Canon
Annual Report 2011

Plain-text annual report

C A N O N A N N U A L R E P O R T 2 0 1 1 C A N O N A N N U A L R E P O R T 2 0 1 1 F i s c a l Y e a r E n d e d D e c e m b e r 3 1 , 2 0 1 1 F I N A N C I A L H I G H L I G H T S Millions of yen (except per share amounts) Thousands of U.S. dollars (except per share amounts) 2011 2010 Change (%) 2011 Net sales Operating profit Income before income taxes Net income attributable to Canon Inc. Net income attributable to Canon Inc. stockholders per share: (cid:516)Basic (cid:516)Diluted Total assets ¥3,557,433 ¥3,706,901 378,071 374,524 248,630 387,552 392,863 246,603 ¥ 204.49 ¥ 199.71 204.48 199.70 ¥3,930,727 ¥3,983,820 Canon Inc. stockholders(cid:495) equity ¥2,551,132 ¥2,645,782 -4.0 -2.4 -4.7 +0.8 +2.4 +2.4 -1.3 -3.6 $45,608,115 4,847,064 4,801,590 3,187,564 $ 2.62 2.62 $50,393,936 $32,706,821 Notes: 1. Canon(cid:495)s consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles. 2. U.S. dollar amounts are translated from yen at the rate of JPY78=U.S.$1, the approximate exchange rate on the Tokyo Foreign Exchange Market as of December 30, 2011, solely for the convenience of the reader. 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 0 400.00 300.00 200.00 100.00 0.00 Net Sales (Millions of yen) 4,481,346 4,094,161 3,706,901 3,557,433 3,209,201 Net Income Attributable to Canon Inc. (Millions of yen) 488,332 500,000 400,000 300,000 200,000 100,000 0 309,148 246,603 248,630 131,647 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 Net Income Attributable to Canon Inc. Stockholders per Share (Yen) 377.59 377.53 246.21 246.20 204.49 204.48 199.71 199.70 106.64 106.64 ROE/ROA (%) 16.5 10.8 20.0 15.0 10.0 5.0 0 11.1 7.3 4.9 3.4 9.2 9.6 6.3 6.3 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 Basic Diluted ROE ROA 01 C O R P O R A T E P R O F I L E T A B L E O F C O N T E N T S Canon develops, manufactures and markets a growing lineup of copying machines, printers, cameras and industrial and other equipment. Through these products, the Company meets growing customer needs that are becoming increasingly diversified and sophisticated. Today, the Canon brand is recognized and trusted throughout the world. In 1996, Canon launched its Excellent Global Corporation Plan with the aim of becoming a company worthy of admiration and respect the world over. Currently, the Company is working to achieve the overwhelming No. 1 position in its existing core businesses and expand related and peripheral businesses by strengthening its advanced solutions business, centered on innovative products, and through other measures. At the same time, Canon is nurturing its operations in the fields of medical equipment and industrial equipment, the latter including intelligent robots, to establish new core businesses. The Company is working to fulfill its responsibilities to investors and society, emphasizing sound corporate governance and stepping up the implementation of activities that contribute to environmental and social sustainability. STRATEGY TO OUR STOCKHOLDERS INTERVIEW WITH THE CEO 02 02 06 BUSINESS UNITS AT A GLANCE OFFICE BUSINESS UNIT 14 14 16 CONSUMER BUSINESS UNIT INDUSTRY AND OTHERS BUSINESS UNIT 2011 TOPICS 18 20 22 MANAGEMENT SYSTEM CORPORATE GOVERNANCE RESEARCH & DEVELOPMENT C O R P O R A T E P H I L O S O P H Y : Ky o s e i Canon(cid:495)s corporate philosophy is kyosei. A concise definition of this word 24 24 28 would be (cid:498)Living and working together for the common good.(cid:499) But Canon(cid:495)s PRODUCTION definition is broader: kyosei is (cid:498)All people, regardless of race, religion or culture, harmoniously living and working together into the future.(cid:499) 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. Truly global companies must foster good relations, not only with their customers and the communities in which they operate, but also with nations, and they need to address environmental issues worldwide. In addition, global companies must bear responsibility for the impact of their activities on society. For this reason, Canon(cid:495)s goal is to contribute to global prosperity and to people(cid:495)s well- being, which will lead to continuing growth and bring the world closer to achieving kyosei. C O R P O R A T E G O A L Canon sees itself growing and prospering over the next 100, and even 200, years. Toward this end, the Company has been promoting its Excellent Global Corporation Plan, launching Phase IV of the initiative in 2011. Building on the financial strengths that the Company has continuously reinforced through the implementation of the plan, Canon aims to join the ranks of the world's top 100 companies in terms of major management indicators. SALES & MARKETING CORPORATE SOCIAL RESPONSIBILITY 30 32 34 FINANCIAL SECTION TRANSFER AND REGISTRAR’S OFFICE STOCKHOLDER INFORMATION 37 100 100 MAJOR CONSOLIDATED SUBSIDIARIES 101 Cover Photo: The entry-level EOS Rebel T3i (EOS 600D in some areas), which comple- ments Canon’s lineup of high-performance digital SLR cameras, has contributed to increased sales volume and expanded market share. The camera offers such advanced features as a Scene Intelligent Auto mode and a Vari-angle Clear View LCD monitor. 02 S T R A T E G Y > T O O U R S T O C K H O L D E R S T O O U R S T O C K H O L D E R S FUJIO MITARAI Chairman & CEO Canon Inc. (cid:18)02 STRATEGY STRATEGY (cid:18)13 Business Units Management System Financial Section 03 P E R F O R M A N C E I N 2 0 11 In fiscal 2011, ended December 31, 2011, the world economy continued growing, albeit moderately, driven by the expansion of newly emerging countries. Looking back, however, it was a demanding year due to a succes- sion of challenging events. In addition to the Great East Japan Earthquake, these included economic turmoil in Europe, which was triggered by the Greek debt crisis in May and gave rise to the sharp appreciation of the yen, as well as massive flooding in Thailand in October. We extend our sincerest condolences to all those affected by the Japan earthquake and the Thai floods, and pray for a speedy recovery of the disaster-stricken areas. Amid these challenging circumstances, Canon posted consolidated net sales of ¥3,557.4 billion, down 4.0% from the previous fiscal year. On the profit side, however, we stepped up efforts to reduce costs and worked (cid:498) Canon will overcome the difficult business environment and return to a path of growth.(cid:499) exhaustively to improve our expenditure efficiency through the comprehen- sive promotion of automated production, in-house production and (cid:498)man-machine cell(cid:499) production, which integrates manual and automated processes. Accordingly, the Company was able to enhance profitability, real- izing a 0.7 point increase in the gross profit ratio to 48.8%, and a 0.1 point improvement in the operating profit ratio to 10.6%. Moreover, net income attributable to Canon Inc. increased 0.8% to ¥248.6 billion, marking the sec- ond consecutive year of year-on-year profit growth. The earthquake in Japan and floods in Thailand had a negative impact on net sales of approximately ¥230.0 billion, and on operating profit of approxi- mately ¥120.0 billion. Excluding the effect of these disasters on our performance, net sales would have increased while operating profit would have jumped approximately 30.0%(cid:516)even despite the yen’s sharp apprecia- tion and the economic instability. We believe, therefore, that we have further boosted the market competitiveness of our products and the Company has made good progress in reducing costs. Canon continues to adopt a proactive approach to steadily returning profits to stockholders while taking into consideration future investments, free cash flow and consolidated business performance. For 2011, Canon has decided to pay a full-year cash dividend of ¥120.00 per share, the same level as the previous year. 04 S T R A T E G Y > T O O U R S T O C K H O L D E R S B E C O M I N G A T R U L Y E X C E L L E N T G L O B A L C O R P O R A T I O N In 2011, Canon launched Phase IV of the Excellent Global Corporation Plan, a five-year management initiative that will conclude in 2015. Under Phase IV, the Company will renew its emphasis on sound growth by undertaking a rapid transformation ahead of the changing times with the aim of joining the ranks of the world’s top 100 companies in terms of all major manage- ment indicators. In line with these strategies, the Company has set the following performance targets for 2015, the final year of Phase IV: net sales of at least ¥5 trillion, an operating profit ratio of 20% or higher, net income ratio of 10% or higher, and a stockholders’ equity ratio of 75% or higher. Through the achievement of these targets, Canon aims to realize great strides toward becoming a truly excellent global corporation. P R O G R E S S O F P H A S E I V Under Phase IV, Canon is implementing the following six strategies: 1. Achieving the overwhelming No. 1 position in all core businesses and expanding related and peripheral businesses; 2. Developing new business through globalized diversification and estab- lishing the Three Regional Headquarters management system; 3. Establishing a world-leading globally optimized production system; 4. Comprehensively reinforcing global sales capabilities; 5. Building the foundations of an environmentally advanced corporation; 6. Imparting a corporate culture, and cultivating human resources befitting a truly excellent global company. With respect to the first strategy, within the digital commercial printing market, in 2011 Canon launched products developed jointly with Netherlands-based Oc(cid:177) N.V., which became a consolidated subsidiary in 2010. In addition, targeting Canon’s full-scale entry into the motion picture production industry commonly associated with Hollywood movies, the Company launched the Cinema EOS System, featuring our extensive lineup of interchangeable lenses supporting next-generation high-definition 4K res- olution and interchangeable-lens digital cinema cameras. Canon has also laid the groundwork for the Company’s entry into the retail photo-finishing service market with a commercial photo printer, DreamLabo 5000. Regarding the second strategy, in the medical equipment field, a dona- tion provided by Canon made possible the establishment in May 2011 of the Clinical Research Center for Medical Equipment Development (CRCMed) at Kyoto University. Working in collaboration with Kyoto University, the (cid:18)02 STRATEGY STRATEGY (cid:18)13 Business Units Management System Financial Section 05 Company plans to accelerate clinical research into the use of optical ultra- sound mammography systems. Under the fourth strategy, Canon further strengthened sales and market- ing functions in China, where economic growth continues, and worked to tap into such emerging markets as India, Brazil and Russia. We have also boosted our cooperative efforts with Oc(cid:177) N.V. and taken steps to reinforce our solutions business supporting improved office productivity. In addition, we have worked to reduce the cost of sales ratio through the promotion of (cid:498)man-machine cell(cid:499) production along with boosting the auto- mated production rate for toner cartridges. S U S T A I N E D G R O W T H T H R O U G H A D VA N C E S I N M A N U F A C T U R I N G Although economic growth rates are slowing in emerging countries, forecasts point to continued growth. By contrast, Canon cannot expect major overall growth in developed countries, which are facing structural factors hindering their economies. Accordingly, a full-scale recovery will take more time, espe- cially in the eurozone. Meanwhile, the yen is expected to remain at historical highs, underscoring the ongoing difficult business climate for Canon. Nevertheless, I believe that Canon is capable of achieving growth regard- less of the circumstances. To date, Canon has overcome the challenge of a strong yen through the conviction that earnings can be generated through manufacturing. Canon’s strength lies in its ability to differentiate its prod- ucts, improve quality and continually realize cost reductions. These stem from the Company’s tireless pursuit of advances in manufacturing, including switchover from conveyor belt-based production to the cell production sys- tem, the adoption of (cid:498)man-machine cell(cid:499) production, and the development of automated production systems. Going forward, Canon will further hone this strength by reaffirming its commitment to its own production systems with the aim of becoming a company capable of realizing sustained growth. 