars 2009 $ 7,634,174 9,719,065 10,816,848 6,712,533 $34,882,620 Note: This summary of net sales by geographic area is determined by the location where the product is shipped to the customer. (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:1)(cid:34)(cid:51)(cid:17)(cid:26)(cid:64)(cid:39)(cid:52)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:74)(cid:81)(cid:68)(cid:1)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:22)(cid:17) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:24)(cid:27)(cid:17)(cid:19)(cid:1)(cid:49)(cid:46) 51 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 gen- erally in yen. Given Canon’s current operating structure, appreci- ation of the yen has a negative impact on net sales and the gross proﬁ t ratio. To reduce the ﬁ nancial risks from changes in foreign exchange rates, Canon utilizes derivative ﬁ nancial instru- ments, which are comprised principally of forward currency exchange contracts. The operating proﬁ t on foreign operation sales is usually lower than that from domestic operations because foreign oper- ations consist mainly of marketing activities. Marketing activities are generally less proﬁ table than production activities, which are mainly conducted by the Company and its domestic subsidiaries. Please refer to the table of geographic information in Note 22 of the Notes to Consolidated Financial Statements. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents in ﬁ scal 2009 increased by ¥115,838 million (U.S.$1,259 million) to ¥795,034 million (U.S.$8,642 million), compared with ¥679,196 million in ﬁ scal 2008 and ¥944,463 million in ﬁ scal 2007. Canon’s cash and cash equivalents are typically denominated both in Japanese yen and in U.S. dollar, with the remainder denominated in foreign currencies. Net cash provided by operating activities in ﬁ scal 2009 decreased slightly by ¥5,449 million (U.S.$59 million) from the previous year to ¥611,235 million (U.S.$6,644 million), as a result of the substantial progress achieved in inventory-reduction efforts. Cash ﬂ ow from operating activities consisted of the following key components: the major component of Canon’s cash inﬂ ow is cash received from customers, and the major components of Canon’s cash outﬂ ow are payments for parts and materials, selling, gener- al and administrative expenses, and income taxes. For ﬁ scal 2009, cash inﬂ ow from cash received from custom- ers decreased, due to the decrease in net sales. There were no signiﬁ cant changes in Canon’s collection rates. Cash outﬂ ow for payments for parts and materials also decreased, as a result of a decrease in net sales and cost reductions. Cost reductions reﬂ ect a decline in unit prices of parts and raw materials, as well as a streamlining of the process of using these parts and materials through promoting efﬁ ciency in operations. Cash outﬂ ow for payments for selling, general and administrative expenses decreased as a result of cost-cutting efforts. Cash outﬂ ow for payments of income taxes decreased, due to the decrease in taxable income. Net cash used in investing activities in ﬁ scal 2009 was ¥370,244 million (U.S.$4,024 million), compared with ¥472,480 million in ﬁ scal 2008 and ¥432,485 million in ﬁ scal 2007, con- sisting primarily of purchases of ﬁ xed assets. The purchases of ﬁ xed assets, which totaled ¥327,983 million (U.S.$3,565 million) in ﬁ scal 2009, were focused on items relevant to introducing new products. Canon deﬁ nes “free cash ﬂ ow” by deducting the cash ﬂ ows from investing activities from the cash ﬂ ows of operating activities. For ﬁ scal 2009, free cash ﬂ ow totaled ¥240,991 mil- lion (U.S.$2,619 million) as compared with ¥144,204 million for ﬁ scal 2008. Canon’s management recognizes that constant and intensive investment in facilities and R&D is required to maintain and strengthen the competitiveness of its products. Canon’s management seeks to meet its capital requirements with cash ﬂ ow principally earned from its operations, therefore, the capital resources are primarily sourced from internally generated funds. Accordingly, Canon has included the information with regard to free cash ﬂ ow as its management frequently monitors this indi- cator, and believes that such indicator is beneﬁ cial to the under- standing of investors. Furthermore, Canon’s management believes that this indicator is signiﬁ cant in understanding Canon’s current liquidity and the alternatives of use in ﬁ nancing activities because it takes into consideration its operating and investing activities. Canon refers to this indicator together with relevant U.S. GAAP ﬁ nancial measures shown in its consolidated statements of cash ﬂ ows and consolidated balance sheets for cash availability analysis. Net cash used in ﬁ nancing activities totaled ¥142,379 million (U.S.$1,548 million) in ﬁ scal 2009, mainly resulting from the div- idend payout of ¥135,793 million (U.S.$1,476 million). The Company paid dividends in ﬁ scal 2009 of ¥110.00 (U.S.$1.20) per share, the same dividend amount as the prior year on a local currency basis. Canon has completed a tender offer for the issued and out- standing ordinary shares of Océ N.V. (listed on the NYSE Euronext in Amsterdam, “Océ”) on March 9, 2010 and made Océ a consolidated subsidiary, in order to create the overall No.1 presence in the printing industry. Including this and other invest- ments, Canon seeks to meet its capital requirements principally with cash ﬂ ow from operations, although Canon expects net cash provided by operating activities in ﬁ scal 2010 to decline. In response to this expectation, Canon is currently endeavoring to optimize the level of capital investments, by further raising the efﬁ ciency of its investments and focusing investments on select- ed material items. This approach is supplemented with group- wide treasury and cash management activities undertaken at the parent company level. To the extent Canon relies on external funding for its liquidi- ty and capital requirements, it generally has access to various funding sources, including the issuance of additional share capi- tal, long-term debt or short-term loans. While Canon has been able to obtain funding from its traditional ﬁ nancing 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 current portion of long-term debt) amounted to ¥4,869 million (U.S.$53 million) at December 31, 2009 compared with ¥5,540 million at December 31, 2008. Long-term debt (excluding current portion) amounted to ¥4,912 million (U.S.$53 million) at December 31, 2009 compared with ¥8,423 million at December 31, 2008. (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:1)(cid:34)(cid:51)(cid:17)(cid:26)(cid:64)(cid:39)(cid:52)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:74)(cid:81)(cid:68)(cid:1)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:22)(cid:18) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:24)(cid:27)(cid:17)(cid:19)(cid:1)(cid:49)(cid:46) 52 CANON ANNUAL REPORT 2009 Canon’s long-term debt (excluding current portion) generally 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 Rating 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 23, 2010, 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 down- grade triggers that would accelerate the maturity of a material amount of its debt. A downgrade in Canon’s credit ratings or outlook could, however, increase the cost of its borrowings. Increase in property, plant and equipment on an accrual basis in ﬁ scal 2009 amounted to ¥216,128 million (U.S.$2,349 million) compared with ¥361,988 million in ﬁ scal 2008 and ¥428,549 million in ﬁ scal 2007. In ﬁ scal 2009, increase in prop- erty, plant and equipment was mainly used to introducing new products. For ﬁ scal 2010, Canon projects its increase in property, plant and equipment will be approximately ¥220,000 million (U. S.$2,391 million). Employer contributions to Canon’s worldwide deﬁ ned bene- ﬁ t pension plans were ¥18,232 million (U.S.$198,174 million) in ﬁ scal 2009, ¥23,033 million in ﬁ scal 2008, ¥21,720 million in ﬁ scal 2007. In addition, employer contributions to Canon’s worldwide deﬁ ned contribution pension plans were ¥9,148 mil- lion (U.S.$99 million) in ﬁ scal 2009, ¥10,840 million in ﬁ scal 2008, and ¥10,262 million in ﬁ scal 2007. Working capital in ﬁ scal 2009 increased by ¥113,241 million (U.S.$1,231 million), to ¥1,234,089 million (U.S.$13,414 mil- lion), compared with ¥1,120,848 million in ﬁ scal 2008 and ¥1,352,082 million in ﬁ scal 2007. This increase was primarily a result of the increase in cash and cash equivalent. Canon believes its working capital will be sufﬁ cient for its requirements for the foreseeable future. Canon’s capital requirements are pri- marily dependent on management’s business plans regarding the levels and timing of purchases of ﬁ xed assets and invest- ments. The working capital ratio (ratio of current assets to cur- rent liabilities) for ﬁ scal 2009 was 2.57 compared to 2.19 for ﬁ scal 2008 and to 2.08 for ﬁ scal 2007. Return on assets (net income attributable to Canon Inc. divid- ed by the average of total assets) was 3.4% in ﬁ scal 2009, com- pared to 7.3% in ﬁ scal 2008 and 10.8% in ﬁ scal 2007. Return on Canon Inc. stockholders’ equity (net income attributable to Canon Inc. divided by the average of total Canon Inc. stockholders’ equity) was 4.9% in ﬁ scal 2009 compared with 11.1% in ﬁ scal 2008 and 16.5% in ﬁ scal 2007. Debt to total assets ratio was 0.3%, 0.4% and 0.6% as of December 31, 2009, 2008 and 2007, respectively. Canon had short-term loans and long-term debt of ¥9,781 million (U.S.$106 million) as of December 31, 2009, ¥13,963 million as of December 31, 2008 and ¥26,997 million as of December 31, 2007. Increase in Property, Plant and Equipment (Millions of yen) Working Capital Ratio Return on Canon Inc. Stockholders’ Eqiuty (%) 500,000 400,000 383,784 379,657 428,549 361,988 300,000 200,000 100,000 0 216,128 05 06 07 08 09 3.0 2.5 2.0 1.5 1.0 0.5 0.0 2.57 2.39 2.28 2.19 2.08 05 06 07 08 09 20 15 10 5 0 16.0 16.3 16.5 11.1 4.9 05 06 07 08 09 (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:1)(cid:34)(cid:51)(cid:17)(cid:26)(cid:64)(cid:39)(cid:52)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:74)(cid:81)(cid:68)(cid:1)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:22)(cid:19) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:24)(cid:27)(cid:17)(cid:19)(cid:1)(cid:49)(cid:46) 53 OFF-BALANCE SHEET ARRANGEMENTS As part of its ongoing business, Canon does not participate in transactions that generate relationships with unconsolidated entities or ﬁ nancial partnerships, such as entities often referred to as structured ﬁ nance or special purpose entities, which would have been 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, afﬁ liates and other companies. Canon would have to perform under a guarantee if the borrower defaults on a payment within the contract periods of 1 year to 30 years in the case of employees with housing loans, and of 1 year to 10 years in the case of afﬁ liates and other companies. The maximum amount of undiscounted payments Canon would have had to make in the event of default by all borrowers was ¥18,526 million (U.S.$201 million) at December 31, 2009. The carrying amounts of the liabilities recognized for Canon’s obligations as a guarantor under those guarantees were insigniﬁ cant. CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS The following summarizes Canon’s contractual obligations at December 31, 2009. Millions of yen Contractual obligations: Long-term debt: Capital lease obligations Other long-term debt Operating lease obligations Purchase commitments for: Property, plant and equipment Parts and raw materials Total Total Less than 1 year 1-3 years 3-5 years More than 5 years Payments due by period ¥ 9,761 20 58,964 21,839 64,226 ¥154,810 ¥ 4,869 — 16,259 21,839 64,226 ¥107,193 ¥ 4,405 20 22,972 — — ¥27,397 ¥ 450 — 11,553 — — ¥12,003 ¥ 37 — 8,180 — — ¥8,217 Note: The table does not include provisions for uncertain tax positions and related accrued interest and penalties, as the speciﬁ c 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. Thousands of U.S. dollars Contractual obligations: Long-term debt: Capital lease obligations Other long-term debt Operating lease obligations Purchase commitments for: Property, plant and equipment Parts and raw materials Total Total Less than 1 year 1-3 years 3-5 years More than 5 years Payments due by period $ 106,098 217 640,913 $ 52,924 — 176,728 237,380 698,109 $1,682,717 237,380 698,109 $1,165,141 $ 47,881 217 249,695 — — $297,793 $ 4,891 — 125,577 — — $130,468 $ 402 — 88,913 — — $89,315 (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:1)(cid:34)(cid:51)(cid:17)(cid:26)(cid:64)(cid:39)(cid:52)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:74)(cid:81)(cid:68)(cid:1)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:22)(cid:20) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:24)(cid:27)(cid:17)(cid:20)(cid:1)(cid:49)(cid:46) 54 CANON ANNUAL REPORT 2009 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 is recognized and is included in selling, general and administrative expenses. Estimates for accrued product warranty cost are primarily based on historical experience, and are affected by ongoing product failure rates, speciﬁ c product class failures outside of the baseline experience, material usage and service delivery costs incurred in correcting a product failure. As of December 31, 2009, accrued product war- ranty costs amounted to ¥13,944 million (U.S.$152 million). At December 31, 2009, commitments outstanding for the purchase of property, plant and equipment were approximately ¥21,839 million (U.S.$237 million), and commitments outstanding for the purchase of parts and raw materials were approximately ¥64,226 million (U.S.$698 million), both for use in the ordinary course of its business. Canon anticipates that funds needed to fulﬁ ll these commitments will be generated internally through operations. During ﬁ scal 2010, Canon expects to contribute ¥14,116 million (U.S.$153 million) to its Japanese deﬁ ned beneﬁ t pen- sion plans and ¥3,650 million (U.S.$40 million) to its foreign deﬁ ned beneﬁ t pension plans. Canon’s management believes that current ﬁ nancial resourc- es, cash generated from operations and Canon’s potential capacity for additional debt and/or equity ﬁ nancing will be sufﬁ - cient to fund current and future capital requirements. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES Canon is in the fourth year of the Excellent Global Corporation Plan, its 5-year (2006–2010) management plan. The slogan of the third phase (“Phase III”) is “Innovation & Sound Growth” and there are four core strategies: • Realize an overwhelming No.1 position worldwide in all current core businesses; • Expand operations through diversiﬁ cation; • Identify new business domains and accumulate necessary technological capabilities; and • Establish new production system to sustain global competitiveness. Canon is striving to implement the three R&D related strate- gies as follows: • Realize an overwhelming No.1 position worldwide in all current core businesses: Pursue development of new products which enable “cross-media imaging” by sophis- ticated functional synergy among the variety of Canon’s image handling products, beneﬁ ting from the prolifera- tion of broad band communication environment. • Expand operations through diversiﬁ cation: Focus on devel- oping various types of display, including Surface-conduc- tion Electron-emitter Display (“SED”) and Organic Light-Emitting Diode displays (“OLED”). • Identify new business domains and accumulate necessary technological capabilities: Accumulate technological capa- bility in each of the medical imaging sector, intelligent robot industry and safety technology domain. Canon is developing and strengthening relationships with universities and other research institutes, such as Kyoto University, Tokyo Institute of Technology, Stanford University and the New Energy and Industrial Technology Development Organization, to assist with fundamental research and to devel- op cutting-edge technologies. Canon has fully introduced 3D-CAD systems across the Canon group, boosting R&D efﬁ ciency to curtail product devel- opment 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, dramati- cally lowering costs and shortening product development lead times. Canon has R&D centers worldwide. Each R&D center is col- laborating with other centers to achieve synergies, and is culti- vating closer ties in ﬁ elds ranging from basic research to product development. Canon’s consolidated R&D expenses were ¥304,600 million (U.S.$3,311 million) in ﬁ scal 2009, ¥374,025 million in ﬁ scal 2008 and ¥368,261 million in ﬁ scal 2007. The ratios of R&D expenses to the consolidated total net sales for ﬁ scal 2009, 2008 and 2007 were 9.5%, 9.1% and 8.2%, respectively. Canon believes that new products protected by patents will not easily allow competitors to compete with it, and will give it an advantage in establishing standards in the market and industry. R&D Expenses (Millions of yen) 400,000 368,261 374,025 308,307 286,476 300,000 304,600 200,000 100,000 0 05 06 07 08 09 (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:1)(cid:34)(cid:51)(cid:17)(cid:26)(cid:64)(cid:39)(cid:52)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:74)(cid:81)(cid:68)(cid:1)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:22)(cid:21) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:24)(cid:27)(cid:17)(cid:20)(cid:1)(cid:49)(cid:46) 55 RECENT DEVELOPMENTS Canon transferred responsibility for sales, service and support functions for semiconductor production equipment and mirror projection mask aligners for LCD panels from Canon Marketing Japan Inc. (“Canon Marketing Japan”) to the Company on January 1, 2010. This was in an effort to fortify the industry equipment business by establishing a completely integrated sys- tem from development to production, sales and servicing. Asia Paciﬁ c System Research Co., Ltd. (“Asia Paciﬁ c System Research”) entered into a share exchange with Canon Electronics Inc. (“Canon Electronics”) and became a wholly owned subsidiary of Canon Electronics on February 1, 2010. This was in an effort to further accelerate business decision- making by integrating the two companies. Prior to the share exchange, Asia Paciﬁ c System Research was delisted from the JASDAQ Securities Exchange. Canon Marketing Japan concluded a share exchange agree- ment with Canon Software Inc. (“Canon Software”) on January 26, 2010, making Canon Software a wholly owned subsidiary effective May 1, 2010. This was in an effort to further fortify and streamline our consolidated business base and accelerate the making of the IT solutions business of Canon Marketing Japan Group into a core business. Canon concluded a share exchange agreement with Canon Finetech Inc. (“Canon Finetech”) on February 8, 2010, making Canon Finetech a wholly owned subsidiary effective May 1, 2010. This was in an effort to facilitate the organic integration of management resources between both companies and further enhance the synergies throughout the Canon Group to promote speed of management and solidify our position in the ofﬁ ce equipment segment. Canon acquired shares of OPTOPOL Technology S.A. (“OPTOPOL”, listed on the Warsaw Stock Exchange) through a tender offer and made it into a subsidiary on February 19, 2010. By making OPTOPOL into a subsidiary, Canon aims to achieve the world’s No. 1 position within the overall ophthalmic diag- nostic equipment segment. Canon acquired shares of Océ N.V. (“Océ”, listed on the NYSE Euronext Amsterdam) through a public cash tender offer in addition to interest Canon held before the public cash tender offer and made it into a subsidiary on March 9, 2010. By mak- ing Océ into a subsidiary, Canon aims to further strengthen its business foundation in order to solidify the position as one of the global leaders. The combination will capitalize on an excel- lent complementary ﬁ t in product mix, channel mix, R&D, and business lines resulting in an outstanding client offer spanning the entire printing industry. MARKET RISK EXPOSURE 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 chang- es in foreign currency exchange rates, Canon uses derivative ﬁ nancial 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 classiﬁ ed as available-for-sale securities, were as follows at December 31, 2009. Available-for-sale securities Due within one year Due after one year through ﬁ ve years Due after ﬁ ve years through ten years Equity securities Millions of yen Thousands of U.S. dollars Cost ¥ 222 3,274 623 11,932 ¥16,051 Fair value 222 ¥ 3,568 573 17,726 ¥22,089 Cost $ 2,413 35,587 6,772 129,696 $174,468 Fair value $ 2,413 38,783 6,227 192,674 $240,097 (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:1)(cid:34)(cid:51)(cid:17)(cid:26)(cid:64)(cid:39)(cid:52)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:74)(cid:81)(cid:68)(cid:1)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:22)(cid:22) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:24)(cid:27)(cid:17)(cid:20)(cid:1)(cid:49)(cid:46) 56 CANON ANNUAL REPORT 2009 Foreign currency exchange rate and interest rate risk Canon operates internationally, exposing it to the risk of chang- es in foreign currency exchange rates. Derivative ﬁ nancial instru- ments are comprised principally of foreign currency exchange contracts utilized by the Company and certain of its subsidiaries to reduce the risk. Canon assesses foreign currency exchange rate risk by continually monitoring changes in the exposures and by evaluating hedging opportunities. Canon does not hold or issue derivative ﬁ nancial instruments for trading purposes. Canon is also exposed to credit-related losses in the event of non-performance by counterparties to derivative ﬁ nancial instruments, but it is not expected that any counterparties will fail to meet their obligations. Most of the counterparties are internationally recognized ﬁ nancial institutions and selected by Canon taking into account their ﬁ nancial condition, and contracts are diversiﬁ ed across a number of major ﬁ nancial institutions. Canon’s international operations expose Canon to the risk of changes in foreign currency exchange rates. Canon uses foreign exchange contracts to manage certain foreign currency exchange exposures principally from the exchange of U.S. dollars and euros into Japanese yen. These contracts are primarily used to hedge the foreign currency exposure of forecasted intercompany sales and intercompany trade receivables which are denominated in foreign currencies. In accordance with Canon’s policy, a speciﬁ c portion of foreign currency exposure resulting from forecasted intercompany sales are hedged using foreign exchange contracts which principally mature within three months. The following table provides information about Canon’s major derivative ﬁ nancial instruments related to foreign currency exchange transactions existing at December 31, 2009. All of the foreign exchange contracts described in the following table have a contractual maturity date in 2010. Millions of yen Forwards to sell foreign currencies: Contract amounts Estimated fair value Forwards to buy foreign currencies: Contract amounts Estimated fair value Thousands of U.S. dollars Forwards to sell foreign currencies: Contract amounts Estimated fair value Forwards to buy foreign currencies: Contract amounts Estimated fair value U.S.$ Euro Others Total ¥277,944 (6,951) ¥182,852 863 ¥33,518 (881) ¥494,314 (6,969) ¥ 25,861 58 ¥ 1,244 (14) ¥ 3,873 467 ¥ 30,978 511 U.S.