2012 marks the second fiscal year of Phase IV. As the entire Canon Group works in concert to fulfill our 2015 targets, we look forward to your ongo- ing understanding and support. FUJIO MITARAI Chairman & CEO Canon Inc. 06 S T R A T E G Y > I N T E R V I E W W I T H T H E C E O I N T E R V I E W W I T H T H E C E O Q A Please share with us the results of Phases I, II and III of Canon’s Excellent Global Corporation Plan? In Phase I, we worked to strengthen the Company’s financial standing and succeeded in cutting our debt by more than half. In Phase II, which focused on reinforcing product competitiveness, we completed the digitization of our copying machines and cameras. And in Phase III, we sought to expand Canon’s business scale while implementing M&A. Back in September 1995, when I became president, Canon’s financial condi- tion was weak and there was considerable waste stemming from redundancies across the Company’s various businesses, because each busi- ness focused solely on optimizing its own operations. In Phase I, therefore, we concentrated on strengthening the Company’s financial standing. Specifically, we significantly increased productivity through the introduction of cash flow management, the cell production sys- tem, and other measures. We also extensively eliminated waste by transforming our focus from partial optimization to total optimization, which reduced our debt by more than half. During Phase II, we worked to reinforce Canon’s product competitiveness. By fully digitizing our copying machines and cameras, we laid the ground- work for the successes that we enjoy today, and created a debt-free company. In Phase III, we sought to expand Canon’s business scope. Here, we expanded our business in the printing and medical-equipment fields and broadened our sales networks while actively carrying out M&A. Due to the global financial crisis in 2008, however, the Company’s business suffered a contraction in terms of scale. THE EXCELLENT GLOBAL CORPORATION PLAN Phase I 1996–2000 Phase II 2001–2005 Phase III 2006–2010 Strengthened our financial structure by thoroughly eliminating wastefulness, with production reforms playing a major role, based on changing our mindset with a focus on total optimization and profitability. Recognized the need for digitalization and raised product competitiveness by enhancing our development infrastructure and reinforcing key components. Strove to achieve “Sound Growth,” seeking high growth levels by establish- ing new businesses while raising the profitability of existing businesses. With the global economy plunging into the global recession, shifted direction towards “improving the quality of management.” Set up an even stronger financial structure and increased momentum towards a dramatic leap forward from now. Phase IV 2011–2015 Tackle again the challenge of achieving “Sound Growth” through timely change in advance of changes in the times. Slogan: “Aiming for the Summit –Speed & Sound Growth” (cid:18)02 STRATEGY STRATEGY (cid:18)13 Business Units Management System Financial Section 07 2015 PERFORMANCE TARGETS Net Sales 5 Trillion yen or more Operating Profit Ratio 20% or more Net Income Ratio 10% or more Stockholders’ Equity Ratio 75% or more Q A Under Phase IV, you are targeting “new heights” and “reforms.” Please elaborate. This refers to reforming our business domains and the functions common to manufacturing operations as we strive to achieve our consolidated net sales target of ¥5 trillion in 2015. Specifically, we will promote new applications for existing products in other fields while fos- tering the medical and industrial equipment businesses. At the same time, we will further enhance the Three Regional Headquarters manage- ment system and establish a globally optimized production system. By (cid:498)new heights(cid:499) we mean surpassing the record-high performance we achieved in 2007. Specifically, in 2015 we are targeting net sales of at least ¥5 trillion, an operating profit ratio of 20% or higher, and a net income ratio of 10% or higher. KEY STRATEGIES FOR PHASE IV To realize these targets, we must pursue two reforms. The first entails 01 02 03 04 05 06 Achieving the overwhelming No.1 position in all core businesses and expanding related and peripheral businesses Developing new business through globalized diversification and establishing the Three Regional Headquarters management system Establishing a world-leading globally optimized production system Comprehensively reinforcing global sales capabilities Building the foundations of an environmentally advanced corporation Imparting a corporate culture, and cultivating human resources befitting a truly excellent global company reforming our business domains. In the Company’s core businesses, we will laterally expand our business domains through new applications for existing products in other fields. In other words, we will deploy technologies of exist- ing products to enter different fields. In addition, we will accelerate our efforts in the medical and industrial equipment fields, which represent the pillars of new business domains for Canon. The second reform involves transforming functions common to our manu- facturing operations. These include research and development, production, and sales and marketing. Specifically, we will further upgrade our Three Regional Headquarters management system, with headquarter functions undertaken not only in Japan, but also in the United States and Europe for the products developed in those regions. Meanwhile, with respect to production operations, we will seek to establish a globally optimized production system based on the comprehensive consideration of various factors, such as costs, tax- ation systems, logistics methods, ease of parts procurement, and manpower. NET SALES/NET INCOME RATIO Net Sales (left) Net Income Ratio (right) (Millions of yen) 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 0 Phase I Phase II Phase III Phase IV (%) 12 10 8 6 4 2 1995 1996 2000 2001 2005 2006 2007 2008 2009 2010 2011 2015 (Target) 08 S T R A T E G Y > I N T E R V I E W W I T H T H E C E O 01 AC H I E V I N G T H E OV E R W H E L M I N G N O . 1 P O S I T I O N I N A L L C O R E B U S I N E S S E S A N D E X PA N D I N G R E L AT E D A N D P E R I P H E R A L B U S I N E S S E S MAIN INITIATIVES Expand Related and Peripheral Businesses In what ways have you deployed innovation to develop appealing products in core businesses? Also, can you describe specific ini- tiatives aimed at raising earnings through the expansion of solutions and services? We developed a professional-use digital cinema camera built off the video-recording capabilities of our digital single-lens reflex (SLR) Q A cameras, and developed the DreamLabo 5000, a commercial photo printer incorporating enhanced inkjet-printing technologies. In addition, we are working to upgrade office network multifunction device (MFD)-based Expand Profits through Solutions and Services solutions and services. In 2011, through the lateral development of an existing product, we suc- cessfully launched the EOS C300 Digital Cinema Camera, an interchangeable-lens digital video camcorder that expanded off the video- recording capabilities offered by our digital SLR cameras. In 2008 we released the EOS 5D Mark II digital SLR camera, boasting video image qual- ity that captured the attention of the U.S. motion picture industry, an opportunity we seized upon to develop the EOS C300. We also developed the DreamLabo 5000 commercial photo printer, realized by building off the inkjet-printing technologies we have cultivated over the years. As for boosting earnings through solutions and services, we offer net- work MFDs and deliver solutions and services tailored to the workflows of our customers, which enables us to increase earnings. Meanwhile, until recently, office IT systems had made use of servers located in the office. But now, the spread of cloud services has sparked a fundamental transforma- tion of network-based communication systems. Responding swiftly to this changing environment, we created Canon Business Imaging Online, a cloud service platform that works in conjunction with imageRUNNER ADVANCE office network MFDs. We are also working to enhance the cloud-based solu- tions and services of our sales companies worldwide. Launch Attractive Products through Innovation Canon’s new large-scale 8.29-megapixel CMOS sensor, used in the EOS C300 Digital Cinema Camera, meets motion picture industry needs with enhanced sensitivity and reduced noise. (cid:18)02 STRATEGY STRATEGY (cid:18)13 Business Units Management System Financial Section 09 02 D E V E LO P I N G N E W B U S I N E S S T H R O U G H G LO B A L I Z E D D I V E R S I F I CAT I O N A N D E S TA B L I S H I N G T H E T H R E E R E G I O N A L H E A D Q U A R T E R S M A N AG E M E N T SY S T E M MEDICAL IMAGING New Expansion in Medical Imaging Optical Ultrasound Mammography System The Kyoto University/Canon Joint Research Project Digital Radiography Systems Ophthalmic Diagnostic Systems Medical IT Solutions Genetic Diagnosis Technologies Target: 100 Billion Yen by 2015 What are your reasons for selecting medical equipment and industrial equipment as new business pillars? What are some of the specific initiatives being carried out in these areas? In the medical equipment field, we noted advancements in elemental technologies for applications in medical care and saw opportunities Q A for further development. As for industrial equipment, we concluded that demand in the factory automation area would expand in developed coun- tries facing aging populations with decreasing working populations. Reflecting the needs of the times, we determined that demand for medical equipment and industrial equipment will grow in the future. In the medical equipment field, because disease will never disappear as long as humans exist, there will always be demand for medical care. Also, we have noted rapid advances in non-invasive optical ultrasound and other elemental medical technologies, and we can foresee further progress in the future. At Canon, we plan to fully mobilize our expertise in optical and office-imaging technologies to expand our business in such areas as diag- nostic imaging solutions, optical ultrasound diagnostic imaging systems INDUSTRIAL EQUIPMENT and genetic diagnostic systems. As for diagnostic imaging systems that Existing Businesses New Businesses Semiconductor Lithography Systems Organic LED Panel Manufacturing Equipment (Canon Tokki Corporation) Die Bonders (Canon Machinery Inc.) Vacuum Thin-Film Deposition Equipment (Canon ANELVA Corporation) Intelligent Robots Machine Vision for Industry employ optical ultrasound, we are conducting clinical research in collabora- tion with Kyoto University. Going forward, we plan to form alliances in the United States and Europe with venture companies offering promising new technologies, acquiring new technologies with which we will continue to expand our business. Regarding industrial equipment, as developed countries face aging popu- lations and decreasing working populations in the future, we expect demand for automated production facilities to increase. Canon is currently developing intelligent robots and will initially address needs for automa- tion and unmanned production at the Company’s manufacturing bases. In the future, however, we will pursue business opportunities in the field of factory automation. 10 S T R A T E G Y > I N T E R V I E W W I T H T H E C E O Q A What, specifically, is the kind of framework you aim to achieve with the Three Regional Headquarters management system? As globalization continues to progress, we cannot keep pace with market changes unless we promote the international diversification of our operations beyond Japan. For this reason, we aim to create a Three Regional Headquarters management system, with headquarter functions in the United States and Europe for the products developed in those regions. Looking back on Canon’s history, diversification began when we aug- mented our camera-related optical and mechanical technologies with electronic technologies to produce calculators. To this we added chemical technologies to make copying machines and laser printers, followed by communication technologies to produce facsimile machines. In other words, Canon’s approach to diversification is based on entering into new businesses that reflect emerging needs by complementing existing tech- nologies with new, highly compatible technologies. To date, all of our diversification has been carried out in Japan. Since Phase II, however, there has been a surge in the wave of globalization, prompting us to recognize the need to further diversify internationally. In Phase III, therefore, we sought to establish the Three Regional Headquarters management system, placing headquarter functions in the United States and Europe for the products developed in those regions. The U.S. headquar- ters will be responsible for products developed in America, while the European headquarters will handle products developed in Europe. While Canon Inc. will remain the parent company in terms of the capital struc- ture, what we have in mind is the creation of three regional product-business headquarters. Moreover, rather than developing all neces- sary technologies from scratch, we will adopt a realistic approach that involves the active use of M&A to acquire technologies as needed. In Europe, we made Oc(cid:177) N.V., with its advanced commercial printing technologies, a consolidated subsidiary, which enabled us to realize a com- mercial printing base. In Phase IV, we plan to complete the Three Regional Headquarters management system through the promotion of further M&A. Océ is expected to play a key role under the Three Regional Headquarters management system. GLOBAL DIVERSIFICATION Develop a Global R&D Structure New Innovation Centers in the U.S. and Europe U.S. Europe Establish Institutes with responsibilities spanning basic research to leading-edge technology application Promote diversification utilizing Océ as a foothold (cid:18)02 STRATEGY STRATEGY (cid:18)13 Business Units Management System Financial Section 11 E S TA B L I S H I N G A WO R L D - L E A D I N G G LO B A L LY O P T I M I Z E D P R O D U CT I O N SY S T E M 03 How do you plan to create a globally optimized production system? Also, what criteria do you apply when selecting the countries where manufacturing will be carried out? We will build the most rational globally optimized production sys- tem following the comprehensive consideration of various factors in Q A each region, including costs, tax systems and labor force. The criterion we use when selecting where to carry out production is the ratio of labor costs to total manufacturing costs. GLOBALLY OPTIMIZED PRODUCTION SYSTEM Drawing on lessons learned from the Great East Japan Earthquake and the floods in Thailand, we will establish a globally optimized production sys- Logistics tem that thoroughly pursues economic rationality based on the Tax Systems etc. Optimized site placement and production distribution in terms of product quality and costs comprehensive consideration of various factors in each country and region, including costs, tax systems, logistics methods, ease of parts pro- Procurement curement, and labor force. When selecting where to carry out production, more important than whether labor costs may be high or low is the proportion of labor cost to manufacturing cost. Even if labor costs are high, provided the value added to Labor products is sufficiently high, then the labor cost ratio will decline. At Canon, we strive to hold the ratio of labor costs to manufacturing costs below a cer- tain level, which provides us with a standard for determining whether to manufacture in Japan or overseas. Currently, we produce high-value-added products in Japan, while products with lower added value and a higher labor cost ratio are made elsewhere. If we are unable to turn a profit despite such efforts, then we will withdraw from that business. In addition, particularly for consumables, we would like to accelerate our efforts to realize localized production, in which the entire process from production to sales, all the way through to the recycling of used products, is carried out within a single region. LOCALIZED PRODUCTION Manufacturing Sales Recycle Asia Europe Virginia (U.S.) 12 S T R A T E G Y > I N T E R V I E W W I T H T H E C E O C O M P R E H E N S I V E LY R E I N FO R C I N G G LO B A L S A L E S CA PA B I L I T I E S 04 Q A How will you reinforce your sales capabilities in developed countries? What about emerging countries displaying significant growth? In developed countries we are working to enhance solutions and services for office network multifunction device (MFD)s. In China and Southeast Asia, where our sales networks have not kept pace with mar- ket growth, we are doing our utmost to expand our organizational reach. Although we already have fully established sales networks in developed countries, in order to achieve further growth, we are working to upgrade solutions and services for network MFDs. Specifically, positioning the imageRUNNER ADVANCE at the core with an eye toward cloud applica- tions, our sales companies worldwide are working to strengthen their network MFD solutions business, expand their customer bases, and enhance services through alliances with leading companies in the IT and cloud-computing fields and software companies. In China, where our sales network is seriously insufficient, we are dili- gently working to boost our sales presence. There are around 300 cities in China with populations exceeding one million and we are making efforts to cover all of them with our network. Because it takes time to gather the required human resources, we are rapidly working to broaden our organi- zation in China. As for India, Indonesia, Vietnam and Thailand, we are working hard to expand our sales networks in these countries as well(cid:516)especially in India and Indonesia. Strengthening our sales and marketing capabilities depends entirely on organizational expansion, which is why we are moving with speed and urgency in China and Southeast Asia. Canon is rapidly expanding its sales net- works to meet strong demand from emerging markets. (The showroom of the Mumbai Office of Canon India Pvt. Ltd.) (cid:18)02 STRATEGY STRATEGY (cid:18)13 Business Units Management System Financial Section 13 05 B U I L D I N G T H E FO U N DAT I O N S O F A N E N V I R O N M E N TA L LY A DVA N C E D C O R P O R AT I O N Q A What is Canon doing about environmental issues? In addition to developing products with high environmental perform- ance, we will emphasize a localized production model for toner cartridges and other initiatives in order to reduce the environmental burden of our business activities. Our policy is to develop energy-saving technologies and materials with low environmental burden while raising the performance of our products. In 1990 we launched our Toner Cartridge Collection and Recycling Program and now carry out the localized recycling of cartridges in the United States, Japan, China and France. We are also promoting localized production, reducing energy consumption and carbon dioxide emissions associated with product transportation. The imageRUNNER ADVANCE series realizes a reduction in total CO2 emissions, through an environmentally conscious design method to set and control CO2 emission reduction targets for each stage of the product lifecycle. 06 I M PA R T I N G A C O R P O R AT E C U LT U R E , A N D C U LT I VAT I N G H U M A N R E S O U R C E S B E F I T T I N G A T R U LY E XC E L L E N T G LO B A L C O M PA N Y What are your thoughts with respect to hiring non-Japanese exchange students and promoting foreigners to management positions? Also, how do you cultivate globally competent human resources? We will be proactive in recruiting and appointing non-Japanese employees. At the same time, we will cultivate global human Q A resources through such means as global management training and by assigning Japanese staff to overseas positions. We have many local people serving in executive positions at our marketing com- panies around the world. In fact, in Europe, our largest regional market, all of the presidents of our marketing companies except for one are from Europe. And, in addition to proactively recruiting non-Japanese exchange students, we offer a global management training program in coordination with the Institute for International Management Development (IMD), a business school in Switzer- land. Meanwhile, there are always around 1,000 of our Japanese employees posted at our marketing and manufacturing companies worldwide. In this way, we are cultivating large numbers of human resources capable of embracing diversity and responding flexibly while respecting local cultures and customs. Managers from Group companies worldwide gather at the Canon Global Management Institute in Japan to study corporate strategies and engage in cross-cultural exchanges. 14 B U S I N E S S U N I T S > A T A G L A N C E A T A G L A N C E B U S I N E S S U N I T S M A I N P R O D U C T S O F F I C E B U S I N E S S U N I T Office Network MFDs Digital Production Printing Systems Laser Printers Large-Format Inkjet Printers C O N S U M E R B U S I N E S S U N I T Digital SLR Cameras Digital Camcorders Inkjet Printers Multimedia Projectors I N D U S T R Y A N D O T H E R S B U S I N E S S U N I T LCD Lithography Systems Ophthalmic Equipment Semiconductor Lithography Systems Document Scanners (cid:520) Office Network Multifunction Devices (MFDs) (cid:520) Laser Printers (cid:520) Laser MFDs (cid:520) Solutions Software (cid:520) Toner Cartridges (cid:520) Digital Production Printing Systems (cid:520) Large-Format Inkjet Printers (cid:520) Digital Single Lens Reflex (SLR) Cameras (cid:520) Compact Digital Cameras (cid:520) Digital Camcorders (cid:520) Interchangeable Lenses (cid:520) Inkjet Printers (cid:520) Multimedia Projectors (cid:520) Image Scanners (cid:520) Broadcast Equipment (cid:520) Calculators (cid:520) LCD Lithography Systems (cid:520) Semiconductor Lithography Systems (cid:520) Ophthalmic Equipment (cid:520) Digital Radiography Systems (cid:520) Document Scanners (cid:520) Handy Terminals (cid:520) Color Label Printers (cid:520) Die Bonders (cid:520) Organic LED Panel Manufacturing Equipment (cid:520) Vacuum Thin-Film Deposition Equipment Strategy BUSINESS UNITS Management System Financial Section (cid:18)14 (cid:18)23 15 O U T L I N E C O N S T I T U T I O N O F S A L E S (%) N E T S A L E S (Millions of yen) In this segment, Canon offers a comprehensive range of multifunction devices (MFDs), printers, and other equipment featuring high image quality, high resolution, and high speed. Leveraging these products, Canon works in close collaboration with various Group companies and alliance partners to deliver optimal solu- tions tailored to match the customer’s business operations. These include various document solutions, such as office document management and the output of records. At the same time, the Company provides top-quality services and sup- port in a swift and reliable manner. Canon’s offerings in this segment include digi- tal cameras, digital camcorders, interchangeable lenses, inkjet printers, and cal- culators. Canon’s digital cameras and digital camcorders(cid:516)designed to deliver unparalleled image quality(cid:516)have earned particularly high acclaim worldwide, thanks to in-house devel- oped lenses, CMOS sensors, and image processors. Also widely popular are Canon’s inkjet printers, which are easy to use and pro- duce beautiful pictures at high speeds. Applying optical technologies and image-pro- cessing technologies amassed over many years, Canon provides high-value-added products to a wide range of industries. The Company is already prominent globally as a manufacturer of LCD lithography and semiconductor lithogra- phy systems. In addition, Canon is focusing on the medical equipment field(cid:516)one of its next- generation core businesses. The Company is aggressively promoting sales of its cutting-edge digital radiography systems and ophthalmic equipment, which employ Canon’s highly regarded medical imaging technologies. 53.9% 2,500,000 2,477,518 2,246,609 1,987,269 1,917,943 1,645,076 2007 2008 2009 2010 2011 2,000,000 1,500,000 1,000,000 500,000 0 2,000,000 1,587,952 1,500,000 1,456,075 1,391,327 1,301,160 1,312,044 36.9% 1,000,000 500,000 0 600,000 500,000 400,000 300,000 200,000 100,000 0 2007 2008 2009 2010 2011 549,983 522,405 432,958 420,863 357,998 2007 2008 2009 2010 2011 11.8% Note: The percentage figures for the three business units presented in the pie charts above do not add up to 100% because (cid:498)Eliminations,(cid:499) used in consolidated accounting, were not included in calculation considerations. 16 B U S I N E S S U N I T S > O F F I C E B U S I N E S S U N I T O F F I C E B U S I N E S S U N I T Canon has expanded the functions of its office network MFDs, which realize enhanced coordination with IT systems and are compatible with various types of system application software, offering an optimal usage environment for all sorts of document-related tasks. 