$ Euro Others Total $ 3,021,130 (75,554) $ 1,987,522 9,380 $ 364,326 (9,576) $ 5,372,978 (75,750) $ 281,098 630 $ 13,522 (152) $ 42,097 5,076 $ 336,717 5,554 All of Canon’s long-term debt is ﬁ xed rate debt. Canon believes that fair value changes, and cash ﬂ ows resulting from reasonable near-term changes in interest rates would be imma- terial. Accordingly, Canon considers interest rate risk is insigniﬁ - cant. See also Note 9 of the Notes to Consolidated Financial Statements. Changes in the fair value of derivative ﬁ nancial instruments designated as cash ﬂ ow hedges, including foreign exchange contracts associated with forecasted intercompany sales, are reported in accumulated other comprehensive income (loss). These amounts are subsequently reclassiﬁ ed into earnings through other income (deductions) in the same period as the hedged items affect earnings. Substantially all such amounts recorded in accumulated other comprehensive income (loss) at year-end are expected to be recognized in earnings over the next 12 months. Canon excludes the time value component from the assessment of hedge effectiveness. Changes in the fair value of a foreign exchange contract for the period between the date that the forecasted intercompany sales occur and its matu- rity date are recognized in earnings and not considered hedge ineffectiveness. The amount of the hedging ineffectiveness was not material for the years ended December 31, 2009, 2008 and 2007. The amounts of net losses excluded from the assessment of hedge effectiveness (time value component) which was recorded in other income (deductions) was ¥462 million (U.S.$5 million), ¥3,701 million and ¥6,883 million for the years ended December 31, 2009, 2008 and 2007, respectively. Canon has entered into certain foreign currency exchange contracts to manage its foreign currency exposures. These for- eign currency exchange contracts have not been designated as hedges. Accordingly, the changes in fair values of these con- tracts are recorded in earnings immediately. (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:1)(cid:34)(cid:51)(cid:17)(cid:26)(cid:64)(cid:39)(cid:52)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:74)(cid:81)(cid:68)(cid:1)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:22)(cid:23) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:24)(cid:27)(cid:17)(cid:20)(cid:1)(cid:49)(cid:46) 57 LOOKING FORWARD Although the global economy has generally entered a recovery trend, there are still various risk factors such as weakened effects of stimulus measures in various countries, worsening employment conditions and consequent weakness in consumer spending, and it is necessary to maintain a close watch on what is a very uncertain future. It is expected that the global economy will continue to be trapped in a slow, L-shaped recovery, with business conditions facing the Canon Group remaining severe for the foreseeable future. The Canon Group has, however, successfully managed to further strengthen its ﬁ nancial condition, by implementing vari- ous management reforms undertaken until this term. Therefore, Canon has designated 2010, the ﬁ nal year of Phase III (2006– 2010) of its “Excellent Global Corporation Plan,” as “First Year of Growth,” a turning point to the growth mode. Canon will make full efforts to improve business performance at a speed that exceeds that of the economic recovery under a new growth strategy. Canon will begin by focusing on the introduction of innova- tive products and services that take markets by storm. For exam- ple, Canon strives to utilize the most of technologies and personnel resources Canon has developed throughout its history to identify market trends early on and create novel products and services like the “imageRUNNER ADVANCE series” which has the potential to become the core of the promising solutions business. Next, Canon will also focus on capturing signiﬁ cant portions of markets in China and other parts of Asia, where signiﬁ cant growth beyond that of the industrialized nations can be expect- ed. Canon’s approach will be to maximize competitiveness by thoroughly considering the characteristics of individual regions and revising sales strategies from the ground up. In addition, Canon will make Océ N.V., a Dutch printer man- ufacturer with strengths in printers for commercial use and large-format printers for business use, into a consolidated sub- sidiary and by doing so, Canon will enhance its direct-sales and direct-service systems, mainly in Europe and the U.S., and apply its technologies and products to overwhelmingly achieve the No.1 position in the printing industry. With the addition of Océ to the Canon Group serving as a foothold, Canon will also accelerate efforts to achieve its long-held objective of construct- ing a global tri-polar (Japan, U.S., and Europe) business creation organization. To nurture the development of new businesses, Canon plans to search for and develop existing businesses and peripheral businesses, enhance Group company sales to non-Group mem- bers and swiftly establish positions in next-generation businesses such as medical imaging and industrial robots. As Canon moves ahead with the measures mentioned above, it will remain steadfast in its efforts to achieve further improvements in management quality. To strengthen its proﬁ t structure, Canon will work on restructuring the semiconductor business, strengthening the ofﬁ ce equipment business and cre- ating an optimal production system. Canon will also continue to promote inventory reductions and strive for “supremacy of quality”. Ofﬁ ce Business Unit The importance of providing added value in the form of net- working, integration, color printing, multifunction and solutions has grown in the ofﬁ ce imaging products business. Canon expects that the printing market will expand in the long term as well as the ofﬁ ce product market. However, as the impact of the economic downturn has continued to affect the entire industry, sales for ﬁ scal 2009 decreased. In recent years, a new printer- based MFD market has emerged as printer vendors seek to enter the copying machine and MFD market. Canon has matched its business strategy to market trends by strengthening its lineup of digital color network MFDs and print- on-demand machines. In 2009, Canon launched the imageRUN- NER ADVANCE series, a new lineup of digital color MFDs with enhanced network capability. In addition, Canon entered into the monochrome printing market with the introduction of the imagePRESS 1135/1125/1110 series. To maintain and enhance its competitive edge and to meet increasingly sophisticated custom- er demands, Canon is reinforcing its hardware and software product lineups and solution capability. Canon’s laser printer business has maintained a strong mar- ket position and has consistently displayed solid growth. However, the recent global economic downturn has led to a dramatic market decline. Although a recovery is expected in developing countries, particularly in Asia, uncertainty remains. Within the monochrome laser printer market, demand in emerg- ing economies, which had been driving market expansion, declined in ﬁ scal 2009 along with demand in developed coun- tries. This situation has caused the overall market to shrink. As for color laser printers, market growth reversed from expansion to a slight contraction. Under such severe market conditions, Canon is accelerating its development of competitive, strategic products in all segments in preparation for an eventual econom- ic recovery. Canon is also focused on shifting from selling single- function models to multifunction models, where Canon expects continued growth in demand. Canon is concurrently promoting automated production of cartridges and in-house production of components in order to ensure stable procurement. (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:1)(cid:34)(cid:51)(cid:17)(cid:26)(cid:64)(cid:39)(cid:52)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:74)(cid:81)(cid:68)(cid:1)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:22)(cid:24) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:24)(cid:27)(cid:17)(cid:20)(cid:1)(cid:49)(cid:46) 58 CANON ANNUAL REPORT 2009 Although the economic downturn caused the large format printer market to decline dramatically, Canon launched four new models (iPF650/655/750/755) that met commercial success and contributed signiﬁ cantly to sales due to their easy use and new compact design. Accordingly, Canon expanded its market share in ﬁ scal year 2009. Consumer Business Unit The digital SLR camera market was affected by the worldwide economic downturn starting in the second half of 2008, result- ing in a much lower volume of shipments in the ﬁ rst quarter of 2009 as compared to the same quarter of the previous year. Subsequent quarters, however, rebounded to roughly the same level as 2008. Thus, the full year improved as compared to the previous year. In technology terms, the market is expected to continue improving image sensor performance, with further increases in ISO settings making it increasingly possible to take beautiful photographs even in dark environments. In addition, video functions are now being included in cameras for every class of user from entry-level to professional, as high-quality video capability has come to be considered as a basic function for these products. Although the Asian market (including China) for compact digital cameras was strong in 2009, the developed market shrank between 10% and 15%, and both the East European and South American markets declined to below the levels for the previous year. Thus, the global market shrank by 8% overall. Nevertheless, Canon has continued to maintain its top market share compared with its market share in 2008. The developed market is expected to remain stable in 2010, and emerging mar- kets other than Russia are expected to remain on a positive growth track, resulting in a projected slight worldwide increase as compared to 2009. Factors including a ﬁ erce price war and the strong yen have been drastically squeezing proﬁ t margins. While both the digital SLR camera market and the compact digital camera market as a whole are relying more and more on electronic manufacturing services companies, because cost competition is expected to intensify in the future, Canon plans to take advantage of its economies of scale and maintain proﬁ tability thanks to its 100% internal manufacturing system. Canon expects the interchangeable lens market to grow as a result of its penetration into the digital SLR camera market. Canon aims to expand its sales and market share by introducing products with features such as Canon’s Image Stabilizer functionality. While the global video camera market has diversiﬁ ed with respect to new storage media, including DVDs, hard disks, ﬂ ash memory and others, the trends toward ﬂ ash memory as the future mainstream medium and HD became clear in 2009. Despite the worldwide economic downturn that started in the fall of 2008, the ﬂ ash memory and HD market segments have continued to grow year-on-year. The low-priced Webcam mar- ket has proven to be strong, particularly in North America. Webcams appeal to a user segment that wants to enjoy conve- nient video capabilities, and they have been selling in increasing numbers. Canon is working to expand sales of its powerful line- up of products to meet a wide range of user needs with even greater added value. Canon seeks to differentiate itself from the competition based on its high-quality HD image technology as well as its dual ﬂ ash memory concept. The business application projector market experienced the effects of the economic downturn during 2009, resulting in a decline from the predicted unit volume and sales targets. This downturn affected products with a high added value. Nevertheless, system integrators and other video professionals continue to inquire about these products, and Canon plans to continue working to expand sales. Prior to the economic downturn, the market for network cameras used for surveillance video and monitoring applications showed consistent double-digit growth by sales value. During 2009, however, due to cancellations and postponements of cap- ital expenditures, this segment contracted for the ﬁ rst time. However, due to trends toward larger numbers of pixels and the standardization of operational commands, market research com- panies are predicting that this segment will rebound once again in the future. In order to avoid missing this trend, Canon is working to expand sales with a lineup ranging from low-priced, mass market models to high value-added models. In the broadcast television lens market, the demand for HD lenses has been growing smoothly over the past several years, mainly in the United States and Europe. Due to the economic downturn, however, advertising revenues declined in 2009, and broadcast stations, which represent the major market segment for such products, struggled to obtain funds. For this reason, stations began to postpone the purchase of new broadcast equipment, resulting in a temporary decline in demand. In the medium term, growing demand for replacing equipment is pro- jected as the conversion to digital broadcasts continues apace in developed nations. Demand for HD lenses for news applications is also expected to grow in emerging countries, and the market (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:1)(cid:34)(cid:51)(cid:17)(cid:26)(cid:64)(cid:39)(cid:52)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:74)(cid:81)(cid:68)(cid:1)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:22)(cid:25) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:24)(cid:27)(cid:17)(cid:21)(cid:1)(cid:49)(cid:46) 59 Forward looking statements The foregoing discussion and other disclosure in this report con- tains forward-looking statements that reﬂ ect management’s cur- rent views with respect to certain future events and ﬁ nancial performance. Actual results may differ materially from those projected or implied in the forward-looking statements. Further, certain forward-looking statements are based upon assumptions of future events that may not prove to be accurate. The follow- ing important factors could cause actual results to differ materi- ally from those projected or implied in any forward-looking statements: foreign currency exchange rate ﬂ uctuations; the uncertainty of Canon’s ability to implement its plans to localize production and other measures to reduce the impact of foreign currency exchange rate ﬂ uctuations; uncertainty as to economic conditions in Canon’s major markets; uncertainty of continued demand for Canon’s high-value-added products; uncertainty as to the recovery of computer and related markets; uncertainty of recovery in demand for Canon’s semiconductor production equipment; Canon’s ability to continue to develop products and to market products that incorporate new technology on a timely basis, are competitively priced, and achieve market acceptance; the possibility of losses resulting from foreign currency transac- tions designed to reduce ﬁ nancial risks from changes in foreign currency exchange rates; and inventory risk due to shifts in mar- ket demand. is expected to rebound as a result. Canon already has a high market share worldwide and plans to increase sales and expand its share as the market recovers, further solidifying its position in the industry. In the inkjet printer market, market growth drastically declined in the ﬁ rst half of 2009, led by the global economic downturn. Beginning in the third quarter, the market started to recover gradually and in the fourth quarter it returned to the levels of the previous year. To manage these trends, Canon has focused on selling mid-range to high-end models which enable large volume printing, including photo printers for professional and experienced amateurs and wireless MFPs. Canon also has strengthened its lineup with respect to entry-level models. Industry and Others Business Unit Earnings for semiconductor device manufacturers deteriorated sharply in the wake of the recent ﬁ nancial crisis, and the impact on the market for steppers has been severe. As a result, a drastic reduction in shipments from 2008 to 2009 was unavoidable. Due to this unexpected prolonged sluggish demand, long-lived assets mainly consisting of production equipment for this business with a carrying amount of ¥15,390 million were written down to zero in 2009. The market for semiconductor devices is gradually recovering, but a true recovery for the semiconductor production equipment market is expected to take more time. Cost-cutting measures therefore remain a high priority. In addition, in case the demand decreases drastically from 2009, the impairment of long-lived assets will not affect the operating proﬁ t because they have been written down to zero in 2009, but other assets may have a risk of impairment. Sales of mask aligners for LCD panels declined drastically in 2009 as LCD panel manufacturers, mainly in Taiwan, postponed or froze their equipment investment between the third quarter of 2008 and the ﬁ rst quarter of 2009. Canon continues to prior- itize the Chinese market and is carefully monitoring market trends, such as bigger sizes and high-deﬁ nition LCD panels, in order to quickly respond to customer demands. The document scanners market has declined due to a reduc- tion of equipment investment during the economic downturn. Despite this decline, Canon will strengthen its lineup of docu- ment scanners in order to expand sales. (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:1)(cid:34)(cid:51)(cid:17)(cid:26)(cid:64)(cid:39)(cid:52)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:74)(cid:81)(cid:68)(cid:1)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:22)(cid:26) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:24)(cid:27)(cid:17)(cid:21)(cid:1)(cid:49)(cid:46) 60 CANON ANNUAL REPORT 2009 TEN-YEAR FINANCIAL SUMMARY Net sales: Domestic Overseas Total Percentage of previous year Millions of yen (except per share amounts) 2009 2008 2007 2006 ¥ 702,344 ¥ 868,280 ¥ 947,587 ¥ 932,290 3,224,469 4,156,759 110.7% 3,533,759 4,481,346 107.8% 3,225,881 4,094,161 91.4% 2,506,857 3,209,201 78.4% Net income attributable to Canon Inc. Percentage of sales 131,647 4.1% 309,148 7.6% 488,332 10.9% 455,325 11.0% Advertising Research and development expenses Depreciation of property, plant and equipment Increase in property, plant and equipment Long-term debt, excluding current installments Canon Inc. stockholders’ equity Total assets Per share data: Income before cumulative effect of change in accounting principle: Basic Diluted Net income attributable to Canon Inc. stockholders per share: Basic Diluted Dividends per share Stock price: High Low 78,009 304,600 277,399 216,128 112,810 374,025 304,622 361,988 132,429 368,261 309,815 428,549 116,809 308,307 235,804 379,657 ¥ 4,912 ¥ 8,423 ¥ 8,680 ¥ 2,688,109 3,847,557 2,659,792 3,969,934 2,922,336 4,512,625 15,789 2,986,606 4,521,915 ¥ 106.64 ¥ 106.64 246.21 ¥ 246.20 377.59 ¥ 377.53 341.95 341.84 106.64 106.64 110.00 4,070 2,115 246.21 246.20 110.00 5,820 2,215 377.59 377.53 110.00 7,450 5,190 341.95 341.84 83.33 6,780 4,567 Average number of common shares in thousands Number of employees 1,234,482 168,879 1,255,626 166,980 1,293,296 131,352 1,331,542 118,499 Common Stock Price Range (Tokyo Stock Exchange) (Yen) 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 00 01 02 03 04 05 06 07 08 09 (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:1)(cid:34)(cid:51)(cid:17)(cid:26)(cid:64)(cid:39)(cid:52)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:74)(cid:81)(cid:68)(cid:1)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:23)(cid:17) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:24)(cid:27)(cid:17)(cid:21)(cid:1)(cid:49)(cid:46) 2005 2004 2003 2002 2001 2000 2009 61 Thousands of U.S. dollars (except per share amounts) ¥ 856,205 ¥ 849,734 ¥ 801,400 ¥ 732,551 ¥ 827,288 ¥ 779,366 1,917,054 2,696,420 106.5% 2,080,285 2,907,573 107.8% 2,897,986 3,754,191 108.3% 2,396,672 3,198,072 108.8% 2,207,577 2,940,128 101.1% 2,618,119 3,467,853 108.4% 384,096 10.2% 343,344 9.9% 275,730 8.6% 190,737 6.5% 167,561 5.8% 134,088 5.0% 106,250 286,476 205,727 383,784 111,770 275,300 174,397 318,730 100,278 259,140 168,636 210,038 71,725 233,669 158,469 198,702 66,837 218,616 147,286 207,674 67,840 194,552 144,043 170,986 ¥ 27,082 ¥ 28,651 ¥ 59,260 ¥ 81,349 ¥ 2,604,682 4,043,553 2,209,896 3,587,021 1,865,545 3,182,148 1,591,950 2,942,706 95,526 ¥ 142,925 1,298,914 2,832,125 1,458,476 2,844,756 $ 7,634,174 27,248,446 34,882,620 78.4% 1,430,946 4.1% 847,924 3,310,870 3,015,207 2,349,217 $ 53,391 29,218,576 41,821,272 ¥ 288.63 ¥ 288.36 258.53 ¥ 257.85 209.21 ¥ 207.17 145.04 ¥ 143.20 124.71 ¥ 123.03 102.44 101.01 $ 288.63 288.36 66.67 4,780 3,460 258.53 257.85 43.33 3,880 3,273 209.21 207.17 33.33 4,140 2,607 145.04 143.20 20.00 3,500 2,413 127.53 125.80 16.67 3,553 2,100 102.44 101.01 14.00 3,747 2,267 1,330,761 115,583 1,328,048 108,257 1,317,974 102,567 1,315,074 97,802 1,313,940 93,620 1,308,909 86,673 1.16 1.16 1.16 1.16 1.20 44.24 22.99 Notes: 1. Canon adopted new guidance for noncontrolling interests in consolidated ﬁ nancial statements in the ﬁ scal year beginning January 1, 2009. In accordance with the adoption of this guidance, “income before income taxes and minority interests” is now referred to as “income before income taxes” and “net income” is now referred to as “net income attributable to Canon Inc.” 2. U.S. dollar amounts are translated from yen at the rate of U.S.$1 = JPY92, the approximate exchange rate on the Tokyo Foreign Exchange Market as of December 30, 2009. 3. The Company made a three-for-two stock split on July 1, 2006. The average number of common shares and the per share data for the periods prior to the stock split have been adjusted to reﬂ ect the stock split. (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:1)(cid:34)(cid:51)(cid:17)(cid:26)(cid:64)(cid:39)(cid:52)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:74)(cid:81)(cid:68)(cid:1)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:23)(cid:18) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:24)(cid:27)(cid:17)(cid:21)(cid:1)(cid:49)(cid:46) 62 CANON ANNUAL REPORT 2009 CONSOLIDATED BALANCE SHEETS CANON INC. AND SUBSIDIARIES ASSETS Current assets: Cash and cash equivalents (Note 1) Short-term investments (Note 3) Trade receivables, net (Note 4) Inventories (Note 5) Prepaid expenses and other current assets (Notes 7 and 12) Total current assets Noncurrent receivables (Note 19) Investments (Note 3) Property, plant and equipment, net (Notes 6 and 7) Intangible assets, net (Note 8) Other assets (Notes 7,8,11 and 12) Total assets LIABILITIES AND EQUITY Current liabilities: Short-term loans and current portion of long-term debt (Note 9) Trade payables (Note 10) Accrued income taxes (Note 12) Accrued expenses (Notes 11 and 19) Other current liabilities (Notes 6 and 12) Total current liabilities Long-term debt, excluding current installments (Note 9) Accrued pension and severance cost (Note 11) Other noncurrent liabilities (Note 12) Total liabilities Commitments and contingent liabilities (Note 19) Equity: Canon Inc. stockholders’ equity: Common stock Authorized 3,000,000,000 shares; issued 1,333,763,464 shares in 2009 and in 2008 (Note 13) Additional paid-in capital (Note 13) Legal reserve (Note 14) Retained earnings (Note 14) Accumulated other comprehensive income (loss) (Note 15) Treasury stock, at cost; 99,288,001 shares in 2009 and 99,275,245 shares in 2008 Total Canon Inc. stockholders’ equity Noncontrolling interests Total equity Total liabilities and equity See accompanying Notes to Consolidated Financial Statements. December 31, 2009 and 2008 Millions of yen Thousands of U.S. dollars (Note 2) 2009 2008 2009 ¥ 795,034 19,089 556,572 373,241 273,843 2,017,779 14,936 114,066 1,269,785 117,396 313,595 ¥ 3,847,557 (As adjusted) (Note 1) ¥ 679,196 7,651 595,422 506,919 275,660 2,064,848 14,752 88,825 1,357,186 119,140 325,183 ¥ 3,969,934 ¥ 4,869 339,113 50,105 274,300 115,303 783,690 4,912 115,904 63,651 968,157 ¥ 5,540 406,746 69,961 277,117 184,636 944,000 8,423 110,784 55,745 1,118,952 $ 8,641,674 207,489 6,049,696 4,056,967 2,976,554 21,932,380 162,348 1,239,848 13,802,011 1,276,043 3,408,642 $ 41,821,272 $ 52,924 3,686,011 544,620 2,981,522 1,253,293 8,518,370 53,391 1,259,826 691,859 10,523,446 174,762 404,293 54,687 2,871,437 (260,818) 174,762 403,790 53,706 2,876,576 (292,820) 1,899,587 4,394,489 594,424 31,211,272 (2,834,978) (556,252) 2,688,109 191,291 2,879,400 ¥ 3,847,557 (556,222) 2,659,792 191,190 2,850,982 ¥ 3,969,934 (6,046,218) 29,218,576 2,079,250 31,297,826 $ 41,821,272 (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:1)(cid:34)(cid:51)(cid:17)(cid:26)(cid:64)(cid:39)(cid:52)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:74)(cid:81)(cid:68)(cid:1)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:23)(cid:19) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:24)(cid:27)(cid:17)(cid:22)(cid:1)(cid:49)(cid:46) CONSOLIDATED STATEMENTS OF INCOME CANON INC. AND SUBSIDIARIES Net sales Cost of sales (Notes 6, 8, 11 and 19) Gross proﬁ t Operating expenses (Notes 1, 6 ,8, 11, 16 and 19): Selling, general and administrative expenses Research and development expenses Operating proﬁ t Other income (deductions): Interest and dividend income Interest expense Other, net (Notes 1, 3 and 18) Income before income taxes Income taxes (Note 12) Consolidated net income 63 Years ended December 31, 2009, 2008 and 2007 Millions of yen Thousands of U.S. dollars (Note 2) 2009 2008 2007 2009 (As adjusted) (Note 1) ¥ 3,209,201 1,781,808 1,427,393 ¥ 4,094,161 2,156,153 1,938,008 ¥ 4,481,346 2,234,365 2,246,981 $ 34,882,620 19,367,479 15,515,141 905,738 304,600 1,210,338 217,055 5,202 (336) (2,566) 2,300 219,355 1,067,909 374,025 1,441,934 496,074 19,442 (837) (33,532) (14,927) 481,147 1,122,047 368,261 1,490,308 756,673 32,819 (1,471) (19,633) 11,715 768,388 9,844,978 3,310,870 13,155,848 2,359,293 56,543 (3,652) (27,891) 25,000 2,384,293 84,122 135,233 160,788 320,359 264,258 504,130 914,369 1,469,924 Less: Net income attributable to noncontrolling interests Net income attributable to Canon Inc. Net income attributable to Canon Inc. stockholders per share (Note 17): Basic Diluted Cash dividends per share See accompanying Notes to Consolidated Financial Statements. 