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0 2 0 11 R E V I E W In the market for office network multifunction devices (MFDs), demand for MFDs remained largely unchanged from the previous year thanks to increased worldwide demand for color devices. In Japan, the Great East Japan Earthquake disrupted parts supplies. While production levels were down temporarily, however, production had mostly returned to normal by 1,987,269 1,917,943 1,645,076 autumn. Sales of color models, such as the imageRUNNER ADVANCE C5000/C2000 series, grew steadily in both value and volume terms. Sales for digital production printing systems increased considerably, cen- tering on color printers in Europe, Asia, and Oceania. In Japan, sales of high-speed monochrome printers, such as the imageRUNNER ADVANCE 8105 PRO, were strong, as were sales of imagePRESS C7010VP in the 2009 2010 2011 Americas, resulting in a year-on-year increase in worldwide sales in both NET SALES (Millions of yen) value and volume terms. Strong sales of the imagePRESS C7010VPS, the first product developed jointly by Canon and Oc(cid:177) N.V., contributed to overall revenue growth. Strategy BUSINESS UNITS Management System Financial Section (cid:18)14 (cid:18)23 17 Sales of MFDs (including laser devices) for individual and SOHO use increased in value and volume terms year on year in Europe and Asia. Despite a drop in sales in Japan and the Americas due to falling sales prices, in terms of volume, Canon maintained more or less the same sales level as in 2010. In laser printers, sales were affected by sluggish demand in Europe. Sales on a unit basis, however, exceeded the previous year’s level because of growth in sales of printers, primarily monochrome offerings, in emerging countries, where demand is strong. In large-format inkjet printers, sales in some regions stagnated due to the earthquake in Japan and financial problems in Europe. However, the overall growth rate for sales volume exceeded the industry average. There are two main factors for this firm performance. One is the expansion of sales realized through the cultivation of CAD markets in emerging coun- tries. The other is the launch of the imagePROGRAF iPF8300S/iPF6300S. This latest release, featuring the LUCIA EX, a new pigment ink, helped boost sales in the poster and proofing markets. As a result of the above, consolidated net sales in the Office Business Unit amounted to ¥1,917.9 billion, a year-on-year decline of 3.5%. 2 0 1 2 I N I T I A T I V E S In the market for office use, Canon will upgrade the lineup and increase sales of the imageRUNNER ADVANCE series. The Company will also pro- mote its cloud business in collaboration with major companies in the field of IT and cloud businesses. By raising its profile as a solutions provider, meanwhile, Canon will strive to broaden its market share on a global scale. In the production printing market, Canon will draw on synergies generated by its alliance with Oc(cid:177) N.V. to reinforce and expand its business. In laser printers, we will launch new products focusing primarily on models designed for high-volume printing, and continue efforts to increase market share and enhance profitability. In large-format inkjet printers, the Company will strengthen its sales and marketing functions in emerging countries. At the same time, Canon will step up marketing activities in the poster and proofing markets. The Company will also target further sales expansion by launching competitive products while closely monitoring market and competitive trends. The imageRUNNER ADVANCE C5051, a mainstay model, which has contributed to revenues of office network MFDs since its launch, meets various busi- ness needs, employing high-speed output of 51 ppm. The imagePRESS C7010VP achieves high image quality and high-precision digital printing that rivals offset printing, with a printing speed of up to 70 ppm. The imagePROGRAF iPF8300S, utilizing the LUCIA EX eight-color ink system, realizes the expanded reproducible color gamut, and offers improved output speed and image quality performance. 18 B U S I N E S S U N I T S > C O N S U M E R B U S I N E S S U N I T C O N S U M E R B U S I N E S S U N I T Canon’s digital SLR cameras, which use groundbreaking technology such as proprietary lenses, CMOS sensors, and image processors, lead the world with their high image quality and contribute to sales. 1,500,000 1,200,000 900,000 600,000 300,000 0 1,391,327 1,312,044 1,301,160 2 0 11 R E V I E W In Japan, demand for digital single lens reflex (SLR) cameras slumped due to the Great East Japan Earthquake, although demand remained steady in other world markets. The downtrend in production levels caused by the earthquake had mostly ended by the summer of 2011. Canon worked hard to increase sales, centering on the entry-level model EOS Rebel T3i (EOS 600D in some areas), as well as the advanced-amateur model EOS 5D Mark II. Since November, Canon has also been affected by shortages in parts sup- plies due to floods in Thailand. Despite this and other setbacks during the period, on a full-year basis, sales of digital SLR cameras grew steadily in both value and volume terms. Demand for compact digital cameras stayed stagnant in developed coun- 2009 2010 2011 tries, but grew in emerging countries. Compact digital cameras that sold NET SALES (Millions of yen) particularly well were the PowerShot ELPH 100 HS (IXUS 115 HS in some areas) and the PowerShot SX230 HS. Nonetheless, total sales of compact dig- ital cameras declined year on year, in both volume and value terms, on the back of the earthquake in Japan and the shortage of parts supplies caused by the floods in Thailand. 19In digital camcorders, facing an overall downturn in market demand,Canon focused on sales of high-definition models, for which demand isexpected to increase. These included the VIXIA HFR 21 (LEGRIA HFR 21 insome areas) and the VIXIA HFM 41 (LEGRIA HFM 41 in some areas). In the broadcast equipment market, there was healthy demand for lensesfor high-definition televisions, as well as an increase in portable lens salesvolume. Accordingly, Canon retained its high market share.In inkjet printers, the economic downturn in Europe and the effects of theearthquake in Japan and floods in Thailand adversely affected the market.Worldwide, sales of inkjet printers slightly declined from the previous year.In this environment, Canon introduced new products that meet diversifyingneeds, such as the PIXMA MG 6200 series, which is equipped with a QuietMode and has both cloud and Wi-Fi (wireless LAN) operation. Thanks to theseefforts to strengthen the product lineup, sales volume of inkjet printersincreased year on year. However, a fall in production caused by the Thaifloods and the impact of the yen’s appreciation inevitably resulted in a salesdecrease in value terms. By contrast, sales of consumables remained strong.In image scanners, Canon retained its top world market share amid con-traction across the entire market.As a result of the above, the Consumer Business Unit posted consolidatednet sales of ¥1,312.0 billion, down 5.7% from the previous year. 2012 INITIATIVESIn Hollywood and elsewhere in the motion picture industry, there isincreasing demand for digital camcorders with superior image resolution,as well as a growing market for highly reliable interchangeable lenses withexcellent image quality. Accordingly, Canon will expand its business target-ing the commercial sector by focusing on enhancing its Cinema EOS System.Launched in 2011, this system features lenses and cameras for use inmovie production.Meanwhile, the retail photo-finishing service market is also showing anexpansionary trend. This business includes over-the-counter and Web-basedprint-service business targeting the production of photo prints, photoalbums and other high-value-added photo materials. Seeking to capitalizeon this growing market opportunities, Canon will concentrate on expand-ing sales of the DreamLabo 5000. This commercial photo printer, featuringhigh productivity coupled with high-quality photos and detailed text, usesthe inkjet method, which is ideally suited to the production of high-value-added photo materials. The EOS Rebel T3i (EOS 600D in some areas)includesScene Intelligent Auto (automatically selecting themost appropriate setting) and a Vari-Angle Clear ViewLCD monitor, enabling shooting from various angles. The PowerShot ELPH 100 HS (IXUS 115 HS in someareas)delivers exceptional performance in low-lightsettings through the HS System, incorporating aCMOS sensor and DIGIC 4 image processor. The PIXMA MG6200 seriesfeatures enhancedbasic performance, including a Quiet Modeand wireless LAN connectivity, and improvedease of use. StrategyBUSINESS UNITSManagement SystemFinancial Section!14!2320 B U S I N E S S U N I T S > I N D U S T R Y A N D O T H E R S B U S I N E S S U N I T I N D U S T R Y A N D O T H E R S B U S I N E S S U N I T Canon, through its semiconductor lithography systems, achieves ever higher levels of performance and functionality to meet the strict cutting-edge demands of the industry, while focusing on the development of future technologies. These technologies also serve as a driving force behind Canon's optical and control technologies. 500,000 400,000 300,000 200,000 100,000 0 432,958 420,863 357,998 2009 2010 2011 NET SALES (Millions of yen) 2 0 11 R E V I E W In semiconductor lithography systems, Canon enjoyed healthy demand for i- line steppers owing to brisk capital investment by makers of NAND-flash memory devices and image sensors, underpinned by strong demand for smartphones. Against this background, in July 2011 Canon released the FPA- 5510iV i-line stepper, its first back-end semiconductor manufacturing tool. The new product is ideal for 3D packaging(cid:516)a next-generation packaging technology. During the year, the Great East Japan Earthquake had some impact on production facilities in Japan, but the pace of restoration was greater than anticipated. Accordingly, sales of Canon’s semiconductor lithog- raphy systems increased significantly, both in value and volume terms. In LCD lithography systems, capital investment was solid in the industry of small and medium-size LCD panels because of the booming market for smartphones and other devices. However, due to weak capital investment in large-scale panels for TVs and the like, overall sales on LCD lithography sys- tems declined year on year, both in value and volume terms. In medical equipment, Canon released in succession new mainstay digital radi- ography systems, including CXDI-501C. The Company also enjoyed year-on-year increases, both in value and volume terms of the systems(cid:516)centering on the CXDI-50 series and CXDI-70C Wireless(cid:516)owing to healthy sales in the United Strategy BUSINESS UNITS Management System Financial Section (cid:18)14 (cid:18)23 21 States and China. As for ophthalmic equipment, overall sales remained rela- tively unchanged from the previous year owing to efforts to boost sales of the CR-2 non-mydriatic retinal cameras, the new tonometer TX-20 and other products, combined with the positive effects of mainly the large business deal gained in Australia. With respect to document scanners manufactured by Canon Electronics Inc., weak sales in the United States, due to a stagnating market for check scanners for financial institutions, were offset by increased sales in Japan and Europe. As a result, total sales of document scanners were largely unchanged from the previous year. Sales of organic LED (OLED) panel manufacturing equipment made by Canon Tokki Corporation (formerly Tokki Corporation) increased dramatically year on year, thanks to proactive capital investment among OLED panel manufacturers. There was a decline in sales of die bonders made by Canon Machinery Inc., as semiconductor device manufacturers curbed their capital invest- ment. However, sales of FA system-related devices rose substantially owing to a continuation of solid orders received, mainly in China and South Korea, for rechargeable battery-related devices for automobiles. Sales of magnetic head and disk thin-film deposition equipment made by Canon ANELVA Corporation declined year on year. However, sales of LED thin-film deposition equipment increased, and sales of semiconductor thin- film deposition equipment were maintained at previous-year levels. As a result, consolidated net sales of the Industry and Others Business Unit amounted to ¥420.9 billion, down 2.8% from the previous year. 2 0 1 2 I N I T I A T I V E S Going forward, Canon will focus on the medical equipment and intelligent robot fields as core areas for new business expansion. In the medical equipment field, Canon will strive to grow its digital radi- ography system business by delivering higher levels of precision, image quality, and sensitivity. At the same time, Canon will seek to broaden its presence in retinal cameras offering greater functionality. In addition, the Company will emphasize development of genetic diagnostic systems, as well as mammography equipment incorporating optical ultrasound tech- nologies that both have minimal impact on the body and enable early detection of cancer and other conditions. In intelligent robots, Canon will deploy a variety of recognition technolo- gies amassed through its experience in cameras and office equipment(cid:516) including face recognition, character recognition, and image retrieval tech- nologies(cid:516)to develop Super Machine Vision (vision system for automatic production robots handling assembly and inspection processes), which is superior to human vision system. Canon will also consider future sales to third parties and step up related initiatives. The FPA-5510iV, a back-end semiconductor lithog- raphy system, meeting the demand for integration on semiconductor devices while realizing high performance, can be used in 3D packaging. The CXDI-501C, a new slim, lightweight digital radi- ography system, incorporates a convenient handle design for superior portability, enables quick imag- ing, and reduces X-ray exposure to patients. The System-ELVESS features a fully automated man- ufacturing process, encompassing the vacuum vapor deposition of OLED materials through to encapsu- lation, realizing high productivity and expandability. 