3,586 ¥ 131,647 11,211 ¥ 309,148 15,798 ¥ 488,332 38,978 $ 1,430,946 Yen U.S. dollars (Note 2) ¥ 106.64 106.64 110.00 ¥ 246.21 246.20 110.00 ¥ 377.59 377.53 110.00 $ 1.16 1.16 1.20 (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:1)(cid:34)(cid:51)(cid:17)(cid:26)(cid:64)(cid:39)(cid:52)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:74)(cid:81)(cid:68)(cid:1)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:23)(cid:20) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:24)(cid:27)(cid:17)(cid:22)(cid:1)(cid:49)(cid:46) 64 CANON ANNUAL REPORT 2009 CONSOLIDATED STATEMENTS OF EQUITY CANON INC. AND SUBSIDIARIES Common stock ¥174,603 Additional paid-in capital ¥403,510 Legal reserve ¥43,600 Retained earnings ¥2,368,047 Millions of yen Accumulated other comprehensive income (loss) ¥ 2,718 Total Canon Inc. stockholders’ equity ¥2,986,606 Treasury stock ¥ (5,872) Noncontrolling interests ¥216,801 Total equity ¥3,203,407 95 95 (617) (2,204) (131,612) 2,417 (2,417) (2,204) 190 (617) (131,612) — (2,204) 190 (12,802) (131,612) (4,612) — (12,185) (4,612) 488,332 488,332 15,798 504,130 (62) (1,778) 814 32,978 46,017 2,720,146 34,670 (450,314) (456,186) 174,698 64 3 402,991 63 761 (145,024) 7,689 (7,689) (62) (1,778) 814 32,978 520,284 (450,311) 2,922,336 127 761 (145,024) — (26) (577) 7 7,664 22,866 222,870 (26,218) (5,123) (88) (2,355) 821 40,642 543,150 (450,311) 3,145,206 127 (25,457) (145,024) (5,123) — 309,148 309,148 11,211 320,359 (258,764) (5,152) 2,342 (65,916) 174,762 (25) 403,790 503 53,706 (5) 2,876,576 (292,820) (100,036) (556,222) (135,793) 981 (981) (258,764) (1,911) (260,675) (5,152) (690) (5,842) 2,342 (65,916) (18,342) (100,066) 2,659,792 503 (135,793) — — (8,949) (339) 191,190 (1,376) (3,326) 2,342 (74,865) (18,681) (100,066) 2,850,982 (873) (135,793) (3,326) — 131,647 131,647 3,586 135,233 33,340 2,150 (1,422) (2,066) ¥174,762 ¥404,293 ¥54,687 (12) ¥2,871,437 ¥(260,818) (30) ¥(556,252) 33,340 2,150 (1,422) (2,066) 163,649 (42) ¥2,688,109 30 67 (1) 1,121 4,803 ¥191,291 33,370 2,217 (1,423) (945) 168,452 (42) ¥2,879,400 Balance at December 31, 2006 Cumulative effect of a change in accounting principle - adoption of accounting guidance for sabbatical leave and other similar beneﬁ ts, net of tax Conversion of convertible debt Equity transactions with noncontrolling interests and other Dividends paid to Canon Inc. stockholders Dividends paid to noncontrolling interests Transfer to legal reserve Comprehensive income: Net income Other comprehensive income (loss), net of tax (Note 15): Foreign currency translation adjustments Net unrealized gains and losses on securities Net gains and losses on derivative instruments Pension liability adjustments Total comprehensive income Repurchase of treasury stock, net Balance at December 31, 2007 Conversion of convertible debt Equity transactions with noncontrolling interests and other Dividends paid to Canon Inc. stockholders Dividends paid to noncontrolling interests Transfer to legal reserve Comprehensive income (loss): Net income Other comprehensive income (loss), net of tax (Note 15): Foreign currency translation adjustments Net unrealized gains and losses on securities Net gains and losses on derivative instruments Pension liability adjustments Total comprehensive income (loss) Repurchase of treasury stock, net Balance at December 31, 2008 Equity transactions with noncontrolling interests and other Dividends paid to Canon Inc. stockholders Dividends paid to noncontrolling interests Transfer to legal reserve Comprehensive income: Net income Other comprehensive income (loss), net of tax (Note 15): Foreign currency translation adjustments Net unrealized gains and losses on securities Net gains and losses on derivative instruments Pension liability adjustments Total comprehensive income Repurchase of treasury stock, net Balance at December 31, 2009 (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:1)(cid:34)(cid:51)(cid:17)(cid:26)(cid:64)(cid:39)(cid:52)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:74)(cid:81)(cid:68)(cid:1)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:23)(cid:21) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:24)(cid:27)(cid:17)(cid:22)(cid:1)(cid:49)(cid:46) 65 Thousands of U.S. dollars (Note 2) Common stock $1,899,587 Additional paid-in capital $4,389,022 Legal reserve Retained earnings $583,761 $31,267,130 Accumulated other Treasury comprehensive stock income (loss) $(3,182,825) $(6,045,892) $28,910,783 Total Canon Inc. stockholders’ equity Noncontrolling interests Total equity $2,078,152 $30,988,935 5,467 (1,476,011) 10,663 (10,663) 5,467 (1,476,011) — (14,956) (36,152) (9,489) (1,476,011) (36,152) — 1,430,946 1,430,946 38,978 1,469,924 362,391 23,370 362,391 23,370 326 728 362,717 24,098 $1,899,587 $4,394,489 (130) $594,424 $31,211,272 (15,457) (22,457) (15,457) (22,457) 1,778,793 (456) $(2,834,978) $(6,046,218) $29,218,576 (326) (11) 12,185 52,206 (15,468) (10,272) 1,830,999 (456) $2,079,250 $31,297,826 Balance at December 31, 2008 Equity transactions with noncontrolling interests and other Dividends paid to Canon Inc. stockholders Dividends paid to noncontrolling interests Transfer to legal reserve Comprehensive income: Net income Other comprehensive income (loss), net of tax (Note 15): Foreign currency translation adjustments Net unrealized gains and losses on securities Net gains and losses on derivative instruments Pension liability adjustments Total comprehensive income Repurchase of treasury stock, net Balance at December 31, 2009 See accompanying Notes to Consolidated Financial Statements. (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:1)(cid:34)(cid:51)(cid:17)(cid:26)(cid:64)(cid:39)(cid:52)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:74)(cid:81)(cid:68)(cid:1)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:23)(cid:22) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:24)(cid:27)(cid:17)(cid:23)(cid:1)(cid:49)(cid:46) 66 CANON ANNUAL REPORT 2009 CONSOLIDATED STATEMENTS OF CASH FLOWS CANON INC. AND SUBSIDIARIES Cash ﬂ ows from operating activities: Consolidated net income Adjustments to reconcile consolidated net income to net cash provided by operating activities: Depreciation and amortization Loss on disposal of property, plant and equipment Impairment loss of ﬁ xed assets (Note 6) Deferred income taxes Equity in (earnings) losses of afﬁ liated companies (Increase) decrease in trade receivables (Increase) decrease in inventories Increase (decrease) in trade payables Increase (decrease) in accrued income taxes Increase (decrease) in accrued expenses Increase (decrease) in accrued (prepaid) pension and severance cost Other, net Net cash provided by operating activities Cash ﬂ ows from investing activities: Purchases of ﬁ xed assets (Note 6) Proceeds from sale of ﬁ xed assets (Note 6) Purchases of available-for-sale securities Proceeds from sale and maturity of available-for-sale securities Proceeds from maturity of held-to-maturity securities (Increase) decrease in time deposits, net Acquisitions of subsidiaries, net of cash acquired Purchases of other investments Other, net Net cash used in investing activities Cash ﬂ ows from ﬁ nancing activities: Proceeds from issuance of long-term debt Repayments of long-term debt Decrease in short-term loans, net Dividends paid Repurchases of treasury stock, net Other, net Net cash used in ﬁ nancing activities Effect of exchange rate changes on cash and cash equivalents Net change in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Supplemental disclosure for cash ﬂ ow information: Cash paid during the year for: Interest Income taxes See accompanying Notes to Consolidated Financial Statements. Years ended December 31, 2009, 2008 and 2007 Millions of yen Thousands of U.S. dollars (Note 2) 2009 2008 2007 2009 (As adjusted) (Note 1) ¥ 135,233 ¥ 320,359 ¥ 504,130 $ 1,469,924 315,393 8,215 15,466 20,712 12,649 48,244 143,580 (76,843) (21,023) (9,827) 4,765 14,671 611,235 (327,983) 8,893 (3,253) 2,460 — (11,345) (2,979) (37,981) 1,944 (370,244) 3,361 (6,282) (280) (135,793) (42) (3,343) (142,379) 341,337 11,811 13,503 (32,497) 20,047 83,521 49,547 (36,719) (77,340) (30,694) (12,128) (34,063) 616,684 (428,168) 7,453 (7,307) 4,320 10,000 2,892 (5,999) (45,473) (10,198) (472,480) 6,841 (15,397) (2,643) (145,024) (100,066) (21,276) (277,565) 341,694 9,985 15,908 (35,021) (5,634) (10,722) (26,643) 21,136 14,988 43,035 (15,387) (18,200) 839,269 (474,285) 9,635 (2,281) 8,614 10,000 31,681 (15,675) (2,432) 2,258 (432,485) 2,635 (13,046) (358) (131,612) (450,311) (11,691) (604,383) 3,428,185 89,294 168,109 225,130 137,490 524,391 1,560,652 (835,250) (228,511) (106,815) 51,793 159,467 6,643,859 (3,565,033) 96,663 (35,359) 26,739 — (123,315) (32,380) (412,837) 21,131 (4,024,391) 36,533 (68,283) (3,043) (1,476,011) (456) (36,338) (1,547,598) 17,226 115,838 679,196 ¥ 795,034 (131,906) (265,267) 944,463 ¥ 679,196 (13,564) (211,163) 1,155,626 ¥ 944,463 187,239 1,259,109 7,382,565 $ 8,641,674 ¥ 384 82,906 ¥ 901 263,392 ¥ 1,476 273,888 $ 4,174 901,152 (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:1)(cid:34)(cid:51)(cid:17)(cid:26)(cid:64)(cid:39)(cid:52)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:74)(cid:81)(cid:68)(cid:1)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:23)(cid:23) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:24)(cid:27)(cid:17)(cid:23)(cid:1)(cid:49)(cid:46) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CANON INC. AND SUBSIDIARIES 67 1. Basis of Presentation and Signiﬁ cant Accounting Policies (a) Description of Business Canon Inc. (the “Company”) and subsidiaries (collectively “Canon”) is one of the world’s leading manufacturers in such ﬁ elds as ofﬁ ce products, consumer products and industry and other products. Ofﬁ ce products consist mainly of network multi- function devices (“MFDs”), copying machines, laser printers and large format inkjet printers. Consumer products consist mainly of digital single-lens reﬂ ex (“SLR”) cameras, compact digital cameras, interchangeable lenses, digital video camcorders, inkjet multifunction peripherals, single function inkjet printers, image scanners and broadcasting equipment. Industry and other prod- ucts consist mainly of semiconductor production equipment, mirror projection mask aligners for liquid crystal display (“LCD”) panels, and medical equipment. Canon’s consolidated net sales for the years ended December 31, 2009, 2008 and 2007 were distributed as follows: the Ofﬁ ce Business Unit 51%, 55% and 55%, the Consumer Business Unit 41%, 35% and 36%, the Industry and Others Business Unit 11%, 13% and 12%, and elimination between segments 3%, 3% and 3%, respectively. These percentages were computed by dividing segment net sales, including intersegment sales, by consolidated net sales, based on the segment operating results described in Note 22. Sales are made principally under the Canon brand name, almost entirely through sales subsidiaries. These subsidiaries are responsible for marketing and distribution, and primarily sell to retail dealers in their geographic area. Approximately 78%, 79% and 79% of consolidated net sales for the years ended December 31, 2009, 2008 and 2007 were generated outside Japan, with 28%, 28% and 30% in the Americas, 31%, 33% and 33% in Europe, and 19%, 18% and 16% in other areas, respectively. Canon sells laser printers on an OEM basis to Hewlett- Packard Company; such sales constituted approximately 20%, 23% and 22% of consolidated net sales for the years ended December 31, 2009, 2008 and 2007, respectively, and are included in the Ofﬁ ce Business Unit. Canon’s manufacturing operations are conducted primarily at 25 plants in Japan and 16 overseas plants which are located in countries or regions such as the United States, Germany, France, Taiwan, China, Malaysia, Thailand and Vietnam. (b) Basis of Presentation The Company and its domestic subsidiaries maintain their books of account in conformity with ﬁ nancial accounting standards of Japan. Foreign subsidiaries maintain their books of account in conformity with ﬁ nancial accounting standards of the countries of their domicile. Certain adjustments and reclassiﬁ cations have been incorpo- rated in the accompanying consolidated ﬁ nancial statements to conform with U.S. generally accepted accounting principles (“GAAP”). These adjustments were not recorded in the statutory books of account. (c) Principles of Consolidation The consolidated ﬁ nancial statements include the accounts of the Company, its majority owned subsidiaries and those variable interest entities where the Company or its consolidated subsid- iaries are the primary beneﬁ ciaries. All signiﬁ cant intercompany balances and transactions have been eliminated. (d) Use of Estimates The preparation of the consolidated ﬁ nancial statements in con- formity with U.S. GAAP requires management to make esti- mates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated ﬁ nancial statements and the reported amounts of revenues and expenses during the period. Signiﬁ cant estimates and assumptions are reﬂ ected in valuation and disclosure of revenue recognition, allowance for doubtful receivables, valuation of inventories, impairment of long-lived assets, environmental liabilities, valuation of deferred tax assets, uncertain tax positions and employee retirement and severance beneﬁ t plans. Actual results could differ materially from those estimates. (e) Translation of Foreign Currencies Assets and liabilities of the Company’s subsidiaries located out- side Japan with functional currencies other than Japanese yen are translated into Japanese yen at the rates of exchange in effect at the balance sheet date. Income and expense items are translated at the average exchange rates prevailing during the year. Gains and losses resulting from translation of ﬁ nancial statements are excluded from earnings and are reported in other comprehensive income (loss). Gains and losses resulting from foreign currency transac- tions, including foreign exchange contracts, and translation of assets and liabilities denominated in foreign currencies are included in other income (deductions) in the consolidated state- ments of income. Foreign currency exchange gains and losses was a net gain of ¥1,842 million ($20,022 thousand) for the year ended December 31, 2009, and were net losses of ¥11,212 million and ¥31,943 million for the years ended December 31, 2008 and 2007, respectively. (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:1)(cid:34)(cid:51)(cid:17)(cid:26)(cid:64)(cid:39)(cid:52)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:74)(cid:81)(cid:68)(cid:1)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:23)(cid:24) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:24)(cid:27)(cid:17)(cid:24)(cid:1)(cid:49)(cid:46) 68 CANON ANNUAL REPORT 2009 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CANON INC. AND SUBSIDIARIES (f) Cash Equivalents All highly liquid investments acquired with original maturities of three months or less are considered to be cash equivalents. Certain debt securities with original maturities of less than three months classiﬁ ed as available-for-sale securities of ¥184,856 mil- lion ($2,009,304 thousand) and ¥194,030 million at December 31, 2009 and 2008, respectively, are included in cash and cash equivalents in the consolidated balance sheets. Additionally, cer- tain debt securities with original maturities of less than three months classiﬁ ed as held-to-maturity securities of ¥999 million ($10,859 thousand) and ¥997 million at December 31, 2009 and 2008, respectively, are also included in cash and cash equiv- alents. Fair value for these securities approximates their cost. (g) Investments Investments consist primarily of time deposits with original maturities of more than three months, debt and marketable equity securities, investments in afﬁ liated companies and non- marketable equity securities. Canon reports investments with maturities of less than one year as short-term investments. Canon classiﬁ es investments in debt and marketable equity securities as available-for-sale or held-to-maturity securities. Canon does not hold any trading securities, which are bought and held primarily for the purpose of sale in the near term. Available-for-sale securities are recorded at fair value. Fair value is determined based on quoted market prices, projected discounted cash ﬂ ows or other valuation techniques as appropri- ate. Unrealized holding gains and losses, net of the related tax effect, are reported as a separate component of other compre- hensive income (loss) until realized. Held-to-maturity securities are recorded at amortized cost, adjusted for amortization of pre- miums and accretion of discounts. Available-for-sale and held-to-maturity securities are regular- ly reviewed for other-than-temporary declines in the carrying amount based on criteria that include the length of time and the extent to which the market value has been less than cost, the ﬁ nancial condition and near-term prospects of the issuer and Canon’s intent and ability to retain the investment for a period of time sufﬁ cient to allow for any anticipated recovery in market value. For debt securities for which the declines are deemed to be other-than-temporary and there is no intent to sell, impair- ments are separated into the amount related to credit loss, which is recognized in earnings, and the amount related to all other factors, which is recognized in other comprehensive income (loss). For debt securities for which the declines are deemed to be other-than-temporary and there is an intent to sell, impairments in their entirety are recognized in earnings. For equity securities for which the declines are deemed to be other- than-temporary, impairments in their entirety are recognized in earnings. Canon recognizes an impairment loss to the extent by which the cost basis of the investment exceeds the fair value of the investment. Realized gains and losses are determined on the average cost method and reﬂ ected in earnings. Investments in afﬁ liated companies over which Canon has the ability to exercise signiﬁ cant inﬂ uence, but does not hold a con- trolling ﬁ nancial interest, are accounted for by the equity method. Non-marketable equity securities in companies over which Canon does not have the ability to exercise signiﬁ cant inﬂ uence are stated at cost and reviewed periodically for impairment. (h)(cid:1)Allowance for Doubtful Receivables Allowance for doubtful trade and ﬁ nance receivables is main- tained for all customers based on a combination of factors, including aging analysis, macroeconomic conditions, signiﬁ cant one-time events, and historical experience. An additional reserve for individual accounts is recorded when Canon becomes aware of a customer’s inability to meet its ﬁ nancial obligations, such as in the case of bankruptcy ﬁ lings. If circumstances related to cus- tomers change, estimates of the recoverability of receivables would be further adjusted. When all collection options are exhausted including legal recourse, the accounts or portions thereof are deemed to be uncollectable and charged against the allowance. (i) Inventories Inventories are stated at the lower of cost or market value. Cost is determined by the average method for domestic inventories and principally by the ﬁ rst-in, ﬁ rst-out method for overseas inventories. (j) 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 indi- cate that the carrying amount of an asset may not be recover- able. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset and the esti- mated undiscounted future cash ﬂ ows expected to be generat- ed by the asset. If the carrying amount of the asset exceeds its estimated undiscounted future cash ﬂ ows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of by sale are reported at the lower of the carry- ing amount or fair value less costs to sell, and are no longer depreciated. (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:1)(cid:34)(cid:51)(cid:17)(cid:26)(cid:64)(cid:39)(cid:52)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:74)(cid:81)(cid:68)(cid:1)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:23)(cid:25) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:24)(cid:27)(cid:17)(cid:24)(cid:1)(cid:49)(cid:46) 69 (k) 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. The depreciation period ranges from 3 years to 60 years for buildings and 1 year to 20 years for machinery and equipment. Assets leased to others under operating leases are stated at cost and depreciated to the estimated residual value of the assets by the straight-line method over the period ranging from 2 years to 5 years. (l) Goodwill and Other Intangible Assets Goodwill and other intangible assets with indeﬁ nite useful lives are not amortized, but are instead tested for impairment annu- ally in the fourth quarter of each year, or more frequently if indi- cators of potential impairment exist. Canon performs its impairment test of goodwill 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 beneﬁ t from the syn- ergies arising from each business combination. Intangible assets with ﬁ nite useful lives, consisting primarily of software and license fees, are amortized using the straight-line method over the estimated useful lives, which range from 3 years to 5 years for software and 5 years to 10 years for license fees. Certain costs incurred in connection with developing or obtaining inter- nal use software are capitalized. These costs consist primarily of payments made to third parties and the salaries of employees working on such software development. Costs incurred in con- nection with developing internal use software are capitalized at the application development stage. In addition, Canon develops or obtains certain software to be sold where related costs are capitalized after establishment of technological feasibility. (m) Environmental Liabilities Liabilities for environmental remediation and other environmen- tal costs are accrued when environmental assessments or reme- dial efforts are probable and the costs can be reasonably estimated. Such liabilities are adjusted as further information develops or circumstances change. Costs of future obligations are not discounted to their present values. (n) Income Taxes Deferred tax assets and liabilities are recognized for the estimat- ed future tax consequences attributable to differences between the ﬁ nancial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Canon records a valuation allowance to reduce the deferred tax assets to the amount that is more likely than not realizable. Canon recognizes the ﬁ nancial statement effects of tax posi- tions when it is more likely than not, based on the technical merits, that the tax positions will be sustained upon examination by the tax authorities. Beneﬁ ts from tax positions that meet the more-likely-than-not recognition threshold are measured at the largest amount of beneﬁ t that is greater than 50% likely of being realized upon settlement. Interest and penalties accrued related to unrecognized tax beneﬁ ts are included in income taxes in the consolidated statements of income. (o) Stock-Based Compensation Canon measures stock-based compensation cost at the grant date, based on the fair value of the award, and recognizes the cost on a straight-line basis over the requisite service period, which is the vesting period. (p) Net Income Attributable to Canon Inc. Stockholders per Share Basic net income attributable to Canon Inc. stockholders per share is computed by dividing net income attributable to Canon Inc. by the weighted-average number of common shares out- standing during each year. Diluted net income attributable to Canon Inc. stockholders per share includes the effect from potential issuances of common stock based on the assumptions that all convertible debentures were converted into common stock and all stock options were exercised. (q) Revenue Recognition Canon generates revenue principally through the sale of ofﬁ ce and consumer products, equipment, supplies, and related servic- es 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 trans- ferred to the customer or services have been rendered, the sales price is ﬁ xed or determinable, and collectibility is probable. Revenue from sales of ofﬁ ce products, such as ofﬁ ce net- work digital MFDs and laser printers, and consumer products, such as digital cameras and inkjet multifunction peripherals, 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 steppers and aligners that are sold with customer acceptance provisions related to their functionality, is recognized when the equipment (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:1)(cid:34)(cid:51)(cid:17)(cid:26)(cid:64)(cid:39)(cid:52)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:74)(cid:81)(cid:68)(cid:1)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:23)(cid:26) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:24)(cid:27)(cid:17)(cid:24)(cid:1)(cid:49)(cid:46) 70 CANON ANNUAL REPORT 2009 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CANON INC. AND SUBSIDIARIES is installed at the customer site and the speciﬁ c criteria of the equipment functionality are successfully tested and demonstrat- ed by Canon. Service revenue is derived primarily from separate- ly 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 ofﬁ ce products, for which the customer typi- cally 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-ﬁ nancing leases is recognized over the life of each respective lease using the interest method. Leases not quali- fying as sales-type leases or direct-ﬁ nancing leases are accounted for as operating leases and related revenue is recognized ratably over the lease term. When equipment leases are bundled with product maintenance contracts, revenue is ﬁ rst allocated consid- ering the relative fair value of the lease and non-lease deliver- ables based upon the estimated relative fair values of each element. Lease deliverables generally include equipment, ﬁ nanc- ing 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 fair value if such element meets the criteria for treatment as a separate unit of accounting. Otherwise, revenue is deferred until the undelivered elements are fulﬁ lled 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 in sales are based upon historical trends and other known factors at the time of sale. In addition, Canon provides price protection to certain resellers of its products, and records reductions to sales for the estimated impact of price protection obligations when announced. Estimated product warranty costs are recorded at the time revenue is recognized and are included in selling, general and administrative expenses in the consolidated statements of income. Estimates for accrued product warranty costs are based on historical experience, and are affected by ongoing product failure rates, speciﬁ c product class failures outside of the base- line experience, material usage and service delivery costs incurred in correcting a product failure. Taxes collected from customers and remitted to governmen- tal authorities are excluded from revenues in the consolidated statements of income. (r) Research and Development Costs Research and development costs are expensed as incurred. (s) Advertising Costs Advertising costs are expensed as incurred. Advertising expenses were ¥78,009 million ($847,924 thousand), ¥112,810 million and ¥132,429 million for the years ended December 31, 2009, 2008 and 2007, respectively. (t) Shipping and Handling Costs Shipping and handling costs totaled ¥45,966 million ($499,630 thousand), ¥62,128 million and ¥63,708 million for the years ended December 31, 2009, 2008 and 2007, respectively, and are included in selling, general and administrative expenses in the consolidated statements of income. (u) Derivative Financial Instruments All derivatives are recognized at fair value and are included in prepaid expenses and other current assets, or other current lia- bilities in the consolidated balance sheets. Canon uses and designates certain derivatives as a hedge of a forecasted transaction or the variability of cash ﬂ ows to be received or paid related to a recognized asset or liability (“cash ﬂ ow” hedge). Canon formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. Canon also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the deriva- tives that are used in hedging transactions are highly effective in offsetting changes in cash ﬂ ows of hedged items. When it is determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, Canon discon- tinues hedge accounting prospectively. Changes in the fair value of a derivative that is designated and qualiﬁ es as a cash ﬂ ow hedge are recorded in other comprehensive income (loss), until earnings are affected by the variability in cash ﬂ ows of the hedged item. Gains and losses from hedging ineffectiveness are included in other income (deductions). Gains and losses related to the components of hedging instruments excluded from the assessment of hedge effectiveness are included in other income (deductions). Canon also uses certain derivative ﬁ nancial instruments which are not designated as hedges. The changes in fair values of these derivative ﬁ nancial instruments are immediately record- ed in earnings. Canon classiﬁ es cash ﬂ ows from derivatives as cash ﬂ ows from operating activities in the consolidated statements of cash ﬂ ows. (v) Guarantees Canon recognizes, at the inception of a guarantee, a liability for the fair value of the obligation it has undertaken in issuing guarantees. (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:1)(cid:34)(cid:51)(cid:17)(cid:26)(cid:64)(cid:39)(cid:52)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:74)(cid:81)(cid:68)(cid:1)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:24)(cid:17) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:24)(cid:27)(cid:17)(cid:24)(cid:1)(cid:49)(cid:46) 71 (w) Recently Issued Accounting Guidance In June 2009, the Financial Accounting Standards Board (“FASB”) issued the Accounting Standards Codiﬁ cation (“ASC”). The ASC has become the source of authoritative U.S. GAAP. Additionally, rules and interpretive releases of the U.S. Securities and Exchange Commission (“SEC”) under authority of the fed- eral securities laws are also sources of authoritative U.S. GAAP for SEC registrants. The ASC did not change current U.S GAAP, but was intended to simplify user access to all authoritative U.S. GAAP by providing all the authoritative literature related to a particular topic in one place. This Codiﬁ cation is effective for ﬁ s- cal years and interim periods ending after September 15, 2009 and was adopted by Canon beginning from the quarter ended September 30, 2009. This adoption did not have a material impact on Canon’s consolidated results of operations and ﬁ nan- cial condition. However, throughout the notes to the consolidat- ed ﬁ nancial statements, references that were previously made to various former authoritative U.S. GAAP pronouncements have been removed. In December 2007, the FASB issued new accounting guid- ance for business combinations. This guidance establishes princi- ples and requirements for how an acquirer recognizes and measures in its ﬁ nancial statements the identiﬁ able assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired in a business combina- tion. This guidance also establishes disclosure requirements to enable the evaluation of the nature and ﬁ nancial effects of the business combination. This guidance is effective for ﬁ scal years beginning on or after December 15, 2008 and was adopted by Canon for any business combinations with an acquisition date on or after January 1, 2009. This adoption did not have a material impact on Canon’s consolidated results of operations and ﬁ nan- cial condition. In December 2007, the FASB issued new accounting guid- ance for noncontrolling interests in consolidated ﬁ nancial state- ments. This guidance establishes accounting and reporting guidance for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. This guidance also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. This guidance is effective for ﬁ scal years beginning on or after December 15, 2008 on a prospective basis, except for certain presentation and disclosure requirements, which must be applied retrospectively for all periods presented, and was adopt- ed by Canon in the ﬁ rst quarter beginning January 1, 2009. Upon the adoption of this guidance, noncontrolling interests, which were previously referred to as minority interests and clas- siﬁ ed between total liabilities and stockholders’ equity on the consolidated balance sheets, are now included as a separate component of total equity. In addition, consolidated net income on the consolidated statements of income now includes the net income (loss) attributable to noncontrolling interests. These ﬁ nancial statement presentation requirements have been adopt- ed retrospectively and prior year amounts in the consolidated ﬁ nancial statements have been reclassiﬁ ed or adjusted to con- form to this guidance. This adoption did not have a material impact on Canon’s consolidated results of operations and ﬁ nan- cial condition. In October 2009, the FASB issued new accounting guidance for revenue recognition under multiple-deliverable arrange- ments. This guidance modiﬁ es the criteria for separating consid- eration under multiple-deliverable arrangements and requires allocation of the overall consideration to each deliverable using the estimated selling price in the absence of vendor-speciﬁ c objective evidence or third-party evidence of selling price for deliverables. As a result, the residual method of allocating arrangement consideration will no longer be permitted. The guidance also requires additional disclosures about how a ven- dor allocates revenue in its arrangements and about the signiﬁ - cant judgments made and their impact on revenue recognition. This guidance is effective for ﬁ scal years beginning on or after June 15, 2010 and is required to be adopted by Canon no later than the ﬁ rst quarter beginning January 1, 2011 (with early adoption permitted). The provisions are effective prospectively for revenue arrangements entered into or materially modiﬁ ed after the effective date, or retrospectively for all prior periods. Canon is currently evaluating the effect that the adoption of this guidance will have on its consolidated results of operations and ﬁ nancial condition. In October 2009, the FASB issued new accounting guidance for software revenue recognition. This guidance modiﬁ es the scope of the software revenue recognition guidance to exclude from its requirements non-software components of tangible products and software components of tangible products that are sold, licensed, or leased with tangible products when the software components and non-software components of the tan- gible product function together to deliver the tangible product’s essential functionality. This guidance is effective for ﬁ scal years beginning on or after June 15, 2010 and is required to be adopted by Canon no later than the ﬁ rst quarter beginning January 1, 2011 (with early adoption permitted) using the same effective date and the same transition method used to adopt the guidance for revenue recognition under multiple-deliverable arrangements. Canon is currently evaluating the effect that the adoption of this guidance will have on its consolidated results of operations and ﬁ nancial condition. (x) Reclassiﬁ cations Certain reclassiﬁ cations have been made to the prior years’ con- solidated statements of cash ﬂ ows to conform to the current year presentation. (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:1)(cid:34)(cid:51)(cid:17)(cid:26)(cid:64)(cid:39)(cid:52)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:74)(cid:81)(cid:68)(cid:1)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:24)(cid:18) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:24)(cid:27)(cid:17)(cid:24)(cid:1)(cid:49)(cid:46) 72 CANON ANNUAL REPORT 2009 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CANON INC. AND SUBSIDIARIES 2. Basis of Financial Statement Translation The consolidated ﬁ nancial statements presented herein are expressed in Japanese yen and, solely for the convenience of the reader, have been translated into United States dollars at the rate of ¥92=U.S.$1, the approximate exchange rate prevailing on the Tokyo Foreign Exchange Market on December 30, 2009. This translation should not be construed as a representation that the amounts shown could be converted into United States dol- lars at such rate. 3. Investments The cost, gross unrealized holding gains, gross unrealized holding losses and fair value for available-for-sale securities included in short-term investments and investments by major security type at December 31, 2009 and 2008 were as follows: December 31 Millions of yen 2009: Current: Government bonds Noncurrent: Government bonds Corporate bonds Fund trusts Equity securities Millions of yen 2008: Current: Government bonds Fund trusts Noncurrent: Government bonds Corporate bonds Fund trusts Equity securities Gross unrealized holding gains Gross unrealized holding losses Cost Fair value ¥ 222 ¥ — ¥ — ¥ 222 ¥ 225 1,397 2,275 11,932 ¥ 15,829 Cost ¥ — ¥ 27 300 7,295 ¥ 7,622 21 55 7 1,501 ¥ 1,584 Gross unrealized holding gains Gross unrealized holding losses ¥ 204 1,369 2,568 17,726 ¥ 21,867 Fair value ¥ ¥ 1 133 134 ¥ — ¥ — ¥ 16 16 — ¥ — ¥ ¥ 1 149 150 ¥ 431 1,593 2,366 10,522 ¥ 14,912 ¥ — ¥ 27 40 2,532 ¥ 2,599 18 32 170 836 ¥ 1,056 ¥ 413 1,588 2,236 12,218 ¥ 16,455 (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:1)(cid:34)(cid:51)(cid:17)(cid:26)(cid:64)(cid:39)(cid:52)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:74)(cid:81)(cid:68)(cid:1)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:24)(cid:19) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:24)(cid:27)(cid:17)(cid:24)(cid:1)(cid:49)(cid:46) Thousands of U.S. dollars 2009: Current: Government bonds Noncurrent: Government bonds Corporate bonds Fund trusts Equity securities 73 Gross unrealized holding gains Gross unrealized holding losses Cost Fair value $ 2,413 $ — $ — $ 2,413 $ 2,446 15,185 24,728 129,696 $ 172,055 $ — $ 293 3,261 79,293 $ 82,847 229 598 76 16,315 $ 17,218 $ 2,217 14,880 27,913 192,674 $ 237,684 Maturities of available-for-sale debt securities and fund trusts included in short-term investments and investments in the accompanying consolidated balance sheets were as follows at December 31, 2009: Due within one year Due after one year through ﬁ ve years Due after ﬁ ve years through ten years Millions of yen Cost ¥ 222 3,274 623 ¥ 4,119 Fair value ¥ 222 3,568 573 ¥ 4,363 Thousands of U.S. dollars Cost $ 2,413 35,587 6,772 $ 44,772 Fair value $ 2,413 38,783 6,227 $ 47,423 Gross realized gains were ¥277 million ($3,011 thousand), ¥116 million and ¥1,512 million for the years ended December 31, 2009, 2008 and 2007, respectively. Gross realized losses, including write-downs for impairments that were other than temporary, were ¥2,482 million ($26,978 thousand) and ¥7,868 million for the years ended December 31, 2009 and 2008, respectively, and were not signiﬁ cant for the year ended December 31, 2007. At December 31, 2009, substantially all of the available-for- sale securities with unrealized losses had been in a continuous unrealized loss position for less than 12 months. Time deposits with original maturities of more than three months are ¥18,852 million ($204,913 thousand) and ¥7,430 million at December 31, 2009 and 2008, respectively, and are included in short-term investments in the accompanying consoli- dated balance sheets. Aggregate cost of non-marketable equity securities account- ed for under the cost method totaled ¥28,567 million ($310,511 thousand) and ¥10,684 million at December 31, 2009 and 2008, respectively. Investments with an aggregate cost of ¥28,087 million ($305,293 thousand) were not evaluat- ed for impairment because (a) Canon did not estimate the fair value of those investments as it was not practicable to estimate the fair value of the investments and (b) Canon did not identify any events or changes in circumstances that might have had sig- niﬁ cant adverse effects on the fair value of those investments. Investments in afﬁ liated companies accounted for by the equity method amounted to ¥61,595 million ($669,511 thou- sand) and ¥59,428 million at December 31, 2009 and 2008, respectively. Canon’s share of the net earnings (losses) in afﬁ liat- ed companies accounted for by the equity method, included in other income (deductions), were losses of ¥12,649 million ($137,490 thousand) and ¥20,047 million for the years ended December 31, 2009 and 2008, respectively, and earnings of ¥5,634 million for the year ended December 31, 2007. (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:1)(cid:34)(cid:51)(cid:17)(cid:26)(cid:64)(cid:39)(cid:52)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:74)(cid:81)(cid:68)(cid:1)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:24)(cid:20) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:24)(cid:27)(cid:17)(cid:25)(cid:1)(cid:49)(cid:46) 74 CANON ANNUAL REPORT 2009 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CANON INC. AND SUBSIDIARIES 4. Trade Receivables Trade receivables are summarized as follows: December 31 Notes Accounts Less allowance for doubtful receivables 5. Inventories Inventories are summarized as follows: December 31 Finished goods Work in process Raw materials Millions of yen 2009 ¥ 13,037 554,878 567,915 (11,343) ¥ 556,572 2008 ¥ 20,303 584,437 604,740 (9,318) ¥ 595,422 Thousands of U.S. dollars 2009 $ 141,707 6,031,282 6,172,989 (123,293) $ 6,049,696 Millions of yen 2009 ¥ 228,161 129,824 15,256 ¥ 373,241 2008 ¥ 316,533 171,511 18,875 ¥ 506,919 Thousands of U.S. dollars 2009 $ 2,480,011 1,411,130 165,826 $ 4,056,967 6. Property, Plant and Equipment Property, plant and equipment are stated at cost less accumulated depreciation and are summarized as follows: December 31 Land Buildings Machinery and equipment Construction in progress Less accumulated depreciation Millions of yen 2009 ¥ 258,824 1,299,154 1,422,076 105,713 3,085,767 (1,815,982) ¥ 1,269,785 2008 ¥ 247,602 1,268,388 1,395,451 81,346 2,992,787 (1,635,601) ¥ 1,357,186 Thousands of U.S. dollars 2009 $ 2,813,304 14,121,239 15,457,348 1,149,055 33,540,946 (19,738,935) $ 13,802,011 (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:1)(cid:34)(cid:51)(cid:17)(cid:26)(cid:64)(cid:39)(cid:52)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:74)(cid:81)(cid:68)(cid:1)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:24)(cid:21) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:24)(cid:27)(cid:17)(cid:25)(cid:1)(cid:49)(cid:46) 75 Depreciation expense for the years ended December 31, 2009, 2008 and 2007 was ¥277,399 million ($3,015,207 thou- sand), ¥304,622 million and ¥309,815 million, respectively. Amounts due for purchases of property, plant and equip- ment were ¥29,030 million ($315,543 thousand) and ¥98,398 million at December 31, 2009 and 2008, respectively, and are included in other current liabilities in the accompanying consoli- dated balance sheets. Fixed assets presented in the consolidated statements of cash ﬂ ows include property, plant and equipment and intangible assets. As a result of continued sluggish demand in the semicon- ductor manufacturing industry and diminished proﬁ tability of the semiconductor production equipment business, Canon rec- ognized impairment losses related primarily to property, plant and equipment of its semiconductor production equipment business, which are included in the results of the Industry and Others Business Unit for the year ended December 31, 2009. Long-lived assets with a carrying amount of ¥15,390 million ($167,283 thousand) were written down to their fair value of zero, which was estimated using discounted future cash ﬂ ows expected to be generated over their remaining useful life. The impairment losses were included in selling, general and adminis- trative expenses in the consolidated statement of income. Canon also recognized impairment losses of ¥11,164 million related primarily to property, plant and equipment of its semi- conductor production equipment business, which are included in the results of the Industry and Others Business Unit for the year ended December 31, 2008, mainly as a result of declining demand in the semiconductor manufacturing industry. The impairment losses were estimated using discounted cash ﬂ ows and included in selling, general and administrative expenses in the consolidated statement of income. 