22 B U S I N E S S U N I T S > 2 0 1 1 T O P I C S 2 0 1 1 T O P I C S O F F I C E B U S I N E S S U N I T C A N O N A N D O C (cid:50) U N V E I L S U C C E S S I O N O F J O I N T L Y D E V E L O P E D P R O D U C T S Since Canon welcomed the and the imageRUNNER ADVANCE C9000S PRO series Dutch company Oc(cid:177) N.V. into of color network multifunction devices (MFDs) incor- the Canon Group in 2010, porating an Oc(cid:177)-made printer controller, and a Canon has been working to strengthen its business series of monochrome production printing systems foundation by building a powerful, complementary that combines a new engine developed by Oc(cid:177) with relationship with Oc(cid:177) covering both technologies a high-performance Canon scanner. Through ongo- and products. In 2011, Canon and Oc(cid:177) unveiled a succession of jointly devel- oped products. They include the imagePRESS C7010VPS series of digital production printing systems imageRUNNER ADVANCE C9000S PRO series ing collaboration with Oc(cid:177), Canon will continue strengthening its product lineup in the production printing market to deliver solutions that meet a wide range of needs. C O N S U M E R B U S I N E S S U N I T A I M I N G T O C R E A T E A N E W C O M M E R C I A L P H O T O P R I N T E R M A R K E T , C A N O N L A U N C H E S A N E W B R A N D (cid:498) D r e a m L a b o (cid:499) The proliferation of digital cam- amassed over many years(cid:516)including its FINE (Full- eras has sparked a rapid photolithography Inkjet Nozzle Engineering) increase in the number of pho- high-precision print head technology(cid:516)and has tos taken, leading to a rise in the use of Internet-based services for ordering photo albums achieved further advances to deliver photo images with a level of color representation*1 that is on the and other merchandise. Demand for high-quality whole superior to that of silver halide systems, print-on-demand (POD) systems that can produce high-resolution photos together with high-quality text is also expected to increase. Against this background, Canon launched its DreamLabo 5000 com- mercial photo printer. Here, Canon leveraged its inkjet technologies DreamLabo 5000 along with high-definition text. DreamLabo's exceptional productiv- ity enables high-speed printing of the contents of a 20-page A4-size photo album in just 72 seconds.*2 *1 Compared with conventional silver halide photos. Based on Canon research. *2 A completed photo album requires a sepa- rate bookbinding process. Strategy BUSINESS UNITS Management System Financial Section (cid:18)14 (cid:18)23 23 C O N S U M E R B U S I N E S S U N I T F U L L - F L E D G E D E N T R Y I N T O M O T I O N P I C T U R E P R O D U C T I O N M A R K E T I N H O L L Y W O O D In recent years, the motion pic- combination of high-performance components. ture industry has seen advances These include a diverse lineup of interchangeable in digitization and image reso- lenses compatible with 4K resolution (the next-gen- lution. Canon has already earned accolades for the eration high-definition standard), a digital video exceptional image quality and sublime imaging camcorder equipped with a large CMOS sensor expression offered by (cid:498)EOS MOVIES,(cid:499) which utilizes that delivers image resolution of approximately its EOS digital SLR cameras and its wide array of EF lenses, and has been used in Hollywood movie pro- duction. Against this background, Canon launched the Cinema EOS System in November 2011. This sys- tem enables expressive images of exceptional quality, thanks to its Cinema EOS System 8.29 megapixels, and a next-gener- ation digital SLR camera with a 4K video recording function. The launch of the Cinema EOS System provides Canon with a platform for expanding into the broader field of cinematographic lenses and cameras. I N D U S T R Y A N D O T H E R S B U S I N E S S U N I T C A N O N E N H A N C E S C X D I - S E R I E S D I G I T A L R A D I O G R A P H Y S Y S T E M L I N E U P Since releasing the world’s first portable CXDI-501C/501G fitted with a convenient digital radiography system in handle, as well as the CXDI-80C Wireless, an 11 x 1998, Canon has made signifi- 14-inch, cassette-sized model that can transmit cant contributions to the digital evolution in image data wirelessly. Canon’s digital radiography diagnostic imaging. In 2011, Canon introduced a systems enable high image quality and high-resolu- succession of new products to the medical imaging tion diagnostic imaging with reduced X-ray market. For example, Canon released four models in the new CXDI-401 series of stationary full- size systems, which can be used without the need to substantially modify existing analog imaging diagnostic equipment. Canon also launched the slim, lightweight, CXDI-80C Wireless exposure for patients. In addition to hospital-based X-ray imaging, these systems will be used in a variety of settings, including mobile health care vehicles and at the scene of disasters. 24 M A N A G E M E N T S Y S T E M > C O R P O R A T E G O V E R N A N C E C O R P O R A T E G O V E R N A N C E Canon maintains sound corporate governance as part of efforts to maximize its stockholders(cid:495) value and become a truly excellent global corporation. The San-ji (“Three Selfs”) spirit are an important guiding principle to become a truly excellent global corporation. B A S I C P O L I C Y A N D C O R P O R A T E G O V E R N A N C E S T R U C T U R E Canon recognizes that management supervision functions and management transparency are vital to strengthening its corporate governance and further raising corporate value. Canon(cid:495)s basic governance structure comprises the General Meeting of Shareholders, the Board of Directors and the Board of Corporate Auditors. Furthermore, the Executive Committee 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 internal auditing structure under- pinned by the Corporate Audit Center and an information disclosure system for management activities. B O A R D O F D I R E C T O R S Important business matters are discussed and ratified during meetings of the Board of Directors and Executive Committee. As of December 31, 2011, the board consisted of 19 directors. In order to facilitate more practical and efficient decision making, the board is entirely composed of internal directors who have well-developed knowledge of the Company(cid:495)s affairs. Also, the board is supported by various management committees that address important management issues in their specific fields. These commit- tees complement the Company(cid:495)s management system by business unit, facilitate efficient decision making and realize a mutual supervisory function for such matters as compliance and ethics. Directors & Corporate Auditors (as of December 31, 2011) Chairman & CEO Fujio Mitarai President & COO Tsuneji Uchida Executive Vice President & CFO Toshizo Tanaka Senior General Manager, External Relations Center Senior General Manager, Corporate Communications Center Group Executive, Finance & Accounting Headquarters Vice Chairman, Supervisory Board of Oc(cid:177) N. V. Executive Vice President & CTO Toshiaki Ikoma Group Executive, Corporate R&D Senior Managing Directors Kunio Watanabe Group Executive, Corporate Planning Development Headquarters Yoroku Adachi President & CEO, Canon U.S.A., Inc. Yasuo Mitsuhashi Chief Executive, Peripheral Products Operations Shigeyuki Matsumoto Group Executive, Device Technology Development Headquarters Managing Directors Tomonori Iwashita Group Executive, Environment Headquarters Group Executive, Quality Management Headquarters Masahiro Osawa Group Executive, Global Procurement Headquarters Group Executive, General Affairs 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, Office Imaging Products Operations Haruhisa Honda Group Executive, Production Engineering Headquarters Hideki Ozawa President & CEO, Canon (China) Co., Ltd. Masaya Maeda Chief Executive, Image Communication Products Operations Directors Yasuhiro Tani Group Executive, Digital Platform Technology Development Headquarters Makoto Araki Group Executive, Information & Communication Systems Headquarters Corporate Auditors Keijiro Yamazaki Shunji Onda Tadashi Ohe (Outside) Kazunori Watanabe (Outside) Kuniyoshi Kitamura (Outside) Strategy Business Units MANAGEMENT SYSTEM MANAGEMENT SYSTEM Financial Section (cid:18)24 (cid:18)36 25 Governance Structure (as of December 31, 2011) Canon Inc. General Meeting of Shareholders Board of Directors Executive Officers Board of Corporate Auditors Representative Directors Executive Committee Chairman & CEO President & COO Executive Vice President & CFO Executive Vice President & CTO Management Strategy Committee Corporate Audit Center New Business Development Committee Headquarters Administrative Divisions Corporate Ethics and Compliance Committee Office Business Unit Internal Control Committee Consumer Business Unit Disclosure Committee Industry and Others Business Unit Subsidiaries & Affiliates Marketing Subsidiaries & Affiliates Manufacturing Subsidiaries & Affiliates R&D Subsidiaries & Affiliates E X E C U T I V E O F F I C E R S Y S T E M Canon is endeavoring to realize more flexible and effi- cient management operations by maintaining an appropriately sized organization of directors and pro- moting capable human resources with accumulated executive knowledge across specific business areas. Executive officers are appointed and dismissed by the Board of Directors and have a term of office of one year. The number of executive officers was 15 as of December 31, 2011. A U D I T I N G S Y S T E M Canon has five corporate auditors, including three out- side corporate auditors who have no personal, capital or business affiliations with the Company. Canon has noti- fied the stock exchanges in Tokyo, Osaka, Nagoya, Fukuoka and Sapporo of the designation of these outside corporate auditors as independent auditors, as provided under the regulations of the stock exchanges. Corporate auditors(cid:495) duties include attending meetings of the Board of Directors and of the Executive Committee, listening to business reports from directors, carefully examining doc- uments related to important decisions and conducting strict audits of the Group(cid:495)s business and assets. Corporate auditors also work closely with accounting auditors and the Corporate Audit Center, which is in charge of moni- toring the Company(cid:495)s compliance, risk management and internal control systems in addition to providing assess- ments and recommendations as required. I N T E R N A L C O N T R O L C O M M I T T E E In response to the Sarbanes-Oxley Act, including Section 404, which came into force during 2006, Canon contin- ues to reinforce internal control systems and implement appropriate measures. The Internal Control Committee is responsible for Groupwide internal controls, including securing credibility of financial reporting. In order to strengthen internal controls, Canon con- ducts comprehensive evaluations of internal controls across areas that include accounting, management oversight, legal compliance, IT systems and the promo- tion of corporate ethics. As of December 31, 2011, internal control over financial reporting has been assessed as effective by the management and an inde- pendent registered public accounting firm. (Please refer to pages 97 and 99.) At Group companies worldwide, employees carry with them compliance cards. 