7. Finance Receivables and Operating Leases Finance receivables represent ﬁ nancing leases which consist of sales-type leases and direct-ﬁ nancing leases resulting from the marketing of Canon’s and complementary third-party products. These receivables typically have terms ranging from 1 year to 6 years. The components of the ﬁ nance receivables, which are included in prepaid expenses and other current assets, and other assets in the accompanying consolidated balance sheets, are as follows: December 31 Total minimum lease payments receivable Unguaranteed residual values Executory costs Unearned income Less allowance for doubtful receivables Less current portion Millions of yen 2009 ¥ 206,267 14,630 (1,973) (26,994) 191,930 (9,023) 182,907 (65,146) ¥ 117,761 2008 ¥ 198,611 16,310 (1,729) (26,658) 186,534 (8,268) 178,266 (59,608) ¥ 118,658 Thousands of U.S. dollars 2009 $ 2,242,033 159,022 (21,446) (293,413) 2,086,196 (98,076) 1,988,120 (708,109) $ 1,280,011 The cost of equipment leased to customers under operating leases included in property, plant and equipment, net at December 31, 2009 and 2008 was ¥53,807 million ($584,859 thousand) and ¥50,388 million, respectively. Accumulated depreciation on equipment under operating leases at December 31, 2009 and 2008 was ¥39,992 million ($434,696 thousand) and ¥37,284 million, respectively. The following is a schedule by year of the future minimum lease payments to be received under ﬁ nancing leases and non-cancelable operating leases at December 31, 2009. Year ending December 31: Millions of yen Thousands of U.S. dollars 2010 2011 2012 2013 2014 Thereafter Financing leases ¥ 82,058 59,342 38,834 18,580 6,396 1,057 ¥ 206,267 Operating leases ¥ 4,685 2,304 1,627 814 51 10 ¥ 9,491 Financing leases $ 891,935 645,022 422,109 201,957 69,522 11,488 $ 2,242,033 Operating leases $ 50,924 25,043 17,685 8,848 554 109 $ 103,163 (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:1)(cid:34)(cid:51)(cid:17)(cid:26)(cid:64)(cid:39)(cid:52)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:74)(cid:81)(cid:68)(cid:1)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:24)(cid:22) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:24)(cid:27)(cid:17)(cid:25)(cid:1)(cid:49)(cid:46) 76 CANON ANNUAL REPORT 2009 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CANON INC. AND SUBSIDIARIES 8. Goodwill and Other Intangible Assets Intangible assets developed or acquired during the year ended December 31, 2009 totaled ¥43,461 million ($472,402 thou- sand), which are subject to amortization and primarily consist of software of ¥39,303 million ($427,207 thousand), which is mainly for internal use, and license fees of ¥2,797 million ($30,402 thousand), in addition to those recorded from December 31 Millions of yen Software License fees Other Thousands of U.S. dollars Software License fees Other acquired businesses. The weighted average amortization period for software, license fees and intangible assets in total is approx- imately 4 years, 7 years and 4 years, respectively. The components of intangible assets subject to amortization at December 31, 2009 and 2008 were as follows: 2009 2008 Gross carrying amount ¥ 198,276 23,889 30,610 ¥ 252,775 Accumulated amortization ¥ 114,410 13,546 8,258 ¥ 136,214 Gross carrying amount ¥ 187,920 21,537 34,341 ¥ 243,798 Accumulated amortization ¥ 103,535 11,104 10,925 ¥ 125,564 2009 Gross carrying amount $ 2,155,174 259,663 332,717 $ 2,747,554 Accumulated amortization $ 1,243,587 147,239 89,761 $ 1,480,587 Aggregate amortization expense for the years ended December 31, 2009, 2008 and 2007 was ¥37,994 million ($412,978 thousand), ¥36,715 million and ¥31,879 million, respectively. Estimated amortization expense for intangible assets currently held for the next ﬁ ve years ending December 31 is ¥36,633 million ($398,185 thousand) in 2010, ¥26,309 million ($285,967 thousand) in 2011, ¥16,959 million ($184,337 thousand) in 2012, ¥10,846 million ($117,891 thousand) in 2013, and ¥6,411 million ($69,685 thousand) in 2014. Years ended December 31 Balance at beginning of year Goodwill acquired during the year Translation adjustments and other Balance at end of year Intangible assets not subject to amortization other than goodwill at December 31, 2009 and 2008 were not signiﬁ cant. The changes in the carrying amount of goodwill, which is included in other assets in the consolidated balance sheets, for the years ended December 31, 2009 and 2008 were as follows: Millions of yen 2009 ¥ 50,754 4,805 312 ¥ 55,871 2008 ¥ 56,783 4,975 (11,004) ¥ 50,754 Thousands of U.S. dollars 2009 $ 551,674 52,228 3,391 $ 607,293 Almost all of the goodwill has been allocated to the Ofﬁ ce Business Unit and the Consumer Business Unit at December 31, 2009 and 2008 for impairment testing. (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:1)(cid:34)(cid:51)(cid:17)(cid:26)(cid:64)(cid:39)(cid:52)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:74)(cid:81)(cid:68)(cid:1)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:24)(cid:23) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:24)(cid:27)(cid:17)(cid:25)(cid:1)(cid:49)(cid:46) 77 9. Short-Term Loans and Long-Term Debt Short-term loans consisting of bank borrowings at December 31, 2008 were ¥220 million. The weighted average interest rate on short-term loans outstanding at December 31, 2008 was 6.21%. Long-term debt consisted of the following: December 31 Loans, principally from banks, maturing in installments through 2017; bearing weighted average interest of 0.30% and 2.93% at December 31, 2009 and 2008, respectively Capital lease obligations Less current portion Millions of yen 2009 2008 ¥ 20 9,761 9,781 (4,869) ¥ 4,912 ¥ 95 13,648 13,743 (5,320) ¥ 8,423 Thousands of U.S. dollars 2009 $ 217 106,098 106,315 (52,924) $ 53,391 The aggregate annual maturities of long-term debt outstanding at December 31, 2009 were as follows: Year ending December 31: 2010 2011 2012 2013 2014 Thereafter Millions of yen ¥ 4,869 3,357 1,068 352 98 37 ¥ 9,781 Thousands of U.S. dollars $ 52,924 36,489 11,609 3,826 1,065 402 $ 106,315 Both short-term and long-term bank loans are made under general agreements which provide that security and guarantees for present and future indebtedness will be given upon request of the bank, and that the bank shall have the right to offset cash deposits against obligations that have become due or, in the event of default, against all obligations due to the bank. 10. Trade Payables Trade payables are summarized as follows: December 31 Notes Accounts Millions of yen 2009 ¥ 7,608 331,505 ¥ 339,113 2008 ¥ 14,544 392,202 ¥ 406,746 Thousands of U.S. dollars $ 2009 82,696 3,603,315 $ 3,686,011 (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:1)(cid:34)(cid:51)(cid:17)(cid:26)(cid:64)(cid:39)(cid:52)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:74)(cid:81)(cid:68)(cid:1)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:24)(cid:24) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:24)(cid:27)(cid:17)(cid:25)(cid:1)(cid:49)(cid:46) 78 CANON ANNUAL REPORT 2009 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CANON INC. AND SUBSIDIARIES 11. Employee Retirement and Severance Beneﬁ ts The Company and certain of its subsidiaries have contributory and noncontributory deﬁ ned beneﬁ t pension plans covering substantially all of their employees. Beneﬁ ts payable under the plans are based on employee earnings and years of service. The Company and certain of its subsidiaries also have deﬁ ned contri- bution pension plans covering substantially all of their employees. The amounts of cost recognized for the deﬁ ned contribution pension plans of the Company and certain of its subsidiaries for the years ended December 31, 2009, 2008 and 2007 were ¥9,148 million ($99,435 thousand), ¥10,840 million and ¥10,262 million, respectively. Obligations and funded status Reconciliations of beginning and ending balances of the beneﬁ t obligations and the fair value of the plan assets are as follows: Years ended December 31 Japanese plans Foreign plans Millions of yen 2009 2008 Thousands of U.S. dollars 2009 Millions of yen 2009 2008 Thousands of U.S. dollars 2009 Change in beneﬁ t obligations: Beneﬁ t obligations at beginning of year ¥ 521,985 ¥ 493,478 $ 5,673,750 236,511 Service cost Interest cost 136,250 Plan participants’ contributions Amendments Actuarial (gain) loss Beneﬁ ts paid Foreign currency exchange rate changes Beneﬁ t obligations at end of year 21,759 12,535 — (674) 10,822 (15,107) — 551,320 20,786 12,253 — (204) 10,160 (14,488) (7,326) 117,631 (164,207) — 521,985 5,992,609 ¥ 78,468 ¥ 113,833 $ 852,913 26,369 3,141 46,207 4,991 12,793 1,460 — 38,402 (19,391) 66,294 1,023,587 2,426 4,251 1,177 — 3,533 (1,784) 6,099 94,170 (86) (4,521) (2,210) (38,140) 78,468 — — Change in plan assets: Fair value of plan assets at beginning of year Actual return on plan assets Employer contributions Plan participants’ contributions Beneﬁ ts paid Foreign currency exchange rate changes Fair value of plan assets at end of year 429,870 26,616 15,173 — (14,451) — 457,208 511,450 (81,981) 14,716 — 4,672,500 289,304 164,924 — (14,315) (157,076) — 429,870 — 4,969,652 $ (1,022,957) 62,996 4,844 3,059 1,177 (1,784) 4,766 75,058 92,908 (8,453) 8,317 1,460 (1,556) (29,680) 62,996 684,739 52,652 33,250 12,793 (19,391) 51,805 815,848 $ (207,739) Funded status at end of year ¥ (94,112) ¥ (92,115) ¥ (19,112) ¥ (15,472) (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:1)(cid:34)(cid:51)(cid:17)(cid:26)(cid:64)(cid:39)(cid:52)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:74)(cid:81)(cid:68)(cid:1)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:24)(cid:25) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:24)(cid:27)(cid:17)(cid:26)(cid:1)(cid:49)(cid:46) Amounts recognized in the consolidated balance sheets at December 31, 2009 and 2008 are as follows: December 31 Japanese plans Foreign plans 79 Millions of yen 2009 2008 Thousands of U.S. dollars 2009 Other assets Accrued expenses Accrued pension and severance cost ¥ 707 ¥ — (94,819) 806 $ — 7,685 — (92,921) ¥ (94,112) ¥ (92,115) (1,030,642) $ (1,022,957) Thousands of U.S. dollars 2009 Millions of yen 2009 2008 ¥ 2,069 ¥ 2,461 $ 22,489 (1,044) (229,184) $ (207,739) (70) (17,863) ¥ (19,112) ¥ (15,472) (96) (21,085) Amounts recognized in accumulated other comprehensive income (loss) at December 31, 2009 and 2008 before the effect of income taxes are as follows: December 31 Japanese plans Foreign plans Actuarial loss Prior service credit Net transition obligation Thousands of U.S. dollars 2009 Millions of yen 2009 2008 ¥ 237,822 ¥ 251,731 $ 2,585,022 (1,694,870) (168,904) 15,696 ¥ 83,338 ¥ 84,993 $ 905,848 (155,928) 1,444 2,166 Millions of yen 2009 2008 ¥ 19,411 ¥ 15,650 (670) — (768) — ¥ 18,741 ¥ 14,882 Thousands of U.S. dollars 2009 $ 210,989 (7,282) — $ 203,707 The accumulated beneﬁ t obligation for all deﬁ ned beneﬁ t plans was as follows: December 31 Japanese plans Foreign plans Accumulated beneﬁ t obligation Millions of yen 2009 2008 ¥ 522,582 ¥ 493,559 $ 5,680,239 Thousands of U.S. dollars 2009 Millions of yen 2009 2008 ¥ 80,361 ¥ 71,627 Thousands of U.S. dollars 2009 $ 873,489 The projected beneﬁ t obligations and the fair value of plan assets for the pension plans with projected beneﬁ t obligations in excess of plan assets, and the accumulated beneﬁ t obligations and the fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets are as follows: December 31 Japanese plans Foreign plans Millions of yen 2009 2008 Thousands of U.S. dollars 2009 Millions of yen 2009 2008 Thousands of U.S. dollars 2009 Plans with projected beneﬁ t obligations in excess of plan assets: Projected beneﬁ t obligations Fair value of plan assets Plans with accumulated beneﬁ t obligations in excess of plan assets: Accumulated beneﬁ t obligations Fair value of plan assets ¥ 545,466 ¥ 516,646 $ 5,928,978 4,898,336 423,725 450,647 ¥ 509,638 ¥ 485,436 $ 5,539,543 4,812,565 420,341 442,756 ¥ 94,123 ¥ 77,083 $ 1,023,076 792,848 59,150 72,942 ¥ 80,314 ¥ 69,471 $ 872,978 792,848 59,089 72,942 (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:1)(cid:34)(cid:51)(cid:17)(cid:26)(cid:64)(cid:39)(cid:52)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:74)(cid:81)(cid:68)(cid:1)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:24)(cid:26) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:24)(cid:27)(cid:17)(cid:26)(cid:1)(cid:49)(cid:46) 80 CANON ANNUAL REPORT 2009 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CANON INC. AND SUBSIDIARIES Components of net periodic beneﬁ t cost and other amounts recognized in other comprehensive income (loss) Net periodic beneﬁ t cost for Canon’s employee retirement and severance deﬁ ned beneﬁ t plans for the years ended December 31, 2009, 2008 and 2007 consisted of the following components: Years ended December 31 Japanese plans Foreign plans Service cost Interest cost Expected return on plan assets Amortization of net transition obligation Amortization of prior service credit Amortization of actuarial loss 2009 Millions of yen 2008 ¥ 21,759 ¥ 20,786 ¥ 20,161 12,535 12,253 11,888 (15,808) (19,721) (21,148) 2007 Thousands of U.S. dollars 2009 $ 236,511 136,250 (171,826) 2009 Millions of yen 2008 ¥ 2,426 ¥ 3,141 ¥ 4,016 4,251 4,991 4,947 (4,211) (5,519) (5,427) 2007 Thousands of U.S. dollars 2009 $26,369 46,207 (45,772) 722 722 722 7,848 — — — — (13,650) (13,373) (13,479) 13,923 7,068 4,868 ¥ 19,481 ¥ 7,735 ¥ 3,012 (148,370) 151,337 $ 211,750 (98) (271) (86) 1,014 898 887 ¥ 3,382 ¥ 3,240 ¥ 4,337 (1,065) 11,022 $36,761 Other changes in plan assets and beneﬁ t obligations recognized in other comprehensive income (loss) for the years ended December 31, 2009 and 2008 are summarized as follows: Years ended December 31 Japanese plans Foreign plans Millions of yen 2009 2008 Thousands of U.S. dollars 2009 Current year actuarial (gain) loss Amortization of actuarial loss Prior service credit due to amendments Amortization of prior service credit Amortization of net transition obligation ¥ 14 (13,923) (674) 13,650 (722) ¥ (1,655) ¥ 111,862 $ (7,068) (204) 13,373 (722) 153 (151,337) (7,326) 148,370 (7,848) ¥ 117,241 $ (17,988) Millions of yen 2009 ¥ 2,900 (1,014) — 98 — ¥ 1,984 2008 ¥ 9,451 (898) (86) 271 — ¥ 8,738 Thousands of U.S. dollars 2009 $31,522 (11,022) — 1,065 — $21,565 The estimated net transition obligation, prior service credit and actuarial loss for the deﬁ ned beneﬁ t pension plans that will be amortized from accumulated other comprehensive income (loss) into net periodic beneﬁ t cost over the next year are summarized as follows: Net transition obligation Prior service credit Actuarial loss Japanese plans Foreign plans ¥ Millions of yen 722 (12,873) 12,639 Thousands of U.S. dollars $ 7,848 (139,924) 137,380 Millions of yen ¥ — (117) 1,245 $ Thousands of U.S. dollars — (1,272) 13,533 Assumptions Weighted-average assumptions used to determine beneﬁ t obligations are as follows: December 31 Discount rate Assumed rate of increase in future compensation levels Japanese plans Foreign plans 2009 2.3% 3.0% 2008 2.4% 3.0% 2009 5.2% 3.5% 2008 5.3% 3.1% (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:1)(cid:34)(cid:51)(cid:17)(cid:26)(cid:64)(cid:39)(cid:52)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:74)(cid:81)(cid:68)(cid:1)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:25)(cid:17) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:24)(cid:27)(cid:17)(cid:26)(cid:1)(cid:49)(cid:46) 81 Weighted-average assumptions used to determine net periodic beneﬁ t cost are as follows: Years ended December 31 Japanese plans Foreign plans Discount rate Assumed rate of increase in future compensation levels Expected long-term rate of return on plan assets 2009 2.4% 3.0% 3.7% 2008 2.5% 2.9% 3.7% 2007 2.5% 2.9% 3.9% 2009 5.3% 3.1% 6.2% 2008 5.1% 3.1% 6.5% 2007 4.5% 2.9% 6.0% Canon determines the expected long-term rate of return based on the expected long-term return of the various asset categories in which it invests. Canon considers the current expectations for future returns and the actual historical returns of each plan asset category. Plan assets Canon’s investment policies are designed to ensure adequate plan assets are available to provide future payments of pension beneﬁ ts to eligible participants. Taking into account the expect- ed long-term rate of return on plan assets, Canon formulates a “model” portfolio comprised of the optimal combination of equity securities and debt securities. Plan assets are invested in individual equity and debt securities using the guidelines of the “model” portfolio in order to produce a total return that will match the expected return on a mid-term to long-term basis. Canon evaluates the gap between expected return and actual return of invested plan assets on an annual basis to determine if such differences necessitate a revision in the formulation of the “model” portfolio. Canon revises the “model” portfolio when and to the extent considered necessary to achieve the expected long-term rate of return on plan assets. Canon’s model portfolio for Japanese plans consists of three major components: approximately 30% is invested in equity securities, approximately 50% is invested in debt securities, and approximately 20% is invested in other investment vehicles, primarily consisting of investments in life insurance company general accounts. Outside Japan, investment policies vary by country, but the long-term investment objectives and strategies remain consis- tent. However, Canon’s model portfolio for foreign plans has been developed as follows: approximately 70% is invested in equity securities, approximately 25% is invested in debt securi- ties, and approximately 5% is invested in other investment vehi- cles, primarily consisting of investments in real estate assets. The equity securities are selected primarily from stocks that are listed on the securities exchanges. Prior to investing, Canon has investigated the business condition of the investee compa- nies, and appropriately diversiﬁ ed investments by type of indus- try and other relevant factors. The debt securities are selected primarily from government bonds, public debt instruments, and corporate bonds. Prior to investing, Canon has investigated the quality of the issue, including rating, interest rate, and repay- ment dates, and has appropriately diversiﬁ ed the investments. Pooled funds are selected using strategies consistent with the equity and debt securities described above. As for investments in life insurance company general accounts, the contracts with the insurance companies include a guaranteed interest rate and return of capital. With respect to investments in foreign invest- ment vehicles, Canon has investigated the stability of the under- lying governments and economies, the market characteristics such as settlement systems and the taxation systems. For each such investment, Canon has selected the appropriate investment country and currency. (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:1)(cid:34)(cid:51)(cid:17)(cid:26)(cid:64)(cid:39)(cid:52)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:74)(cid:81)(cid:68)(cid:1)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:25)(cid:18) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:24)(cid:27)(cid:18)(cid:17)(cid:1)(cid:49)(cid:46) 82 CANON ANNUAL REPORT 2009 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CANON INC. AND SUBSIDIARIES The three levels of input used to measure fair value are more The fair values of Canon’s pension plan assets at December fully described in Note 21. 31, 2009, by asset category are as follows: Japanese plans Foreign plans Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Millions of yen Equity securities: Japanese companies (a) Foreign companies Pooled funds (b) Debt securities: Government bonds (c) Municipal bonds Corporate bonds Pooled funds (d) Mortgage backed securities (and other asset backed securities) Life insurance company general accounts Other assets Equity securities: Japanese companies (a) Foreign companies Pooled funds (b) Debt securities: Government bonds (c) Municipal bonds Corporate bonds Pooled funds (d) Mortgage backed securities (and other asset backed securities) Life insurance company general accounts Other assets ¥48,844 5,444 — ¥ — ¥ — ¥ 48,844 5,444 85,353 — 85,353 — — ¥ — ¥ 3,898 — — — 47,290 ¥ — — — ¥ — 3,898 47,290 — 14,803 879 — — 7,665 — 189,870 — 943 — — — — — 14,803 879 7,665 189,870 1,581 — — — — — 6,673 9,343 943 — 256 — — — — — — — ¥69,091 94,269 8,367 ¥387,346 — 771 ¥771 94,269 9,138 ¥457,208 — — ¥5,479 — 6,017 ¥69,579 — — ¥ — 1,581 — 6,673 9,343 256 — 6,017 ¥75,058 Japanese plans Foreign plans Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Thousands of U.S. dollars $530,913 $ 59,174 — $ — $ 530,913 59,174 — 927,750 — 927,750 — — $ — $ 42,369 — — — 514,022 $ — — — $ — 42,369 514,022 — 160,902 9,554 — — 83,315 — 2,063,804 160,902 — 9,554 — — 83,315 — 2,063,804 — 17,185 — — — 72,533 — 101,554 — 10,250 — 10,250 — 2,783 — — — — — — 1,024,663 90,947 — 8,380 $750,989 $4,210,283 $8,380 — 1,024,663 99,327 $4,969,652 — — — 65,402 $59,554 $756,294 — — $ — 17,185 — 72,533 101,554 2,783 — 65,402 $815,848 (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:1)(cid:34)(cid:51)(cid:17)(cid:26)(cid:64)(cid:39)(cid:52)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:74)(cid:81)(cid:68)(cid:1)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:25)(cid:19) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:24)(cid:27)(cid:18)(cid:17)(cid:1)(cid:49)(cid:46) 83 (a) The plan’s equity securities include common stock of the Company and certain of its subsidiaries in the amounts of ¥950 million ($10,326 thousand) at December 31, 2009. (b) These funds invest in listed equity securities consisting of approximately 50% Japanese companies and 50% foreign companies for Japanese plans, and mainly foreign companies for foreign plans. (c) This class includes approximately 80% Japanese government bonds and 20% foreign government bonds. (d) These funds invest in approximately 55% Japanese govern- ment bonds, 25% foreign government bonds, 10% Japanese municipal bonds, and 10% corporate bonds. Each level into which assets are categorized is based on inputs used to measure the fair value of the assets, and does not necessarily indicate the risks or ratings of the assets. Level 1 assets are comprised principally of equity securities and government bonds, which are valued using unadjusted quoted market prices in active markets with sufﬁ cient volume and frequency of transactions. Level 2 assets are comprised prin- cipally of pooled funds that invest in equity and debt securities, corporate bonds and investments in life insurance company general accounts. Pooled funds are valued at their net asset val- ues that are calculated by the sponsor of the fund and have daily liquidity. Corporate bonds are valued using quoted prices for identical assets in markets that are not active. Investments in life insurance company general accounts are valued at conver- sion value. The fair value of Level 3 assets, consisting of hedge funds, was ¥771 million ($8,380 thousand) and ¥712 million at December 31, 2009 and 2008, respectively. Amounts of actual returns on, and purchases and sales of, these assets during the year ended December 31, 2009 were not signiﬁ cant. Contributions Canon expects to contribute ¥14,116 million ($153,435 thousand) to its Japanese deﬁ ned beneﬁ t pension plans and ¥3,650 million ($39,674 thousand) to its foreign deﬁ ned beneﬁ t pension plans for the year ending December 31, 2010. Estimated future beneﬁ t payments The following beneﬁ t payments, which reﬂ ect expected future service, as appropriate, are expected to be paid: Year ending December 31: Japanese plans Foreign plans 2010 2011 2012 2013 2014 2015–2019 Millions of yen ¥ 13,029 14,571 15,643 17,120 17,961 114,536 Thousands of U.S. dollars $ 141,620 158,380 170,033 186,087 195,228 1,244,957 Millions of yen ¥ 1,765 1,867 1,972 2,004 2,074 12,939 Thousands of U.S. dollars $ 19,185 20,293 21,435 21,783 22,543 140,641 (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:1)(cid:34)(cid:51)(cid:17)(cid:26)(cid:64)(cid:39)(cid:52)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:74)(cid:81)(cid:68)(cid:1)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:25)(cid:20) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:24)(cid:27)(cid:18)(cid:17)(cid:1)(cid:49)(cid:46) 84 CANON ANNUAL REPORT 2009 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CANON INC. AND SUBSIDIARIES 12. Income Taxes Domestic and foreign components of income before income taxes and the current and deferred income tax expense (beneﬁ t) attrib- utable to such income are summarized as follows: Years ended December 31 2009: Income before income taxes Income taxes: Current Deferred 2008: Income before income taxes Income taxes: Current Deferred 2007: Income before income taxes Income taxes: Current Deferred 2009: Income before income taxes Income taxes: Current Deferred Japanese ¥ 