26 M A N A G E M E N T S Y S T E M > C O R P O R A T E G O V E R N A N C E O T H E R C O M M I T T E E S The Corporate Ethics and Compliance Committee, in addition to the Disclosure Committee, is the key body of Canon(cid:495)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 Disclosure Committee works to ensure strict com- pliance with disclosure regulations as prescribed by stock exchanges. C O M P L I A N C E Shortly after its founding, Canon established the San-Ji, or (cid:498)Three Selfs(cid:499) spirit(cid:516)namely: (cid:498)self-motivation,(cid:499) or tak- ing the initiative and being proactive in all things; (cid:498)self-management,(cid:499) or conducting oneself responsibly and being accountable for all one(cid:495)s actions; and (cid:498)self- awareness,(cid:499) or understanding one(cid:495)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 information, Canon does its utmost to protect this valu- able form of information asset in the course of fulfilling 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. D I S C L O S U R E Canon makes every effort to disclose information on its management and business strategies as well as its per- formance results to all stakeholders in an accurate, fair and timely manner. To this end, Canon holds regular briefings and posts the latest information on its website together with a broad range of disclosure materials. Canon has formulated its own Disclosure Guidelines and established the Disclosure Committee, which Significant Differences in Corporate Governance Practices between Canon and U.S. Companies Listed on the NYSE Section 303A of the New York Stock Exchange (the (cid:498)NYSE(cid:499)) Listed Company Manual (the (cid:498)Manual(cid:499)) provides that compa- nies listed on the NYSE must comply with certain corporate governance standards. However, foreign private issuers whose shares have been listed on the NYSE, such as Canon Inc. (the (cid:498)Company(cid:499)), are permitted, with certain exceptions, to follow the laws and practices of their home country in place of the corporate governance practices stipulated under the Manual. In such circumstances, the foreign private issuer is required to disclose the significant differences between the corporate governance practices under Section 303A of the Manual and those required in Japan. A summary of these dif- ferences as they apply to the Company is provided below. 1. Directors Currently, the Company(cid:495)s Board of Directors does not have any director who could be regarded as an (cid:498)independent direc- tor(cid:499) under the NYSE Corporate Governance Rules for U.S. listed companies. Unlike the NYSE Corporate Governance Rules, the Corporation Law of Japan (the (cid:498)Corporation Law(cid:499)) does not require Japanese companies with a board of corpo- rate auditors such as the Company, to appoint independent directors as members of the board of directors. The NYSE Cor- porate Governance Rules require non-management directors of U.S. listed companies to meet at regularly scheduled execu- tive sessions without the presence of management. Unlike the NYSE Corporate Governance Rules, however, the Corporation Law does not require companies to implement an internal corporate organ or committee comprised solely of independ- ent directors. Thus, the Company(cid:495)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 audi- tors, whose duties include monitoring and reviewing the management and reporting the results of these activities to the stockholders or Board of Directors of the Company. While the NYSE Corporate Governance Rules provide that U.S. listed companies must have an audit committee, nominating com- mittee and compensation committee, each composed entirely of independent directors, the Corporation Law does not require companies to have specified committees, including those that are responsible for director nomination, corporate governance and executive compensation. The Company(cid:495)s Board of Directors nominates candidates for directorships and submits a proposal at the General Meeting of Shareholders for stockholder approval. Pursuant to the Corpo- ration Law, the stockholders then vote to elect directors at the meeting. The Corporation Law requires that the total amount or calculation method of compensation for directors and cor- porate auditors be determined by a resolution of the General Meeting of Shareholders respectively, unless the amount or calculation method is provided under the Articles of Incorpo- ration. As the Articles of Incorporation of the Company do not provide an amount or calculation method, the amount of com- Strategy Business Units MANAGEMENT SYSTEM MANAGEMENT SYSTEM Financial Section (cid:18)24 (cid:18)36 27 makes decisions regarding information disclosure, including necessity, content and timing. The Disclosure Committee makes such decisions after receiving reports on information that might need to be disclosed from the person in charge of the disclosure working group at each headquarters. C O U N T E R I N G A N T I S O C I A L F O R C E S Canon has formulated a basic policy stipulating that no Canon Group company 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 activi- ties aimed at countering such parties while reinforcing cooperative ties with applicable public authorities. In addition, Canon(cid:495)s Employment Regulations include a clause prohibiting such relationships, and the Company continues to step up efforts to ensure strict employee adherence. R I S K M A N A G E M E N T As Canon pursues business expansion in various fields 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 altogether, while honoring the trust placed in it by its stakeholders, Canon works diligently to avoid or minimize its exposure, to this end assigning specifically designated management commit- tees to address key issues. In particular, the Executive Committee and various management committees engage in careful discussions regarding significant risk factors. The Corporate Audit Center preemptively identifies 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. pensation for the directors and corporate auditors of the Com- pany is determined by a resolution of the General Meeting of Shareholders. The allotment of compensation for each director from the total amount of compensation is determined by the Company(cid:495)s Board of Directors, and the allotment of compensa- tion to each corporate auditor is determined by consultation among the Company(cid:495)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 pri- vate issuer which has established a board of corporate auditors shall be exempt from the audit committee require- ments, subject to certain requirements which continue to be applicable under Rule 10A-3. Pursuant to the requirements of the Corporation Law, the stockholders elect the corporate auditors by resolution of a gen- eral meeting of shareholders. The Company currently has five corporate auditors, although the minimum number of corpo- rate 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 com- pany, and may resolve other matters concerning the execution of the corporate auditor(cid:495)s duties. The Board of Corporate Audi- tors prepares auditors(cid:495) reports and may veto a proposal for the nomination of corporate auditors, accounting auditors and the determination of the amount of compensation for the account- ing auditors put forward by the Board of Directors. Under the Corporation Law, the half or more of a company(cid:495)s corporate auditors must be (cid:498)outside(cid:499) corporate auditors. These are individuals who are prohibited to have ever been a director, executive officer, manager, or employee of the Company or its subsidiaries. The Company(cid:495)s current corporate auditor system meets these requirements. In addition, pursuant to the regula- tions of the Japanese stock exchanges, the Company is required to have one or more (cid:498)independent director(s) or independent corporate auditor(s)(cid:499) which terms are defined under the rele- vant regulations of the Japanese stock exchanges as (cid:498)outside directors(cid:499) or (cid:498)outside corporate auditors(cid:499) (each of which terms is defined under the Corporation Law) who are unlikely to have any conflict of interests with shareholders of the Company. Among the five members on the Company’s board of audi- tors, three are outside corporate auditors. In addition, all such three outside corporate auditors are also qualified as independent corporate auditors under the regulations of the Japanese stock exchanges. The qualifications for an (cid:498)outside(cid:499) or (cid:498)independent(cid:499) corpo- rate auditor under the Corporation Law or the regulations of the Japanese stock exchanges are different from the audit committee independence requirement under the NYSE Cor- porate Governance Rules. 4. Shareholder Approval of Equity Compensation Plans The NYSE Corporate Governance Rules require that sharehold- ers be given the opportunity to vote on all equity compensation plans and any material revisions of such plans, with certain limited exceptions. Under the Corporation Law, a company is required to obtain stockholder approval regarding the stock options to be issued to directors and corporate auditors as part of remuneration of directors and corporate auditors. 28 M A N A G E M E N T S Y S T E M > R E S E A R C H & D E V E L O P M E N T R E S E A R C H & D E V E L O P M E N T Seeking new possibilities for Canon, the Company is establishing R&D structures in Japan, the United States, and Europe under a Three Regional Headquarters management system. At the same time, Canon will develop the medical and industrial fields into new business pillars. Canon is actively advancing research and development activities, which may take a relatively long time. For example, the Company is currently engaged in the development of next-generation printing material technology. 2011 TOP TEN U.S. PATENT HOLDERS BY COMPANY E X PA N S I O N O F O U R I N N O VA T I O N C E N T E R S Canon’s growth to date has been attributable to employing strong technologies to develop competitive products, mainly in Japan, and then disseminating those 6,163 offerings around the world. Going forward, the Company will set up innovation 4,899 centers in Europe and the United States as well, laying the foundation for the IBM* Samsung Electronics CANON Panasonic Toshiba Microsoft Sony 2,813 2,566 2,478 2,306 2,282 Seiko Epson 1,535 Hon Hai Precision Industry Hitachi 1,485 1,464 * IBM is an abbreviation for International Business Machines Corporation. Source: U.S. Patent and Trademark Office. Calculated based upon publicly disclosed weekly totals Three Regional Headquarters management system that Canon envisions. In the United States, Canon will set up centers to pursue activities rang- ing from research into fundamental technologies in healthcare and other new business fields to the application of cutting-edge technologies. In Europe, the Company will reinforce R&D on business products, spearheaded by Oc(cid:177) N.V., in addition to R&D in new business fields. R & D E X P E N S E S A N D PA T E N T S Canon is bolstering R&D activities to enable the ongoing development of innovative products and services. In the year under review, R&D expenses amounted to ¥307.8 billion, down 2.5%, or ¥8.0 billion, from the previous year. The ratio of R&D expenses to net sales was 8.7%. By segment, the Company allocated ¥103.4 billion (33.6% of total R&D expenses) to the Office Business Strategy Business Units MANAGEMENT SYSTEM MANAGEMENT SYSTEM Financial Section (cid:18)24 (cid:18)36 29 Unit, ¥82.7 billion (26.9%) to the Consumer Business Unit, and ¥27.1 billion (8.8%) to the Industry and Others Business Unit. Basic R&D expenses not allo- cated to specific business units amounted to ¥94.6 billion (30.7%). This focus on R&D activities has cemented Canon’s high status in the field of intellectual property. In 2011, Canon was granted 2,813 patents in the United States. R E I N F O R C I N G C O R E T E C H N O L O G I E S Canon is concentrating efforts on pre-competitive fields, involving research that can take more than ten years. At the same time, the Company is contin- ually bolstering activities centered on key components and key devices in order to enhance the competitiveness of its products. In 2011, a telescope equipped with Canon’s world-class ultra-high sensitivity CMOS image sensor, measuring around 20 cm by 20 cm, made the world’s first video recording of meteors in dark conditions with an equivalent apparent magnitude of 10. M E D I C A L A N D I N D U S T R I A L E Q U I P M E N T Canon is drawing on its imaging technologies, amassed over many years, to diversify into the medical imaging field. Recently, the Company provided Kyoto University with a donation to establish the Clinical Research Center for Medical Equipment Development (CRCMeD), founded in 2011. Under the Kyoto University/Canon Joint Research Project, the Center is accelerating clinical research into the use of an optical ultrasound mammography sys- tem in breast cancer examinations. Because it does not expose patients to radiation, this method significantly reduces the physical effects on patients. Our R&D base in the United States is undertaking research on genetic diag- nostic systems with the aim of establishing practical applications for these systems in the near future. In addition to the current joint research project with the University of Utah, we commenced joint research with the University of Maryland in 2011, in order to nurture future technologies. In the field of factory automation, Canon is working to realize intelligent robots for industrial applications. One technology being developed for these robots is Super Machine Vision, which employs cutting-edge image recogni- tion and image measuring technologies to realize vision that is superior to human vision. Canon is also considering applying such technologies to the areas of hazard prediction and elderly nursing care. In addition, by applying Mixed Reality (MR) technology(cid:516)an imaging technology that seamlessly integrates the real and virtual worlds in real time(cid:516)Canon is aiming to commercialize development and manufacturing solutions for application in design and manufacturing operations. Canon succeeded in developing an ultra- large-scale CMOS image sensor, which is expected to be used in surveillance cameras for night use and other applications. Canon U.S. Life Sciences, Inc. is Canon’s base for research and development of groundbreaking genetic diagnostic systems in the United States, where genetic diagnosis is gaining momentum. 30 M A N A G E M E N T S Y S T E M > P R O D U C T I O N P R O D U C T I O N In addition to establishing a globally optimized production system, Canon seeks improved quality and productivity by putting a priority on conducting production operations itself to ensure the progress of its manufacturing expertise. Canon’s “man-machine cell” production inte- grates automated equipment into the cell production system. (Nagasaki Canon Inc.) Canon Virginia Inc. realizes a “Made in America” production model for toner cartridges, which promotes “manufacturing in the local market.” E S T A B L I S H I N G A G L O B A L L Y O P T I M I Z E D P R O D U C T I O N S Y S T E M Canon aims to establish a globally optimized production system that identi- fies the most suitable locations worldwide for the production of individual products based on a comprehensive assessment of various considerations. These factors include cost, taxation, logistics, the ease of parts procurement, and the workforce. An optimized system will lead to additional improve- ments in productivity for the entire Canon Group. In the United States, for example, Canon has implemented a business model for toner cartridges that incorporates everything from automated pro- duction to sales, collection, and recycling at the point of consumption of its products. Canon is considering to apply this model in Europe and Asia as well. B O L S T E R I N G P R O D U C T I O N C A PA C I T Y Under the globally optimized production system, Canon is working to rein- force its production structure on a global scale in anticipation of growth in product demand. Strategy Business Units MANAGEMENT SYSTEM MANAGEMENT SYSTEM Financial Section (cid:18)24 (cid:18)36 31 In 2011, Canon Hi-Tech (Thailand) Ltd. commenced operations at its new inkjet printer plant, and Hita Canon Materials Inc. began construction of a toner cartridge parts and toner plant, which is scheduled to start opera- tion sometime in 2012. I M P R O V I N G P R O D U C T I V I T Y By putting a priority on conducting production operations itself, Canon seeks to raise quality and reduce costs through progress in manufacturing by making full use of the expertise and insights of individual workers engaged in production. To this end, the Company has adopted a cell pro- duction system(cid:516)an approach that fully utilizes the creativity of individual workers. Canon continues to improve productivity by making efforts to increase production efficiencies in cell production while rolling out (cid:498)man-machine cell(cid:499) production systems that integrate manual and auto- mated processes. In addition to increasing the rate of automation in the production of toner cartridges, Canon will be promoting automated production of other items that lend themselves to this method. Until now, Canon has been undertaking the production of image sensors and other key components and devices in-house. Due to shortages of some components as a result of the Great East Japan Earthquake and the floods in Thailand, Canon is escalating the shift to in-house production while assessing the importance of individual components. Meanwhile, by implementing IT innovations that link development, design, production, logistics, and sales and seek to achieve further efficien- cies, Canon aims to establish advanced supply chain management that is capable of withstanding fluctuations in demand. Q U A L I T Y F I R S T As a manufacturer, quality is Canon’s most important lifeline. With the goal of further improving product quality, Canon is working to control quality defects by focusing on actual numbers instead of percentages, with the aim of integrating company-wide management and analysis. Canon will continue pursuing optimal quality through close collabora- tion between the production and development departments, in order to Canon is aiming to achieve fully automated production that realizes high quality and sta- ble operation 24 hours a day, 365 days a year. BELIEF IN “INTERNAL PRODUCTION” In-House Production Automation Man-Machine Cell • Production Efficiency Improvement • Production Efficiency Improvement • Production Localization • Cost Reduction from Design Phase • Lead Time Reduction • Further Automation • Cost Reduction • Product Differentiation •Technology Protection • Production Flexibility • Lead Time Reduction • Quality Improvement Internal Production create designs that expedite manufacturing, as well as by making the most of quality improvement initiatives being implemented by workers on the factory floor. 32 M A N A G E M E N T S Y S T E M > S A L E S & M A R K E T I N G S A L E S & M A R K E T I N G Canon bolsters its sales and marketing capabilities by providing advanced solutions and innovative products tailored to meet the characteristics of each region. Canon launched Cinema EOS System, and has opened the Canon Hollywood Professional Technology & Support Center for professionals in the motion picture and television industries. CONSTITUTION OF SALES BY REGION Asia and Oceania 22.2% ¥788.0 billion The Americas 27.0% ¥961.9 billion Net Sales ¥3,557.4 billion G E N E R A L R E V I E W In all existing core businesses, Canon is strengthening its sales, marketing, and service functions by responding to actual conditions based on analyses of the features of each region. In 2011, Canon focused on expanding sales in emerging countries and resource-producing countries that are experiencing significant economic growth. In China, Canon increased its sales force and implemented various other measures aimed at boosting sales. Canon has been expanding its businesses by taking full advantage of the products and sales network of Oc(cid:177) N.V. on a global scale. Canon made efforts to market globally a standardized Canon Managed Document Japan 19.5% ¥694.4 billion Europe 31.3% ¥1,113.1 billion Services (Canon MDS), a comprehensive document management service that creates optimal document input-output environments for customers, target- ing global companies as its main customers. At the same time, Canon has engaged in a cloud-based solutions business by offering a document man- agement service using a cloud platform, and other services. Strategy Business Units MANAGEMENT SYSTEM MANAGEMENT SYSTEM Financial Section (cid:18)24 (cid:18)36 33 T H E A M E R I C A S In the year under review, sales in the Americas totaled ¥961.9 billion (27.0% of consolidated net sales). In April 2011, Canon established a solutions business subsidiary, Canon Information and Imaging Solutions, Inc., in the United States. In addition to Canon’s existing documentation-oriented solutions, the new company will pursue broader solutions, including IT-based applications. Canon Information and Imaging Solutions seeks to enhance customer service value and expand its customer base by cultivating previously untapped markets. E U R O P E ( E U R O P E , T H E M I D D L E E A S T A N D A F R I C A ) Sales in Europe amounted to ¥1,113.1 billion (31.3% of consolidated net sales). In 2011, Canon Europe Ltd. further strengthened its sales and marketing functions in emerging markets, such as Russia and Turkey, by increasing its sales force in those markets and through other measures. Accordingly, Canon Europe steadily expanded its business in those markets. In addition, Canon Europe has expedited expansion of Canon’s solutions business by focusing on Canon’s proprietary Managed Print Services (MPS), and stepping up sales of uniFLOW, a unified print and scan platform solution that now has smartphone connectivity. A S I A A N D O C E A N I A In Japan, sales totaled ¥694.4 billion (19.5% of consolidated net sales), while sales in Oceania and Asia (excluding Japan) amounted to ¥788.0 billion (22.2% of consolidated net sales). In Japan, initiatives to bolster Canon’s solutions business included the establishment of an organization dedicated to cloud service and the launch of a cloud-based document management service ahead of other developed countries. In China and Southeast Asia, Canon worked hard to further expand its sales networks and offer an extensive product lineup amid continued steady growth in each market. As a result, it achieved a double-digit increase in sales for the entire Asian region compared with the previous year. In Australia’s challenging business environment, Canon worked to improve the efficiency of sales activities and increase the market share of its products in the local market. At Graphispag 2011, an international print media trade fair held in Barcelona, Canon and Océ shared a booth, displaying their lineup of products and solutions. Canon China’s showroom in Beijing displays Canon’s latest products, including hands-on demonstration by staff members. 34 M A N A G E M E N T S Y S T E M > C O R P O R A T E S O C I A L R E S P O N S I B I L I T Y C O R P O R A T E S O C I A L R E S P O N S I B I L I T Y Canon is promoting CSR activities with the aim of becoming a truly excellent global corporation that is admired and respected the world over. In 1990, Canon established Toner Cartridge Collection and Recycling Program—an unthinkable initiative in the electronic devices field at the time—and has achieved the recycling of used cartridges collected without using them for landfill. Under the Canon—Green Library for Kids program, which is part of the Canon—For a Green Vietnam project, Canon has donated more than 40,000 used books to elementary and junior high schools in Vietnam. C A N O N ’ S B A S I C A P P R O A C H T O C S R Canon recognizes that its corporate activities are supported by the develop- ment of society as a whole, and contributes to the realization of a better society as a good corporate citizen, effectively leveraging its advanced tech- nological strengths, global business deployment, and diverse, specialized human resources. E N V I R O N M E N T A L A C T I V I T I E S In line with (cid:498)Action for Green,(cid:499) the Canon Environmental Vision, Canon strives to support both enriched lifestyles and the global environment. As an environmentally advanced corporation, we are steadily working to cut CO2 emissions and use resources effectively over the entire product lifecycle while providing customers improved functionality and ease of use. In 2011, we rolled out new software called the Ecology Information Plug-in*. This software allows the monitoring of power consumption and CO2 emissions of office-use MFDs and laser printers. Strategy Business Units MANAGEMENT SYSTEM MANAGEMENT SYSTEM Financial Section (cid:18)24 (cid:18)36 35 Canon is also engaged in various initiatives aimed at protecting the envi- ronment, tackling important environmental issues such as biodiversity and global warming. * The Ecology Information Plug-in is available as an option with Canon's imageWARE Enterprise Management Console network device management utility. WWF-Canon Polar Bear Tracker Canon Europe Ltd. became WWF (World Wide Fund for Nature)’s conserva- tion partner in 1998. Since 2007, we have been promoting the WWF-Canon Polar Bear Tracker project, which tracks the movements of polar bears in the Arctic by satellite as a means of studying the impact of global warming. As part of the project, the WWF and Canon Europe have established a polar bear-themed environmental education website for children to increase chil- dren’s awareness of global environmental conservation. Continued Support for the Canon Envirothon in North America Since 1998, Canon U.S.A., Inc. has been a sponsor of the Canon Envirothon, an environmental contest for high school students. With more than 500,000 teenagers taking part in the Canon Envirothon each year, it has grown into one of the largest contests of its kind in North America. Participants deepen their understanding of the natural environment through hands-on fieldwork and other activities. S O C I A L C O N T R I B U T I O N A C T I V I T I E S Canon conducts wide-ranging social contribution activities in all parts of the world, as a (cid:498)good corporate citizen.