130,857 ¥ 45,079 15,415 ¥ 60,494 Millions of yen Foreign ¥ 88,498 ¥ 18,331 5,297 ¥ 23,628 Total ¥ 219,355 ¥ 63,410 20,712 ¥ 84,122 ¥ 382,299 ¥ 98,848 ¥ 481,147 ¥ 168,428 (34,073) ¥ 134,355 ¥ 24,857 1,576 ¥ 26,433 ¥ 193,285 (32,497) ¥ 160,788 ¥ 575,017 ¥ 193,371 ¥ 768,388 ¥ 238,921 (31,930) ¥ 206,991 ¥ 60,358 (3,091) ¥ 57,267 ¥ 299,279 (35,021) ¥ 264,258 Thousands of U.S. dollars Japanese $ 1,422,359 Foreign $ 961,934 Total $ 2,384,293 $ 489,989 167,554 $ 657,543 $ 199,250 57,576 $ 256,826 $ 689,239 225,130 $ 914,369 The Company and its domestic subsidiaries are subject to a number of income taxes, which, in the aggregate, represent a statutory income tax rate of approximately 40% for the years ended December 31, 2009, 2008 and 2007. A reconciliation of the Japanese statutory income tax rate and the effective income tax rate as a percentage of income before income taxes is as follows: Years ended December 31 Japanese statutory income tax rate Increase (reduction) in income taxes resulting from: Expenses not deductible for tax purposes Income of foreign subsidiaries taxed at lower than Japanese statutory tax rate Tax credit for research and development expenses Change in valuation allowance Other Effective income tax rate 2009 40.0% 2008 40.0% 2007 40.0% 0.9 0.5 0.3 (5.4) (2.8) 5.4 0.2 38.3% (2.6) (4.6) 0.1 0.0 33.4% (2.8) (4.5) 0.1 1.3 34.4% (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:1)(cid:34)(cid:51)(cid:17)(cid:26)(cid:64)(cid:39)(cid:52)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:74)(cid:81)(cid:68)(cid:1)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:25)(cid:21) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:24)(cid:27)(cid:18)(cid:17)(cid:1)(cid:49)(cid:46) 85 Net deferred income tax assets and liabilities are included in the accompanying consolidated balance sheets under the following captions: December 31 Prepaid expenses and other current assets Other assets Other current liabilities Other noncurrent liabilities Millions of yen 2009 ¥ 94,798 117,263 (2,018) (36,278) ¥ 173,765 2008 ¥ 96,613 130,378 (2,491) (29,075) ¥ 195,425 Thousands of U.S. dollars 2009 $ 1,030,413 1,274,598 (21,935) (394,326) $ 1,888,750 The tax effects of temporary differences that give rise to the deferred tax assets and deferred tax liabilities at December 31, 2009 and 2008 are presented below: December 31 Deferred tax assets: Inventories Accrued business tax Accrued pension and severance cost Research and development—costs capitalized for tax purposes Property, plant and equipment Accrued expenses Net operating losses carried forward Other Less valuation allowance Total deferred tax assets Deferred tax liabilities: Undistributed earnings of foreign subsidiaries Net unrealized gains on securities Tax deductible reserve Financing lease revenue Prepaid pension and severance cost Other Total deferred tax liabilities Net deferred tax assets Millions of yen 2009 2008 ¥ 24,121 3,861 52,639 45,718 53,011 29,409 12,305 44,709 265,773 (22,188) 243,585 (8,023) (2,052) (7,797) (35,505) (314) (16,129) (69,820) ¥ 173,765 ¥ 36,817 5,183 51,713 41,661 58,682 27,748 6,745 44,894 273,443 (10,817) 262,626 (10,407) (607) (8,119) (31,035) (2,644) (14,389) (67,201) ¥ 195,425 Thousands of U.S. dollars 2009 $ 262,185 41,967 572,163 496,935 576,207 319,663 133,750 485,967 2,888,837 (241,174) 2,647,663 (87,207) (22,304) (84,750) (385,924) (3,413) (175,315) (758,913) $ 1,888,750 The net changes in the total valuation allowance were increases of ¥11,371 million ($123,598 thousand), ¥1,490 mil- lion and ¥2,827 million for the years ended December 31, 2009, 2008 and 2007, respectively. Based upon the level of historical taxable income and projections for future taxable income over the periods which the net deductible temporary differences are expected to reverse, management believes it is more likely than not that Canon will realize the beneﬁ ts of these deferred tax assets, net of the existing valuation allowance, at December 31, 2009. At December 31, 2009, Canon had net operating losses which can be carried forward for income tax purposes of ¥34,410 million ($374,022 thousand) to reduce future taxable income. Periods available to reduce future taxable income vary in each tax jurisdiction and generally range from one year to ten years as follows: (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:1)(cid:34)(cid:51)(cid:17)(cid:26)(cid:64)(cid:39)(cid:52)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:74)(cid:81)(cid:68)(cid:1)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:25)(cid:22) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:24)(cid:27)(cid:18)(cid:18)(cid:1)(cid:49)(cid:46) 86 CANON ANNUAL REPORT 2009 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CANON INC. AND SUBSIDIARIES Within one year After one year through ﬁ ve years After ﬁ ve years through ten years Indeﬁ nite period Total Millions of yen ¥ 1,534 7,209 17,501 8,166 ¥ 34,410 Thousands of U.S. dollars $ 16,674 78,359 190,228 88,761 $ 374,022 Income taxes have not been accrued on undistributed earnings of domestic subsidiaries as the tax law provides a means by which the dividends from a domestic subsidiary can be received tax free. Canon has not recognized deferred tax liabilities of ¥28,092 million ($305,348 thousand) for a portion of undistributed earnings of foreign subsidiaries that arose for the year ended December 31, 2009 and prior years because Canon currently does not expect to have such amounts distributed or paid as dividends to the Company in the foreseeable future. Deferred tax liabilities will be recognized when Canon expects that it will realize those undistributed earnings in a taxable manner, such as through receipt of dividends or sale of the investments. At December 31, 2009, such undistributed earnings of these subsidiaries were ¥769,380 million ($8,362,826 thousand). A reconciliation of the beginning and ending amount of unrecognized tax beneﬁ ts is as follows: Years ended December 31 Balance at beginning of year Additions for tax positions of the current year Additions for tax positions of prior years Reductions for tax positions of prior years Lapse of the applicable statute of limitations Settlements with tax authorities Other Balance at end of year 2009 ¥ 12,689 — 1,442 (1,106) — — 210 ¥ 13,235 Millions of yen 2008 ¥ 15,791 8,700 1,354 (8,512) — (1,208) (3,436) ¥ 12,689 2007 ¥ 16,087 994 1,902 (1,340) (1,311) (322) (219) ¥ 15,791 Thousands of U.S. dollars 2009 $ 137,924 — 15,674 (12,022) — — 2,283 $ 143,859 The total amounts of unrecognized tax beneﬁ ts that would reduce the effective tax rate, if recognized, are ¥4,746 million ($51,587 thousand) and ¥4,405 million at December 31, 2009 and 2008, respectively. Although Canon believes its estimates and assumptions of unrecognized tax beneﬁ ts are reasonable, uncertainty regarding the ﬁ nal determination of tax audit settlements and any related litigation could affect the effective tax rate in the future period. Based on each of the items of which Canon is aware at December 31, 2009, no signiﬁ cant changes to the unrecognized tax beneﬁ ts are expected within the next twelve months. Canon recognizes interest and penalties accrued related to unrecognized tax beneﬁ ts in income taxes. Both interest and penalties accrued at December 31, 2009 and 2008, and interest and penalties included in income taxes for the years ended December 31, 2009, 2008 and 2007 are not material. Canon ﬁ les income tax returns in Japan and various foreign tax jurisdictions. In Japan, Canon is no longer subject to regular income tax examinations by the tax authority for years before 2006. While there has been no speciﬁ c indication by the tax authority that Canon will be subject to a transfer pricing examination in the near future, the tax authority could conduct a transfer pricing examination for years after 2002. In other major foreign tax jurisdictions, including the United States and Netherlands, Canon is no longer subject to income tax examinations by tax authorities for years before 2004 with few exceptions. The tax authorities are currently conducting income tax examinations of Canon’s income tax returns for years after 2005 in Japan and for certain years after 2003 in major foreign tax jurisdictions. 13. Common Stock For the years ended December 31, 2008 and 2007, the Company issued 127,254 shares and 190,380 shares of com- mon stock, respectively, in connection with the conversion of convertible debt. In accordance with the Corporation Law of Japan, conversion into common stock of convertible debt is accounted for by crediting one-half or more of the conversion price to the common stock account and the remainder to the additional paid-in capital account. (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:1)(cid:34)(cid:51)(cid:17)(cid:26)(cid:64)(cid:39)(cid:52)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:74)(cid:81)(cid:68)(cid:1)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:25)(cid:23) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:24)(cid:27)(cid:18)(cid:18)(cid:1)(cid:49)(cid:46) 87 14. Legal Reserve and Retained Earnings The Corporation Law of Japan provides that an amount equal to 10% of distributions from retained earnings paid by the Company and its Japanese subsidiaries be appropriated as a legal reserve. No further appropriations are required when the total amount of the additional paid-in capital and the legal reserve equals 25% of their respective stated capital. The Corporation Law of Japan also provides that additional paid-in capital and legal reserve are available for appropriations by the resolution of the stockholders. Certain foreign subsidiaries are also required to appropriate their earnings to legal reserves under the laws of the respective countries. Cash dividends and appropriations to the legal reserve charged to retained earnings for the years ended December 31, 2009, 2008 and 2007 represent dividends paid out during those years and the related appropriations to the legal reserve. Retained earnings at December 31, 2009 did not reﬂ ect current year-end dividends in the amount of ¥67,896 million ($738,000 thousand) which were approved by the stockholders in March 2010. The amount available for dividends under the Corporation Law of Japan is based on the amount recorded in the Company’s nonconsolidated books of account in accordance with ﬁ nancial accounting standards of Japan. Such amount was ¥1,307,735 million ($14,214,511 thousand) at December 31, 2009. Retained earnings at December 31, 2009 included Canon’s equity in undistributed earnings of afﬁ liated companies account- ed for by the equity method in the amount of ¥10,301 million ($111,967 thousand). 15. Other Comprehensive Income (Loss) Changes in accumulated other comprehensive income (loss) are as follows: Years ended December 31 Foreign currency translation adjustments: Balance at beginning of year Adjustments for the year Balance at end of year Net unrealized gains and losses on securities: Balance at beginning of year Adjustments for the year Balance at end of year Net gains and losses on derivative instruments: Balance at beginning of year Adjustments for the year Balance at end of year Pension liability adjustments: Balance at beginning of year Adjustments for the year Balance at end of year Millions of yen 2009 2008 2007 Thousands of U.S. dollars 2009 ¥ (235,968) 33,340 (202,628) ¥ 22,796 (258,764) (235,968) ¥ 22,858 (62) 22,796 $ (2,564,870) 362,391 (2,202,479) 1,135 2,150 3,285 1,493 (1,422) 71 6,287 (5,152) 1,135 (849) 2,342 1,493 (59,480) (2,066) (61,546) 6,436 (65,916) (59,480) 8,065 (1,778) 6,287 (1,663) 814 (849) (26,542) 32,978 6,436 12,337 23,370 35,707 16,229 (15,457) 772 (646,521) (22,457) (668,978) Total accumulated other comprehensive income (loss): Balance at beginning of year Adjustments for the year Balance at end of year (292,820) 32,002 ¥ (260,818) 34,670 (327,490) ¥ (292,820) 2,718 31,952 ¥ 34,670 (3,182,825) 347,847 $ (2,834,978) (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:1)(cid:34)(cid:51)(cid:17)(cid:26)(cid:64)(cid:39)(cid:52)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:74)(cid:81)(cid:68)(cid:1)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:25)(cid:24) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:24)(cid:27)(cid:18)(cid:18)(cid:1)(cid:49)(cid:46) 88 CANON ANNUAL REPORT 2009 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CANON INC. AND SUBSIDIARIES Tax effects allocated to each component of other com- prehensive income (loss) and reclassiﬁ cation adjustments, including amounts attributable to noncontrolling interests, are as follows: Years ended December 31 2009: Foreign currency translation adjustments Net unrealized gains and losses on securities: Amount arising during the year Reclassiﬁ cation adjustments for gains and losses realized in net income Net change during the year Net gains and losses on derivative instruments: Amount arising during the year Reclassiﬁ cation adjustments for gains and losses realized in net income Net change during the year Pension liability adjustments: Amount arising during the year Reclassiﬁ cation adjustments for gains and losses realized in net income Net change during the year Other comprehensive income (loss) 2008: Foreign currency translation adjustments Net unrealized gains and losses on securities: Before-tax amount Millions of yen Tax (expense) or beneﬁ t Net-of-tax amount ¥ 35,459 ¥ (2,089) ¥ 33,370 2,231 2,205 4,436 298 (2,670) (2,372) (1,333) (886) (2,219) (119) 1,068 949 898 1,319 2,217 179 (1,602) (1,423) (4,115) 1,911 (2,204) ¥ 35,319 1,891 (632) 1,259 ¥ (2,100) (2,224) 1,279 (945) ¥ 33,219 ¥ (266,568) ¥ 5,893 ¥ (260,675) Amount arising during the year Reclassiﬁ cation adjustments for gains and losses realized in net income Net change during the year (17,485) 7,752 (9,733) Net gains and losses on derivative instruments: Amount arising during the year Reclassiﬁ cation adjustments for gains and losses realized in net income Net change during the year Pension liability adjustments: Amount arising during the year Reclassiﬁ cation adjustments for gains and losses realized in net income Net change during the year Other comprehensive income (loss) 2007: Foreign currency translation adjustments Net unrealized gains and losses on securities: 6,992 (3,101) 3,891 (9,248) 7,688 (1,560) 23,121 (19,219) 3,902 (111,215) (4,956) (116,171) ¥ (388,570) 39,233 2,073 41,306 ¥ 49,530 (10,493) 4,651 (5,842) 13,873 (11,531) 2,342 (71,982) (2,883) (74,865) ¥ (339,040) ¥ (396) ¥ 308 ¥ (88) Amount arising during the year Reclassiﬁ cation adjustments for gains and losses realized in net income Net change during the year Net gains and losses on derivative instruments: Amount arising during the year Reclassiﬁ cation adjustments for gains and losses realized in net income Net change during the year Pension liability adjustments: Amount arising during the year Reclassiﬁ cation adjustments for gains and losses realized in net income Net change during the year Other comprehensive income (loss) (7,721) (580) (8,301) 589 780 1,369 3,231 2,715 5,946 (236) (312) (548) (4,490) 2,135 (2,355) 353 468 821 71,364 (7,088) 64,276 ¥ 56,948 (26,586) 2,952 (23,634) ¥ (17,928) 44,778 (4,136) 40,642 ¥ 39,020 (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:1)(cid:34)(cid:51)(cid:17)(cid:26)(cid:64)(cid:39)(cid:52)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:74)(cid:81)(cid:68)(cid:1)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:25)(cid:25) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:24)(cid:27)(cid:18)(cid:18)(cid:1)(cid:49)(cid:46) 89 Thousands of U.S. dollars Before-tax amount Tax (expense) or beneﬁ t Net-of-tax amount $ 385,424 $ (22,707) $ 362,717 2009: Foreign currency translation adjustments Net unrealized gains and losses on securities: Amount arising during the year Reclassiﬁ cation adjustments for gains and losses realized in net income Net change during the year 24,251 23,967 48,218 Net gains and losses on derivative instruments: Amount arising during the year Reclassiﬁ cation adjustments for gains and losses realized in net income Net change during the year Pension liability adjustments: 3,239 (29,022) (25,783) Amount arising during the year Reclassiﬁ cation adjustments for gains and losses realized in net income Net change during the year Other comprehensive income (loss) (44,729) 20,772 (23,957) $ 383,902 (14,490) (9,630) (24,120) (1,294) 11,609 10,315 9,761 14,337 24,098 1,945 (17,413) (15,468) 20,555 (6,870) 13,685 $ (22,827) (24,174) 13,902 (10,272) $ 361,075 16. Stock-Based Compensation On May 1, 2009, based on the approval of the stockholders, the Company granted stock options to its directors, executive ofﬁ - cers and certain employees to acquire 954,000 shares of com- mon stock. These option awards vest after two years of continued service beginning on the grant date and have a four year contractual term. The grant-date fair value per share of the stock options granted during the year ended December 31, 2009 was ¥699 ($7.60). On May 1, 2008, based on the approval of the stockholders, the Company granted stock options to its directors, executive ofﬁ cers and certain employees to acquire 592,000 shares of common stock. These option awards vest after two years of continued service beginning on the grant date and have a four year contractual term. The grant-date fair value per share of the stock options granted during the year ended December 31, 2008 was ¥1,247. The compensation cost recognized for these stock options for the years ended December 31, 2009 and 2008 was ¥564 million ($6,130 thousand) and ¥246 million, respectively, and is included in selling, general and administrative expenses in the consolidated statements of income. The fair value of each option award was estimated on the date of grant using the Black-Scholes option pricing model that incorporates the assumptions presented below: Years ended December 31 2009 Expected term of option (in years) 4.0 Expected volatility Dividend yield Risk-free interest rate 40.08% 3.51% 0.64% 2008 4.0 37.39% 2.10% 0.95% A summary of option activity under the stock option plans as of and for the years ended December 31, 2009 and 2008 is presented below: Shares Weighted-average exercise price Weighted- average remaining contractual term Aggregate intrinsic value Yen U.S. dollars Year Millions of yen Thousands of U.S. dollars Outstanding at January 1, 2008 Granted Forfeited Outstanding at December 31, 2008 Granted Forfeited Outstanding at December 31, 2009 — 592,000 — 592,000 954,000 (34,000) 1,512,000 ¥ — 5,502 — 5,502 3,287 4,851 ¥4,119 $59.80 35.73 52.73 $44.77 3.3 3.0 ¥ — $ — ¥588 $6,391 (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:1)(cid:34)(cid:51)(cid:17)(cid:26)(cid:64)(cid:39)(cid:52)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:74)(cid:81)(cid:68)(cid:1)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:25)(cid:26) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:24)(cid:27)(cid:18)(cid:19)(cid:1)(cid:49)(cid:46) 90 CANON ANNUAL REPORT 2009 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CANON INC. AND SUBSIDIARIES At December 31, 2009, all option awards were nonvested but expected to be vested, and there was ¥558 million ($6,065 thousand) of total unrecognized compensation cost related to these nonvested stock options. That cost is expected to be rec- ognized over a weighted-average period of 0.96 year. 17. Net Income Attributable to Canon Inc. Stockholders per Share A reconciliation of the numerators and denominators of basic and diluted net income attributable to Canon Inc. stockholders per share computations is as follows: Years ended December 31 Net income attributable to Canon Inc. Effect of dilutive securities: 1.30% Japanese yen convertible debentures, due 2008 Diluted net income attributable to Canon Inc. Average common shares outstanding Effect of dilutive securities: 1.30% Japanese yen convertible debentures, due 2008 Diluted common shares outstanding Net income attributable to Canon Inc. stockholders per share: Basic Diluted 2009 ¥ 131,647 Millions of yen 2008 ¥ 309,148 2007 ¥ 488,332 Thousands of U.S. dollars 2009 $ 1,430,946 — ¥ 131,647 2 ¥ 309,150 4 ¥ 488,336 — $ 1,430,946 1,234,481,836 1,255,626,490 1,293,295,680 Number of shares 221,751 1,234,481,836 1,255,706,419 1,293,517,431 79,929 — Yen U.S. dollars ¥106.64 106.64 ¥246.21 246.20 ¥377.59 377.53 $1.16 1.16 The computation of diluted net income attributable to Canon Inc. stockholders per share for the years ended December 31, 2009 and 2008 exclude outstanding stock options because the effect would be anti-dilutive. 18. Derivatives and Hedging Activities Risk management policy Canon operates internationally, exposing it to the risk of chang- es in foreign currency exchange rates. Derivative ﬁ nancial instru- ments are comprised principally of foreign exchange contracts utilized by the Company and certain of its subsidiaries to reduce the risk. Canon assesses foreign currency exchange rate risk by continually monitoring changes in the exposures and by evaluat- ing hedging opportunities. Canon does not hold or issue deriva- tive ﬁ nancial instruments for trading purposes. Canon is also exposed to credit-related losses in the event of non-performance by counterparties to derivative ﬁ nancial instruments, but it is not expected that any counterparties will fail to meet their obliga- tions. Most of the counterparties are internationally recognized ﬁ nancial institutions and selected by Canon taking into account their ﬁ nancial condition, and contracts are diversiﬁ ed across a number of major ﬁ nancial institutions. Foreign currency exchange rate risk management Canon’s international operations expose Canon to the risk of changes in foreign currency exchange rates. Canon uses foreign exchange contracts to manage certain foreign currency exchange exposures principally from the exchange of U.S. dollars and euros into Japanese yen. These contracts are primarily used to hedge the foreign currency exposure of forecasted intercompany sales and intercompany trade receivables that are denominated in for- eign currencies. In accordance with Canon’s policy, a speciﬁ c por- tion of foreign currency exposure resulting from forecasted intercompany sales are hedged using foreign exchange contracts which principally mature within three months. (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:1)(cid:34)(cid:51)(cid:17)(cid:26)(cid:64)(cid:39)(cid:52)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:74)(cid:81)(cid:68)(cid:1)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:26)(cid:17) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:24)(cid:27)(cid:18)(cid:19)(cid:1)(cid:49)(cid:46) 91 Cash ﬂ ow hedge Changes in the fair value of derivative ﬁ nancial instruments des- ignated as cash ﬂ ow hedges, including foreign exchange con- tracts associated with forecasted intercompany sales, are reported in accumulated other comprehensive income (loss). These amounts are subsequently reclassiﬁ ed into earnings through other income (deductions) in the same period as the hedged items affect earnings. Substantially all amounts recorded in accumulated other comprehensive income (loss) at year-end are expected to be recognized in earnings over the next 12 months. Canon excludes the time value component from the assessment of hedge effectiveness. Changes in the fair value of a foreign exchange contract for the period between the date that the forecasted intercompany sales occur and its maturity date are recognized in earnings and not considered hedge inef- fectiveness. Derivatives not designated as hedges Canon has entered into certain foreign exchange contracts to primarily offset the earnings impact related to ﬂ uctuations in foreign currency exchange rates associated with certain assets denominated in foreign currencies. Although these foreign exchange contracts have not been designated as hedges as required in order to apply hedge accounting, the contracts are effective from an economic perspective. The changes in the fair value of these contracts are recorded in earnings immediately. Contract amounts of foreign exchange contracts as of December 31, 2009 and 2008 are set forth below: December 31 To sell foreign currencies To buy foreign currencies Millions of yen 2009 ¥ 494,314 30,978 2008 ¥ 350,959 35,247 Thousands of U.S. dollars 2009 $ 5,372,978 336,717 Fair value of derivative instruments in the consolidated balance sheet The following tables present Canon’s derivative instruments measured at gross fair value as reﬂ ected in the consolidated balance sheet as of December 31, 2009. Derivatives designated as hedging instruments December 31, 2009 Liabilities: Balance sheet location Millions of yen Fair value Foreign exchange contracts Other current liabilities ¥ 644 Derivatives not designated as hedging instruments December 31, 2009 Assets: Foreign exchange contracts Liabilities: Balance sheet location Prepaid expenses and other current assets Foreign exchange contracts Other current liabilities Millions of yen Fair value ¥ 752 6,566 Thousands of U.S. dollars Fair value $ 7,000 Thousands of U.S. dollars Fair value $ 8,174 71,370 (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:1)(cid:34)(cid:51)(cid:17)(cid:26)(cid:64)(cid:39)(cid:52)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:74)(cid:81)(cid:68)(cid:1)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:26)(cid:18) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:24)(cid:27)(cid:18)(cid:19)(cid:1)(cid:49)(cid:46) 92 CANON ANNUAL REPORT 2009 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CANON INC. AND SUBSIDIARIES Effect of derivative instruments on the consolidated statement of income The following tables present the effect of Canon’s derivative instruments on the consolidated statement of income for the year ended December 31, 2009. Derivatives in cash ﬂ ow hedging relationships Year ended December 31, 2009 Gain (loss) recognized in OCI (effective portion) Millions of yen Foreign exchange contracts Amount ¥(2,372) Gain (loss) reclassiﬁ ed from accumulated OCI into income (effective portion) Location Other, net Amount ¥2,670 Gain (loss) recognized in OCI (effective portion) Gain (loss) reclassiﬁ ed from accumulated OCI into income (effective portion) Thousands of U.S. dollars Foreign exchange contracts Amount $(25,783) Location Other, net Amount $29,022 Gain (loss) recognized in income (ineffective portion and amount excluded from effectiveness testing) Location Other, net Amount ¥(462) Gain (loss) recognized in income (ineffective portion and amount excluded from effectiveness testing) Location Other, net Amount $(5,022) The amount of the hedging ineffectiveness was not material for the years ended December 31, 2008 and 2007. The amount of net gains or losses excluded from the assessment of hedge effectiveness (time value component) which was recorded in other income (deductions) was net losses of ¥3,701 million and ¥6,883 million for the years ended December 31, 2008 and 2007, respectively. Derivatives not designated as hedging instruments Year ended December 31, 2009 Foreign exchange contracts Location Other, net Gain (loss) recognized in income on derivative Amount Millions of yen ¥(8,638) Thousands of U.S. dollars $(93,891) 19. Commitments and Contingent Liabilities Commitments At December 31, 2009, commitments outstanding for the pur- chase of property, plant and equipment approximated ¥21,839 million ($237,380 thousand), and commitments outstanding for the purchase of parts and raw materials approximated ¥64,226 million ($698,109 thousand). Canon occupies sales ofﬁ ces and other facilities under lease arrangements accounted for as operating leases. Deposits made under such arrangements aggregated ¥14,210 million ($154,457 thousand) and ¥14,223 million at December 31, 2009 and 2008, respectively, and are included in noncurrent receivables in the accompanying consolidated balance sheets. Rental expenses under the operating lease arrangements amounted to ¥36,474 million ($396,457 thousand), ¥41,169 million and ¥36,900 million for the years ended December 31, 2009, 2008 and 2007, respectively. (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:1)(cid:34)(cid:51)(cid:17)(cid:26)(cid:64)(cid:39)(cid:52)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:74)(cid:81)(cid:68)(cid:1)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:26)(cid:19) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:24)(cid:27)(cid:18)(cid:19)(cid:1)(cid:49)(cid:46) 93 Future minimum lease payments required under noncancelable operating leases that have initial or remaining lease terms in excess of one year at December 31, 2009 are as follows: Year ending December 31: 2010 2011 2012 2013 2014 Thereafter Total future minimum lease payments Millions of yen ¥ 16,259 13,331 9,641 6,551 5,002 8,180 ¥ 58,964 Thousands of U.S. dollars $ 176,728 144,902 104,793 71,207 54,370 88,913 $ 640,913 Guarantees Canon provides guarantees for bank loans of its employees, afﬁ liates and other companies. The guarantees for the employ- ees are principally made for their housing loans. The guarantees of loans of its afﬁ liates and other companies are made to ensure that those companies operate with less ﬁ nancial risk. For each guarantee provided, Canon would have to perform under a guarantee if the borrower defaults on a payment within the contract periods of 1 year to 30 years, in the case of employees with housing loans, and of 1 year to 10 years, in the case of afﬁ liates and other companies. The maximum amount of undiscounted payments Canon would have had to make in the event of default is ¥18,526 million ($201,370 thousand) at December 31, 2009. The carrying amounts of the liabilities rec- ognized for Canon’s obligations as a guarantor under those guarantees at December 31, 2009 were not signiﬁ cant. Canon also issues contractual product warranties under which it generally guarantees the performance of products delivered and services rendered for a certain period or term. Changes in accrued product warranty cost for the years ended December 31, 2009 and 2008 are summarized as follows: Years ended December 31 Balance at beginning of year Addition Utilization Other Balance at end of year Millions of yen 2009 ¥ 17,372 21,670 (22,050) (3,048) ¥ 13,944 2008 ¥ 20,138 30,644 (26,846) (6,564) ¥ 17,372 Thousands of U.S. dollars 2009 $ 188,826 235,543 (239,674) (33,130) $ 151,565 Legal proceedings In October 2003, a lawsuit was ﬁ led by a former employee against the Company at the Tokyo District Court in Japan. The lawsuit alleges that the former employee is entitled to ¥45,872 million ($498,609 thousand) as reasonable remuneration for an invention related to certain technology used by the Company, and the former employee has sued for a partial payment of ¥1,000 million ($10,870 thousand) and interest thereon. On January 30, 2007, the Tokyo District Court of Japan ordered the Company to pay the former employee approximately ¥33.5 million ($364 thousand) and interest thereon. On the same day, the Company appealed the decision. On February 26, 2009, the Intellectual Property High Court of Japan issued a judgment in the appellate court review and ordered the Company to pay the former employee approximately ¥69.6 million ($757 thousand), consist- ing of reasonable remuneration of approximately ¥56.3 million ($612 thousand) and interest thereon. On March 12, 2009, the Company appealed the decision to the Supreme Court. In Germany, Verwertungsgesellschaft Wort (“VG Wort”), a collecting agency representing certain copyright holders, has ﬁ led a series of lawsuits seeking to impose copyright levies upon digital products such as PCs and printers, that allegedly enable the reproduction of copyrighted materials, against the compa- nies importing and distributing these digital products. VG Wort ﬁ led a lawsuit in January 2006 against Canon seeking payment of copyright levies on single-function printers, and the court of ﬁ rst instance in Düsseldorf ruled in favor of the claim by VG Wort in November 2006. Canon lodged an appeal against such decision in December 2006 before the court of appeals in Düsseldorf. Following a decision by the same court of appeals in Düsseldorf on January 23, 2007 in relation to a similar court case seeking copyright levies on single-function printers of Epson Deutschland GmbH, Xerox GmbH and Kyocera Mita Deutschland GmbH, whereby the court rejected such alleged levies, in its judgment of November 13, 2007, the court of appeals rejected VG Wort’s claim against Canon. VG Wort (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:1)(cid:34)(cid:51)(cid:17)(cid:26)(cid:64)(cid:39)(cid:52)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:74)(cid:81)(cid:68)(cid:1)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:26)(cid:20) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:24)(cid:27)(cid:18)(cid:19)(cid:1)(cid:49)(cid:46) 94 CANON ANNUAL REPORT 2009 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CANON INC. AND SUBSIDIARIES appealed further against said decision of the court of appeals before the Federal Supreme Court. In December 2007, for a similar Hewlett-Packard GmbH case relating to single-function printers, the Federal Supreme Court delivered its judgment in favor of Hewlett-Packard GmbH and dismissed VG Wort’s claim. VG Wort has already ﬁ led a constitutional complaint with the Federal Constitutional Court against said judgment of the Federal Supreme Court. Likewise, after rejection by the Federal Supreme Court of an appeal by VG Wort in relation to Canon’s single-function printers case in September 2008, VG Wort lodged a claim before the Federal Constitutional Court. Canon received a brief from the Federal Constitutional Court in September 2009 to enable the Court to decide on whether to accept the claim, and Canon responded to it in November 2009. In 2007, an amendment of German copyright law was carried out, and a new law has been effective from January 1, 2008 for both multi-function printers and single-function printers. The new law sets forth that the scope and tariff of copyright levies will be agreed between industry and the collecting society. Industry and the collecting society, based on the requirement under the new law, reached an agreement in December 2008. This agreement is applicable retroactively from January 1, 2008 and will remain effective through end of 2010. However, in Canon’s assessment, the ﬁ nal outcome of the court case regard- ing the single-function printers sold in Germany before January 1, 2008 remains uncertain. Canon is involved in various claims and legal actions, includ- ing those noted above, arising in the ordinary course of busi- ness. Canon has recorded provisions for liabilities when it is probable that liabilities have been incurred and the amount of loss can be reasonably estimated. Canon reviews these provi- sions at least quarterly and adjusts these provisions to reﬂ ect the impact of the negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a partic- ular case. Based on its experience, Canon believes that any dam- age amounts claimed in the speciﬁ c matters discussed above and other outstanding matters are not a meaningful indicator of Canon’s potential liability. In the opinion of management, the ultimate disposition of outstanding matters would not have a material adverse effect on Canon’s consolidated ﬁ nancial posi- tion, results of operations, or cash ﬂ ows. However, litigation is inherently unpredictable. While Canon believes that it has valid defenses with respect to legal matters pending against it, it is possible that Canon’s consolidated ﬁ nancial position, results of operations, or cash ﬂ ows could be materially affected in any particular period by the unfavorable resolution of one or more of these matters. 20. Disclosures about the Fair Value of Financial Instruments and Concentrations of Credit Risk Fair value of ﬁ nancial instruments The estimated fair values of Canon’s ﬁ nancial instruments at December 31, 2009 and 2008 are set forth below. The follow- ing summary excludes cash and cash equivalents, trade receiv- ables, ﬁ nance receivables, noncurrent receivables, short-term loans, trade payables and accrued expenses for which fair values approximate their carrying amounts. The summary also excludes investments which are disclosed in Note 3. December 31 Millions of yen Thousand of U.S. dollars 2009 2008 2009 Carrying amount Estimated fair value Carrying amount Estimated fair value Carrying amount Estimated fair value Long-term debt, including current installments ¥ (9,781) ¥ (9,777) Foreign exchange contracts: ¥ (13,743) ¥ (13,727) $ (106,315) $ (106,272) Assets Liabilities 752 (7,210) 752 (7,210) 10,516 (678) 10,516 (678) 8,174 (78,370) 8,174 (78,370) The following methods and assumptions are used to estimate the fair value in the above table. Long-term debt The fair values of Canon’s long-term debt instruments are based on the present value of future cash ﬂ ows associated with each instrument discounted using current market borrowing rates for similar debt instruments of comparable maturity. Foreign exchange contracts The fair values of foreign exchange contracts are measured based on the market price obtained from ﬁ nancial institutions. Limitations Fair value estimates are made at a speciﬁ c point in time, based on relevant market information and information about the ﬁ nancial instruments. These estimates are subjective in nature and involve uncertainties and matters of signiﬁ cant judgment and therefore cannot be determined with precision. Changes in assumptions could signiﬁ cantly affect the estimates. Concentrations of credit risk At December 31, 2009 and 2008, one customer accounted for approximately 22% and 19% of consolidated trade receivables, respectively. Although Canon does not expect that the customer will fail to meet its obligations, Canon is potentially exposed to concentrations of credit risk if the customer failed to perform according to the terms of the contracts. (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:1)(cid:34)(cid:51)(cid:17)(cid:26)(cid:64)(cid:39)(cid:52)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:74)(cid:81)(cid:68)(cid:1)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:26)(cid:21) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:24)(cid:27)(cid:18)(cid:20)(cid:1)(cid:49)(cid:46) 95 21. Fair Value Measurements Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly trans- action between market participants at the measurement date. A three-level fair value hierarchy that prioritizes the inputs used to measure fair value is as follows: Level 1 — Inputs are quoted prices in active markets for identical assets or liabilities. Level 2 — Inputs are quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs that are derived principally from or corroborated by observable market data by correlation or other means. Level 3 — Inputs are derived from valuation techniques in which one or more signiﬁ cant inputs or value drivers are unobservable, which reﬂ ect the reporting entity’s own assumptions about the assumptions that market participants would use in establishing a price. Assets and liabilities measured at fair value on a recurring basis The following table presents Canon’s assets and liabilities that are measured at fair value on a recurring basis at December 31, 2009 and 2008. December 31 Millions of yen 2009: Assets: Cash and cash equivalents Available-for-sale securities (current): Government bonds Available-for-sale securities (noncurrent): Government bonds Corporate bonds Fund trusts Equity securities Derivatives Total assets Liabilities: Derivatives Total liabilities Millions of yen 2008: Assets: Cash and cash equivalents Available-for-sale securities (current): Government bonds Fund trusts Available-for-sale securities (noncurrent): Government bonds Corporate bonds Fund trusts Equity securities Derivatives Total assets Liabilities: Derivatives Total liabilities Level 1 Level 2 Level 3 Total ¥ — ¥ 184,856 ¥ — ¥ 184,856 222 — — 222 204 — 1,589 17,726 — ¥ 19,741 — 29 979 — 752 ¥ 186,616 — 1,340 — — — ¥ 1,340 204 1,369 2,568 17,726 752 ¥ 207,697 ¥ — ¥ — ¥ 7,210 ¥ 7,210 ¥ — ¥ — ¥ 7,210 ¥ 7,210 Level 1 Level 2 Level 3 Total ¥ — ¥ 194,030 ¥ — ¥ 194,030 1 149 413 43 1,284 12,218 — ¥ 14,108 — — — 29 952 — 10,516 ¥ 205,527 — — — 1,516 — — — ¥ 1,516 1 149 413 1,588 2,236 12,218 10,516 ¥ 221,151 ¥ — ¥ — ¥ ¥ 678 678 ¥ — ¥ — ¥ ¥ 678 678 (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:1)(cid:34)(cid:51)(cid:17)(cid:26)(cid:64)(cid:39)(cid:52)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:74)(cid:81)(cid:68)(cid:1)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:26)(cid:22) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:24)(cid:27)(cid:18)(cid:20)(cid:1)(cid:49)(cid:46) 96 CANON ANNUAL REPORT 2009 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CANON INC. AND SUBSIDIARIES Thousands of U.S. dollars 2009: Assets: Cash and cash equivalents Available-for-sale securities (current): Government bonds Available-for-sale securities (noncurrent): Government bonds Corporate bonds Fund trusts Equity securities Derivatives Total assets Liabilities: Derivatives Total liabilities Level 1 Level 2 Level 3 Total $ — $ 2,009,304 $ — $ 2,009,304 2,413 2,217 — 17,272 192,674 — — 2,413 — 315 10,641 — — 14,565 — — — 2,217 14,880 27,913 192,674 8,174 $ 2,257,575 $ 14,565 — 8,174 $ 2,028,434 $ 214,576 $ $ — $ — $ 78,370 78,370 $ — $ $ — $ 78,370 78,370 Level 1 investments are comprised principally of equity secu- rities, which are valued using an unadjusted quoted market price in active markets with sufﬁ cient volume and frequency of transactions. Level 2 cash and cash equivalents are valued using quoted prices for identical assets in markets that are not active. Level 3 investments are mainly comprised of corporate bonds, which are valued based on unobservable inputs as the market for the assets was not active at the measurement date. Derivative ﬁ nancial instruments are comprised of foreign exchange contracts. Level 2 derivatives are valued using quotes obtained from counterparties or third parties, which are periodi- cally validated by pricing models using observable market inputs, such as foreign currency exchange rates and interest rates. The following table presents the changes in Level 3 assets measured on a recurring basis, consisting of corporate bonds, for the years ended December 31, 2009 and 2008. Years ended December 31 Balance at beginning of year Total gains or losses (realized or unrealized): Included in earnings Included in other comprehensive income (loss) Purchases, issuances, and settlements Balance at end of year Millions of yen 2009 ¥ 1,516 (221) (1) 46 ¥ 1,340 2008 ¥ 1,889 (559) (8) 194 ¥ 1,516 Thousands of U.S. dollars 2009 $ 16,478 (2,402) (11) 500 $ 14,565 Substantially all gains and losses included in earnings are related to corporate bonds still held at December 31, 2009 and 2008, respectively, and are reported in “Other, net” in the con- solidated statements of income. Assets and liabilities measured at fair value on a nonrecurring basis During the year ended December 31, 2009, long-lived assets held and used with a carrying amount of ¥15,390 million ($167,283 thousand) were written down to their fair value of zero and classiﬁ ed as Level 3 assets, resulting in an impairment charge of ¥15,390 million ($167,283 thousand), which was included in earnings. During the year ended December 31, 2009, non-marketable equity securities with a carrying amount of ¥1,468 million ($15,957 thousand) were written down to their fair value of ¥480 million ($5,218 thousand) and classiﬁ ed as Level 3 instruments, resulting in an other-than-temporary impairment charge of ¥988 million ($10,739 thousand), which was included in earnings. During the year ended December 31, 2008, non-marketable equi- ty securities with a carrying amount of ¥513 million were written down to their fair value of ¥112 million and classiﬁ ed as Level 3 instruments, resulting in an other-than-temporary impairment charge of ¥401 million, which was included in earnings. (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:1)(cid:34)(cid:51)(cid:17)(cid:26)(cid:64)(cid:39)(cid:52)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:74)(cid:81)(cid:68)(cid:1)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:26)(cid:23) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:24)(cid:27)(cid:18)(cid:20)(cid:1)(cid:49)(cid:46) 97 Consumer Business Unit: Digital SLR cameras, Compact digital cameras, Interchangeable lenses, Digital video camcorders, Inkjet multi- function peripherals, Single function inkjet printers, Image scanners, and Broadcasting equipment Industry and Others Business Unit: Semiconductor production equipment, Mirror projection mask aligners for LCD panels, Medical equipment, Components, Computer information systems, Document scanners, and Personal information products The accounting policies of the segments are substantially the same as those described in the signiﬁ cant accounting policies in Note 1. Canon evaluates performance of, and allocates resourc- es to, each segment based on operating proﬁ t. Information about operating results and assets for each seg- ment as of and for the years ended December 31, 2009, 2008 and 2007 is as follows: 22. Segment Information Certain foreign private issuers, including Canon, have been exempted from the segment disclosure requirements of U.S. GAAP in ﬁ lings with the SEC under the Securities Exchange Act of 1934. However, in September 2008, the SEC issued its “Foreign Issuer Reporting Enhancements” (“FIRE”) rule. The FIRE rule eliminates an instruction to the Form 20-F that permitted certain foreign private issuers to omit segment disclosures required by U.S. GAAP, as well as other enhancements. This aspect of the FIRE rule regarding elimi- nation of ability to omit segment disclosures is effective for ﬁ scal years ended on or after December 15, 2009 and was adopted by Canon in the year ended December 31, 2009 for all periods pre- sented. Segment information Canon operates its business in three segments: the Ofﬁ ce Business Unit, the Consumer Business Unit, and the Industry and Others Business Unit, which are based on the organizational structure and information reviewed by Canon’s management to evaluate results and allocate resources. The primary products included in each segment are as follows: Ofﬁ ce Business Unit: Ofﬁ ce network digital MFDs, Color network digital MFDs, Ofﬁ ce copying machines, Personal-use copying machines, Full- color copying machines, Laser printers, and Large format ink- jet printers Millions of yen 2009: Net sales: External customers Intersegment Total Operating cost and expenses Operating proﬁ t (loss) Total assets Depreciation and amortization Capital expenditures 2008: Net sales: External customers Intersegment Total Operating cost and expenses Operating proﬁ t (loss) Total assets Depreciation and amortization Capital expenditures Ofﬁ ce Consumer Industry and Others Corporate and eliminations Consolidated 10,020 1,645,076 1,415,680 ¥ 1,635,056 ¥ 1,299,194 1,966 1,301,160 1,117,668 ¥ 229,396 ¥ 183,492 ¥ 745,646 ¥ 437,160 48,701 27,503 90,878 96,718 (95,033) (95,033) 24,844 ¥ 274,951 ¥ 83,047 357,998 433,954 — ¥ 3,209,201 — 3,209,201 2,992,146 ¥ (75,956) ¥ (119,877) ¥ 217,055 ¥ 359,635 ¥ 2,305,116 ¥ 3,847,557 315,393 115,044 258,252 108,387 60,770 25,644 23,356 2,246,609 1,789,263 ¥ 2,223,253 ¥ 1,453,647 2,428 1,456,075 1,232,951 ¥ 457,346 ¥ 223,124 ¥ 822,660 ¥ 502,927 58,082 52,641 99,962 139,046 (130,928) (130,928) 5,592 ¥ 417,261 ¥ 105,144 522,405 570,281 — ¥ 4,094,161 — 4,094,161 3,598,087 ¥ (47,876) ¥ (136,520) ¥ 496,074 ¥ 453,581 ¥ 2,190,766 ¥ 3,969,934 341,337 111,736 403,400 180,268 71,557 31,445 (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:1)(cid:34)(cid:51)(cid:17)(cid:26)(cid:64)(cid:39)(cid:52)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:74)(cid:81)(cid:68)(cid:1)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:26)(cid:24) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:24)(cid:27)(cid:18)(cid:20)(cid:1)(cid:49)(cid:46) 98 CANON ANNUAL REPORT 2009 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CANON INC. AND SUBSIDIARIES Millions of yen 2007: Net sales: External customers Intersegment Total Operating cost and expenses Operating proﬁ t Total assets Depreciation and amortization Capital expenditures Thousands of U.S. dollars 2009: Net sales: External customers Intersegment Total Operating cost and expenses Operating proﬁ t (loss) Total assets Depreciation and amortization Capital expenditures Ofﬁ ce Consumer Industry and Others Corporate and eliminations Consolidated 2,645 1,587,952 1,260,113 20,720 2,477,518 1,912,343 ¥ 2,456,798 ¥ 1,585,307 ¥ 439,241 ¥ — ¥ 4,481,346 — (134,107) 4,481,346 (134,107) 3,724,673 25,178 22,944 ¥ (159,285) ¥ 756,673 ¥ 565,175 ¥ 327,839 ¥ ¥ 981,627 ¥ 590,208 ¥ 535,825 ¥ 2,404,965 ¥ 4,512,625 341,694 469,664 110,742 549,983 527,039 122,199 194,081 65,331 113,178 97,886 126,857 56,278 35,548 Ofﬁ ce Consumer Industry and Others Corporate and eliminations Consolidated 108,913 $ 17,772,348 $ 14,121,674 $ 2,988,598 $ — $ 34,882,620 902,685 (1,032,967) — 21,369 3,891,283 (1,032,967) 34,882,620 17,881,261 14,143,043 15,387,826 12,148,565 270,044 32,523,327 4,716,892 $ 2,493,435 $ 1,994,478 $ (825,609) $ (1,303,011) $ 2,359,293 $ 8,104,848 $ 4,751,739 $ 3,909,076 $ 25,055,609 $ 41,821,272 660,543 1,250,479 3,428,185 278,739 1,178,119 2,807,087 987,804 1,051,283 529,359 298,946 Intersegment sales are recorded at the same prices used in transactions with third parties. Expenses not directly associated with speciﬁ c segments are allocated based on the most reason- able measures applicable. Corporate expenses include certain corporate research and development expenses. Segment assets are based on those directly associated with each segment. Corporate assets primarily consist of cash and cash equivalents, ﬁ nance receivables, investments, deferred tax assets and corpo- rate properties. Capital expenditures represent the additions to property, plant and equipment and intangible assets measured on an accrual basis. Geographic information Information by major geographic area as of and for the years ended December 31, 2009, 2008 and 2007 is as follows: Net sales: Japan Americas Europe Other areas Total Long-lived assets: Japan Americas Europe Other areas Total 2009 ¥ 702,344 894,154 995,150 617,553 ¥3,209,201 ¥1,205,887 59,273 44,875 77,146 ¥1,387,181 Millions of yen 2008 ¥ 868,280 1,154,571 1,341,400 729,910 ¥4,094,161 ¥1,314,092 43,435 47,392 71,407 ¥1,476,326 2007 ¥ 947,587 1,336,168 1,499,286 698,305 ¥4,481,346 ¥1,284,283 45,492 68,944 78,499 ¥1,477,218 Thousands of U.S. dollars 2009 $ 7,634,174 9,719,065 10,816,848 6,712,533 $34,882,620 $13,107,467 644,272 487,772 838,543 $15,078,054 (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:1)(cid:34)(cid:51)(cid:17)(cid:26)(cid:64)(cid:39)(cid:52)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:74)(cid:81)(cid:68)(cid:1)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:26)(cid:25) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:24)(cid:27)(cid:18)(cid:21)(cid:1)(cid:49)(cid:46) 99 Net sales are attributed to areas based on the location where the product is shipped to the customers. Other than in Japan and the United States, Canon does not conduct business in any individual country in which its sales in that country exceed 10% of consolidated net sales. Net sales in the United States are ¥793,428 million ($8,624,217 thousand), ¥1,043,333 million and ¥1,217,096 million for the years ended December 31, 2009, 2008 and 2007, respectively. Long-lived assets represent property, plant and equipment and intangible assets for each geographic area. The following information is based on the location of the Company and its subsidiaries as of and for the years ended December 31, 2009, 2008 and 2007. In addition to the disclo- sure requirements under U.S. GAAP, Canon discloses this infor- mation as supplemental information based on the disclosure requirements of the Japanese Financial Instruments and Exchange Law. Millions of yen 2009: Net sales: External customers Intersegment Total Operating cost and expenses Operating proﬁ t Total assets 2008: Net sales: External customers Intersegment Total Operating cost and expenses Operating proﬁ t Total assets 2007: Net sales: External customers Intersegment Total Operating cost and expenses Operating proﬁ t Total assets Thousands of U.S. dollars 2009: Net sales: External customers Intersegment Total Operating cost and expenses Operating proﬁ t Total assets Japan Americas Europe Other areas Corporate and eliminations Consolidated ¥ 827,762 ¥ 871,633 ¥ 991,336 ¥ 518,470 ¥ — ¥ 3,209,201 — (2,250,704) 1,714,375 3,209,201 (2,250,704) 2,542,137 2,992,146 (2,141,002) 2,288,471 ¥ 253,666 ¥ 33,409 ¥ (109,702) ¥ 217,055 ¥ 1,386,511 ¥ 198,094 ¥ 378,477 ¥ 384,795 ¥ 1,499,680 ¥ 3,847,557 534,147 1,052,617 1,019,208 919 992,255 964,606 1,263 872,896 860,863 12,033 ¥ 27,649 ¥ ¥ 998,676 ¥ 1,141,560 ¥ 1,337,147 ¥ 616,778 ¥ — ¥ 4,094,161 — 2,318,521 4,094,161 3,317,197 3,598,087 2,812,645 ¥ 504,552 ¥ (84,342) ¥ 496,074 ¥ 1,607,653 ¥ 203,255 ¥ 417,562 ¥ 344,638 ¥ 1,396,826 ¥ 3,969,934 (2,997,286) (2,997,286) (2,912,944) 670,678 1,287,456 1,247,156 4,329 1,341,476 1,314,942 3,758 1,145,318 1,136,288 40,300 ¥ 26,534 ¥ 9,030 ¥ ¥ 1,048,310 ¥ 1,329,479 ¥ 1,499,821 ¥ 603,736 ¥ — ¥ 4,481,346 — 2,494,251 4,481,346 3,542,561 3,724,673 2,768,998 ¥ 773,563 ¥ (180,791) ¥ 756,673 ¥ 1,899,452 ¥ 280,458 ¥ 591,104 ¥ 424,244 ¥ 1,317,367 ¥ 4,512,625 (3,327,199) (3,327,199) (3,146,408) 824,844 1,428,580 1,378,306 3,496 1,503,317 1,441,972 4,608 1,334,087 1,281,805 52,282 ¥ 50,274 ¥ 61,345 ¥ Japan Americas Europe Other areas Corporate and eliminations Consolidated 13,728 — $ 34,882,620 $ 8,997,413 $ 9,474,272 $ 10,775,391 $ 5,635,544 $ — 18,634,511 9,488,000 10,785,380 11,441,489 (24,464,173) 34,882,620 27,631,924 9,357,207 10,484,847 11,078,348 (23,271,760) 32,523,327 24,874,685 $ 2,757,239 $ 130,793 $ 363,141 $ (1,192,413) $ 2,359,293 $ 15,070,772 $ 2,153,196 $ 4,113,880 $ 4,182,554 $ 16,300,870 $ 41,821,272 9,989 5,805,945 (24,464,173) 300,533 $ (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:1)(cid:34)(cid:51)(cid:17)(cid:26)(cid:64)(cid:39)(cid:52)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:74)(cid:81)(cid:68)(cid:1)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:26)(cid:26) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:24)(cid:27)(cid:18)(cid:21)(cid:1)(cid:49)(cid:46) 100 CANON ANNUAL REPORT 2009 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CANON INC. AND SUBSIDIARIES 23. Subsequent Events Share exchange agreement to make Canon Finetech Inc. a wholly owned subsidiary of Canon Inc. On February 8, 2010, the Board of Directors of the Company approved a share exchange under which the Company would make Canon Finetech Inc. (“Canon Finetech”) its wholly owned subsidiary, and the Company has entered into a share exchange agreement with Canon Finetech on the same date. As of February 8, 2010, the Company owned 57.59% of Canon Finetech. The share exchange is expected to become effective on May 1, 2010. The share exchange ratio is one share of Canon Finetech for 0.38 share of the Company. The Company will issue no new shares of stock, as it plans to issue its treasury stock for this transaction. In order to secure the fairness of the share exchange ratio, the Company and Canon Finetech determined that each com- pany would separately request an independent third-party appraisal agency to calculate the share exchange ratio, and dili- gently examined the results of the professional analyses and advice on the calculation of the proposed share exchange ratios submitted by the third-party appraisal agencies. As a result, the Boards of Directors of the Company and Canon Finetech deter- mined the share exchange ratio of 0.38 share of the Company’s common stock for each share of Canon Finetech common stock at their meetings held on February 8, 2010. As a result of the share exchange, the carrying amount of the Company’s noncontrolling interest in Canon Finetech will be decreased from ¥31,675 million ($344,293 thousand) to zero. The difference between the fair value of the shares of the Company issued to the noncontrolling interest holders and the decrease in the carrying amount of the noncontrolling interests will be recognized as an adjustment to additional paid-in capital. Additionally, after the date of the exchange, all of the net income of Canon Finetech will be attributable to the Company. The Company has decided that making Canon Finetech its wholly owned subsidiary would facilitate the organic integration of both companies’ management resources, further enhance the synergy effect throughout the Canon Group, and further elevate the ﬂ exibility and speed of management. Acquisition of Océ N.V. On March 9, 2010, Canon acquired 34.8% of the total out- standing shares of Océ N.V. (“Océ”), which is listed on NYSE Euronext Amsterdam, through a fully self-funded public cash tender offer for consideration of ¥38,785 million ($421,576 thousand), in addition to the 22.9% interest Canon held before the public cash tender offer. Subsequent to the acquisition date, Canon acquired an additional 9.8% of the total outstanding shares of Océ for consideration of ¥10,918 million ($118,674 thousand) during the post-acceptance period of the tender offer and also acquired 0.6% for consideration of ¥671 million ($7,293 thousand) through market purchases. In addition, Canon subsequently acquired Océ’s convertible cumulative ﬁ nancing preference shares representing 19.1% of the total outstanding shares of Océ for consideration of ¥8,027 million ($87,250 thousand). As a result, Canon’s aggregate interest cur- rently represents 87.2% of the total outstanding shares of Océ. Océ is engaged in research and development, manufacture and sale of document management systems, printing systems for professionals and high-speed, wide format digital printing sys- tems. Canon and Océ have complementary technologies and products and would beneﬁ t from this strong business relation- ship. Amid the increasingly competitive printing industry, Canon is further strengthening its business foundation in order to solid- ify its position as one of the global leaders. Canon aims to pro- vide diversiﬁ ed solutions to its customers in the printing industry by making Océ a consolidated subsidiary. This acquisition will be accounted for using the acquisition method. Prior to the March 9, 2010 acquisition date, Canon accounted for its 22.9% interest in Océ using the equity meth- od. The acquisition-date fair value of the previous equity interest of ¥25,508 million ($277,261 thousand) was remeasured using the quoted price of Océ’s common stock on the acquisition date, and will be included in the measurement of the total acquisition consideration. Further information related to the accounting for this busi- ness combination has not been disclosed, because none of the activities required to complete the initial accounting for this acquisition have been completed as of the issuance date of the consolidated ﬁ nancial statements. (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:1)(cid:34)(cid:51)(cid:17)(cid:26)(cid:64)(cid:39)(cid:52)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:74)(cid:81)(cid:68)(cid:1)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:18)(cid:17)(cid:17) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:24)(cid:27)(cid:18)(cid:21)(cid:1)(cid:49)(cid:46) MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING 101 The management of Canon is responsible for establishing and maintaining adequate internal control over ﬁ nancial reporting. Internal control over ﬁ nancial reporting is deﬁ ned in Rule 13a-15(f) promulgated under the Securities Exchange Act of 1934 , as amended, as a process designed by, or under the supervision of, the company’s principal executive and principal ﬁ nancial ofﬁ cers and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of ﬁ nancial reporting and the preparation of ﬁ nancial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reﬂ ect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of ﬁ nancial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the ﬁ nancial statements. Because of its inherent limitations, internal control over ﬁ nancial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Canon’s management assessed the effectiveness of internal control over ﬁ nancial reporting as of December 31, 2009. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (the “COSO criteria”). Based on its assessment, management concluded that, as of December 31, 2009, Canon’s internal control over ﬁ nancial reporting was effective based on the COSO criteria. Canon’s independent registered public accounting ﬁ rm, Ernst & Young ShinNihon LLC, has issued an audit report on the effectiveness of our internal control over ﬁ nancial reporting. (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:1)(cid:34)(cid:51)(cid:17)(cid:26)(cid:64)(cid:39)(cid:52)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:74)(cid:81)(cid:68)(cid:1)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:18)(cid:17)(cid:18) (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:1)(cid:34)(cid:51)(cid:17)(cid:26)(cid:64)(cid:39)(cid:52)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:74)(cid:81)(cid:68)(cid:1)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:18)(cid:17)(cid:18) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:24)(cid:27)(cid:18)(cid:22)(cid:1)(cid:49)(cid:46) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:24)(cid:27)(cid:18)(cid:22)(cid:1)(cid:49)(cid:46) 102 CANON ANNUAL REPORT 2009 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders of Canon Inc. We have audited the accompanying consolidated balance sheets of Canon Inc. and subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of income, equity, and cash ﬂ ows for each of the three years in the period ended December 31, 2009, all expressed in Japanese yen. These ﬁ nancial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these ﬁ nancial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the ﬁ nancial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the ﬁ nancial statements. An audit also includes assessing the accounting principles used and signiﬁ cant estimates made by management, as well as evaluating the overall ﬁ nancial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our report dated March 16, 2009, we expressed an opinion that, except for the omission of segment reporting information, the 2008 and 2007 consolidated ﬁ nancial statements presented fairly, in all material respects, the consolidated ﬁ nancial position, results of operations and cash ﬂ ows of Canon Inc. and subsidiaries, in conformity with U.S. generally accepted accounting principles. As described in Note 22, in 2009 the Company adopted segment reporting guidance and revised the disclosures in its 2008 and 2007 consolidated ﬁ nancial statements to conform with U.S. generally accepted accounting principles. Accordingly, our present opinion on the 2008 and 2007 consolidated ﬁ nancial statements, as presented herein, is unqualiﬁ ed rather than qualiﬁ ed. In our opinion, the ﬁ nancial statements referred to above present fairly, in all material respects, the consolidated ﬁ nancial position of Canon Inc. and subsidiaries at December 31, 2009 and 2008, and the consolidated results of their operations and their cash ﬂ ows for each of the three years in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles. As discussed in Note 1 to the consolidated ﬁ nancial statements, in 2009 the Company adopted new accounting guidance for noncontrolling interests in consolidated ﬁ nancial statements. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Canon Inc. and subsidiaries’ internal control over ﬁ nancial reporting as of December 31, 2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 30, 2010 expressed an unqualiﬁ ed opinion thereon. We have also recomputed the translation of the consolidated ﬁ nancial statements as of and for the year ended December 31, 2009 into United States dollars. In our opinion, the consolidated ﬁ nancial statements expressed in Japanese yen have been translated into United States dollars on the basis described in Note 2. (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:1)(cid:34)(cid:51)(cid:17)(cid:26)(cid:64)(cid:39)(cid:52)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:74)(cid:81)(cid:68)(cid:1)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:18)(cid:17)(cid:19) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:24)(cid:27)(cid:19)(cid:19)(cid:1)(cid:49)(cid:46) REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 103 The Board of Directors and Stockholders of Canon Inc. We have audited Canon Inc. and subsidiaries’ internal control over ﬁ nancial reporting as of December 31, 2009, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Canon Inc. and subsidiaries’ management is responsible for maintaining effective internal control over ﬁ nancial reporting, and for its assessment of the effectiveness of internal control over ﬁ nancial reporting included in the accom- panying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the com- pany’s internal control over ﬁ nancial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over ﬁ nancial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over ﬁ nancial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over ﬁ nancial reporting is a process designed to provide reasonable assurance regarding the reliability of ﬁ nancial reporting and the preparation of ﬁ nancial statements for external purposes in accordance with generally accepted account- ing principles. A company’s internal control over ﬁ nancial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reﬂ ect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of ﬁ nancial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regard- ing prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the ﬁ nancial statements. Because of its inherent limitations, internal control over ﬁ nancial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, Canon Inc. and subsidiaries maintained, in all material respects, effective internal control over ﬁ nancial reporting as of December 31, 2009, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the con- solidated balance sheets of Canon Inc. and subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of income, equity, and cash ﬂ ows for each of the three years in the period ended December 31, 2009, all expressed in Japanese yen, and our report dated March 30, 2010 expressed an unqualiﬁ ed opinion thereon. (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:1)(cid:34)(cid:51)(cid:17)(cid:26)(cid:64)(cid:39)(cid:52)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:74)(cid:81)(cid:68)(cid:1)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:18)(cid:17)(cid:20) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:24)(cid:27)(cid:19)(cid:21)(cid:1)(cid:49)(cid:46) 104 CANON ANNUAL REPORT 2009 TRANSFER AND REGISTRAR’S OFFICE STOCKHOLDER INFORMATION Canon Inc. 30-2, Shimomaruko 3-chome, Ohta-ku, Tokyo 146-8501, Japan Stock Exchange Listings: Tokyo, Osaka, Nagoya, Fukuoka, Sapporo and New York stock exchanges Manager of the Register of Stockholders Mizuho Trust & Banking Co., Ltd. 2-1, Yaesu 1-chome, Chuo-ku, Tokyo 103-8670, Japan Depositary and Agent with Respect to American Depositary Receipts for Common Shares JPMorgan Chase Bank, N.A. 4 New York Plaza, New York, N.Y. 10004, U.S.A. American Depositary Receipts are traded on the New York Stock Exchange (CAJ). Ordinary General Meeting of Shareholders: March 30, 2010, in Tokyo Further Information: For publications or information, please contact the External Relations Headquarters, Canon Inc., Tokyo, or access Canon’s Website at www.canon.com (cid:36)(cid:66)(cid:79)(cid:80)(cid:79)(cid:1)(cid:34)(cid:51)(cid:17)(cid:26)(cid:64)(cid:39)(cid:52)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:64)(cid:74)(cid:81)(cid:68)(cid:1)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:18)(cid:17)(cid:21) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:19)(cid:27)(cid:21)(cid:24)(cid:27)(cid:19)(cid:21)(cid:1)(cid:49)(cid:46) MAJOR CONSOLIDATED SUBSIDIARIES MANUFACTURING Canon Electronics Inc. Canon Finetech Inc. Nisca Corporation Canon Semiconductor Equipment Inc. Canon Ecology Industry Inc. Canon Chemicals Inc. Canon Components, Inc. Canon Precision Inc. Oita Canon Inc. Nagahama Canon Inc. Oita Canon Materials Inc. Ueno Canon Materials Inc. Fukushima Canon Inc. Canon Optron, Inc. Canon Mold Co., Ltd. Canon Machinery Inc. Canon ANELVA Corporation SED Inc. Tokki Corporation Canon Virginia, Inc. Canon Giessen GmbH Canon Bretagne S.A.S. Canon Inc., Taiwan Canon Dalian Business Machines, Inc. Canon Zhuhai, Inc. Canon Zhongshan Business Machines Co., Ltd. Tianjin Canon Co., Ltd. Canon (Suzhou) Inc. Canon Opto (Malaysia) Sdn. Bhd. Canon Hi-Tech (Thailand) Ltd. Canon Engineering (Thailand) Ltd. Canon Vietnam Co., Ltd. Canon Electronic Business Machines (H.K.) Co., Ltd. Canon Imaging Systems Inc. RESEARCH & DEVELOPMENT Canon Development Americas, Inc. Canon Research Centre France S.A.S. Canon Information Systems Research Australia Pty. Ltd. Canon Information Technology (Beijing) Co., Ltd. Canon (Suzhou) System Software Inc. Canon i-tech, Inc. 105 (As of December 31, 2009) MARKETING & OTHER Canon Marketing Japan Inc. Canon System & Support Inc. Canon IT Solutions Inc. Canon Software Inc. e-system Corporation Asia Paciﬁ c System Research Co., Ltd. Canon U.S.A., Inc. Canon Canada, Inc. Canon Mexicana, S. de R.L. de C.V. Canon Latin America, Inc. Canon do Brasil Industria e Comércio Limitada Canon Chile, S.A. Canon Panama, S.A. Canon Argentina, S.A. Virtual Imaging, Inc. Canon Business Solutions, Inc. Canon Financial Services, Inc. Canon Information Technology Services, Inc. Canon Europa N.V. Canon Europe Ltd. Canon (UK) Ltd. Canon Deutschland GmbH Canon France S.A.S. Canon Italia S.p.A. Canon España S.A. Canon Nederland N.V. Canon Danmark A/S Canon Belgium N.V./S.A. Canon (Schweiz) A.G. Canon Austria GmbH Canon Svenska AB Canon Oy Canon North-East Oy Canon Norge AS Canon Ru LLC Canon CEE GmbH Canon Eurasia A.S. Canon Portugal S.A. Canon Middle East FZ-LLC Canon South Africa Pty. Ltd. Canon Australia Pty. Ltd. Canon New Zealand Ltd. Canon Finance Australia Ltd. Canon (China) Co., Ltd. Canon Singapore Pte. Ltd. Canon Hongkong Co., Ltd. Canon Marketing (Malaysia) Sdn. Bhd. Canon Marketing (Philippines), Inc. Canon Marketing (Thailand) Co., Ltd. Canon India Pvt. Ltd. Canon Korea Consumer Imaging Inc. Canon Semiconductor Engineering Korea Inc. Canon Semiconductor Equipment Taiwan Inc. Canon Engineering Hong Kong Co., Ltd. (cid:68)(cid:66)(cid:79)(cid:80)(cid:79)(cid:34)(cid:51)(cid:64)(cid:36)(cid:18)(cid:14)(cid:36)(cid:21)(cid:64)(cid:74)(cid:81)(cid:68)(cid:64)(cid:39)(cid:52)(cid:36)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:20)(cid:14)(cid:21) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:18)(cid:17)(cid:27)(cid:22)(cid:25)(cid:27)(cid:21)(cid:20)(cid:1)(cid:34)(cid:46) CANON INC. 30-2, Shimomaruko 3-chome, Ohta-ku, Tokyo 146-8501, Japan PUB. BEP019 0410AB14.7 Printed in Japan (cid:68)(cid:66)(cid:79)(cid:80)(cid:79)(cid:34)(cid:51)(cid:64)(cid:36)(cid:18)(cid:14)(cid:36)(cid:21)(cid:64)(cid:74)(cid:81)(cid:68)(cid:64)(cid:39)(cid:52)(cid:36)(cid:64)(cid:17)(cid:20)(cid:19)(cid:22)(cid:15)(cid:74)(cid:79)(cid:69)(cid:69)(cid:1)(cid:1)(cid:1)(cid:18)(cid:14)(cid:19) (cid:18)(cid:17)(cid:15)(cid:20)(cid:15)(cid:19)(cid:23)(cid:1)(cid:1)(cid:1)(cid:18)(cid:17)(cid:27)(cid:22)(cid:19)(cid:27)(cid:22)(cid:19)(cid:1)(cid:34)(cid:46)

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