(cid:499) Providing Aid to Areas Hit by the Great East Japan Earthquake Following the Great East Japan Earthquake that occurred in March 2011, Canon has been providing support for restoration and reconstruction efforts through a variety of activities. In addition to making monetary dona- tions, we have donated Canon products such as five portable digital radiography systems given to the Japanese Red Cross Society to support medical efforts. We also donated office equipment and refrigerated contain- ers to support the recovery of the fishing industry in cooperation with the (cid:498)Signal of Hope(cid:499) project. The WWF-Canon Polar Bear Tracker project has revealed new evidence that indicates the progressive melting of Arctic ice. © Angela Plumb/WWF-Canon The top ten teams in Canon’s Envirothon, an environmental contest, are awarded Canon scholarships, to fund further study. 36 M A N A G E M E N T S Y S T E M > C O R P O R A T E S O C I A L R E S P O N S I B I L I T Y In 2011, under the “Tsuzuri Project,” Canon donated to Kennin-ji temple in Kyoto high- resolution facsimiles it had made of 20 sliding panels belonging to the temple’s col- lection. The panels, which have been designated as “Important Cultural Property,” comprise 16 panels of the “Seven Sages in a Bamboo Grove” series and four panels of the “Landscapes” series. Canon invites engineers and technicians from production sites in Southeast Asia and China to the Manufacturing Training Center in Japan to take part in training programs. The Tsuzuri Project Canon and the non-profit organization Kyoto Culture Association jointly pro- mote a project called the (cid:498)Tsuzuri Project(cid:499) (Official title: Cultural Heritage Inheritance Project). The aim of the project is to blend Canon’s latest digital technology and traditional Japanese crafts, such as gold leaf craftwork, to create high resolution facsimiles of folding screens and other ancient Japanese cultural assets, while keeping the original cultural assets in more favorable environments. In 2011, reproductions of six assets were donated to temples and museums. In the four years since the launch of the project in 2007, a total of 21 cultural assets have been reproduced and donated. Canon Vietnam’s (cid:498)For a bright future(cid:499) Scholarship Program In 2011, Canon Vietnam Co., Ltd. continued implementing a scholarship project, (cid:498)For a bright future(cid:499) program, for secondary school students in underprivileged regions. This program is aimed at helping and encouraging underprivileged students to continue studying. Thanks to this program, in 2011, 600 underprivileged students received Canon scholarships, covering educational and living expenses. A D D R E S S I N G T H E I S S U E O F C O N F L I C T M I N E R A L S The term (cid:498)conflict minerals(cid:499) refers to certain minerals originating in the Democratic Republic of the Congo and adjoining countries in Africa, the profit from the trade of which, provided through the global supply chain, is alleged to be funding armed groups in that region. There is growing concern worldwide about the issue of conflict minerals. In the United States, for example, legislation has been enacted requiring publicly listed companies to disclose their usage of such minerals. Canon began investigations into conflict minerals in 2010 and established a project team at its headquarters in 2011. In these ways, the Company is working to create a framework for responding to legal regulations and guide- lines from international organizations. Seeking to ensure that customers use Canon’s products with peace of mind, the Company is working together with business partners and industry entities to identify the history of minerals used in its products with the aim of avoiding the use of conflict minerals. C U L T I VA T I N G D I V E R S E H U M A N R E S O U R C E S In order to achieve sustainable globalization, Canon must work constantly to cultivate a talented workforce. Canon has established a management training program to train executives, and help them to upgrade their skills and strengthen their sense of mission. Given our priority to keep produc- tion in-house, it is important for us to cultivate personnel with world-class skills and expertise on a global scale. StrategyBusiness UnitsManagement SystemFINANCIAL SECTION37!37!101FINANCIAL SECTION37FINANCIAL SECTIONTABLE OF CONTENTSFINANCIALOVERVIEW38TEN-YEARFINANCIALSUMMARY54CONSOLIDATEDBALANCE SHEETS56CONSOLIDATEDSTATEMENTS OFINCOME57CONSOLIDATEDSTATEMENTS OFEQUITY58CONSOLIDATEDSTATEMENTS OFCASH FLOWS60NOTES TOCONSOLIDATEDFINANCIALSTATEMENTS61MANAGEMENT’SREPORT ONINTERNALCONTROL OVERFINANCIALREPORTING97REPORTS OFINDEPENDENTREGISTEREDPUBLICACCOUNTINGFIRM98FINANCIALSECTION38FINANCIAL SECTION>FINANCIAL OVERVIEWFINANCIAL OVERVIEWGENERALThe following discussion and analysis provides informationthat management believes to be relevant to understandingCanon’s consolidated financial condition and results of oper-ations. References in this discussion to the !Company"are toCanon Inc. and, unless otherwise indicated, references to thefinancial condition or operating results of !Canon"refer toCanon Inc. and its consolidated subsidiaries.OVERVIEWCanon is one of the world’s leading manufacturers of plainpaper copying machines, digital multifunction devices(!MFDs"), laser printers, cameras, inkjet printers, semiconduc-tor lithography equipment and liquid crystal display (!LCD")lithography equipment. Canon earns revenues primarilyfrom the manufacture and sale of these products domesti-cally and internationally. Canon’s basic management policyis to contribute to the prosperity and well-being of the worldwhile endeavoring to become a truly excellent global corpo-rate group targeting continued growth and development. Canon divides its businesses into three segments: theOffice Business Unit, the Consumer Business Unit, and theIndustry and Others Business Unit.Economic environmentLooking back at the global economy in 2011, amid increasinguncertainty in the second half of the year as the pace of recov-ery decelerated due to economic downturn in the UnitedStates and Europe, the economy as a whole continued togrow moderately, primarily driven by emerging economies.In the United States, a lack of improvement in employmentconditions and housing problems led to a lower rate ofgrowth, while in Europe, the sovereign debt crisis negativelyaffected the real economy, which led to a noticeable slow-down in recovery. Emerging markets, such as China andIndia, maintained a high rate of growth amid concerns overthe effects of tight monetary policies. In Japan, severe circum-stances persisted following the Great East Japan Earthquakein March and, just as production activities began showingsigns of recovery, Thailand was hit with massive flooding inOctober, resulting in a slowdown of the economy.Market environmentAs for the markets in which Canon operates amid these con-ditions, within the office equipment market, demand forcolor network digital MFDs showed growth in all regionsaround the globe. As for laser printers, while robust demandin emerging markets fueled growth, European marketscooled in the second half of the year. Within the consumerproducts market, demand for digital SLR cameras continuedto display healthy growth across global markets whiledemand for compact digital cameras grew in emergingnations but remained sluggish in developed countries.Overall demand for inkjet printers was supported by steadygrowth in emerging economies. In the industry and othersmarket, despite somewhat restrained investment in semicon-ductor lithography equipment used to manufacture DRAMmemory devices, the market recorded robust growth overall.As for LCD lithography equipment, despite solid demand forequipment to manufacture mid- and small-size LCD panelsused in smartphones, demand for equipment used to manu-facture large-size LCD panels remained sluggish. The average value of the yen during the year was ¥79.55against the U.S. dollar, a year-on-year appreciation of approxi-mately ¥8 or 9%, and ¥110.72 against the euro, a year-on-yearappreciation of approximately ¥4 or 4%.Summary of operationsOwing to the historically high valuation of the yen com-bined with the effects of the earthquake and floods, all ofCanon’s businesses faced extremely demanding conditionsthroughout the year. Amid this harsh environment, Group-wide efforts to swiftly restore production in the aftermathof the disasters, coupled with efforts to maximize produc-tion and boost sales, led to net sales for the year totaling¥3,557.4 billion (U.S.$45,608 million), a year-on-year declineof 4.0%. Despite the significant negative impact of thestrong yen and the effects of the earthquake and floods, thegross profit ratio rose 0.7 points year-on-year to 48.8%,owing to the further acceleration of production innovationactivities. Gross profit, however, decreased by 2.6% to¥1,736.8 billion (U.S.$22,266 million) for the year.Operating expenses totaled ¥1,358.7 billion (U.S.$17,419million), a decrease of 2.6%, owing to comprehensivespending cuts across the Canon Group implemented afterthe earthquake to control expenses more efficiently. Cost-reduction and expense-cutting activities contributed tofurther reinforcing the company’s financial structure,which helped make up for the significant drop in revenuein the first half of the year mainly triggered by the earth-quake, while also absorbing the financial impact of thestrong yen and the floods in the second half of the year. Asa result, operating profit dipped 2.4% to ¥378.1 billion(U.S.$4,847 million) for the year and other income (deduc-tions) declined ¥8.9 billion (U.S.$114 million), mainly dueto foreign currency exchange losses, leading to incomebefore income taxes of ¥374.5 billion (U.S.$4,802 million), adecrease of 4.7% year-on-year. Net income attributable toCanon Inc., however, grew by 0.8% to ¥248.6 billion(U.S.$3,188 million) for the year owing to the lower effec-tive income tax rate compared with the previous year. Key performance indicatorsThe following are the key performance indicators (!KPIs") thatStrategyBusiness UnitsManagement SystemFINANCIAL SECTION39!37!101FINANCIAL SECTION!02!13!14!23!24!37!24!37Canon uses in managing its business. The changes from year toyear in these KPIs are set forth in the table shown on page 39.RevenuesAs Canon pursues the goal to become a truly excellentglobal company, one indicator upon which Canon’s man-agement places strong emphasis is revenue. The followingare some of the KPIs related to revenue that managementconsiders to be important.Net sales is one such KPI. Canon derives net sales primarilyfrom the sale of products and, to a much lesser extent, provi-sion of services associated with its products. Sales varydepending on such factors as product demand, the numberand size of transactions within the reporting period, marketacceptance for new products, and changes in sales prices.Other factors involved are market share and market environ-ment. In addition, management considers the evaluation ofnet sales by segment to be important for the purpose ofassessing Canon’s sales performance in various segments, tak-ing into account recent market trends.Gross profit ratio (ratio of gross profit to net sales) isanother KPI for Canon. Through its reforms of product devel-opment, Canon has been striving to shorten productdevelopment lead times in order to launch new, competitivelypriced products at a faster pace. Furthermore, Canon has fur-ther achieved cost reductions through enhancement ofefficiency in its production. Canon believes that these achieve-ments have contributed to improving Canon’s gross profitratio, and will continue pursuing the curtailment of productdevelopment lead times and reductions in production costs.Operating profit ratio (ratio of operating profit to netsales) and research and development (!R&D") expense to netsales ratio are considered to be KPIs by Canon. Canon is focus-ing on two areas for improvement. Canon is striving tocontrol and reduce its selling, general and administrativeexpenses as its first key point. Secondly, Canon’s R&D policyis designed to maintain a certain level of spending in coretechnology to sustain Canon’s leading position in its currentbusiness areas and to seek possibilities in other markets.Canon believes such investments will create the basis forfuture success in its business and operations.Cash flow managementCanon also places significant emphasis on cash flow manage-ment. The following are the KPIs with regard to cash flowmanagement that Canon’s management believes to be important. Inventory turnover measured in days is a KPI because itmeasures the adequacy of supply chain management.Inventories have inherent risks of becoming obsolete, physi-cally damaged or otherwise decreasing significantly in value,which may adversely affect Canon’s operating results. To mit-igate these risks, management believes that it is crucial tocontinue reducing inventories and decrease production leadtimes in order to promptly recover related product expensesby strengthening supply chain management.Canon’s management seeks to meet its liquidity and capitalrequirements primarily with cash flow from operations.Management also seeks debt-free operations. For a manufactur-ing company like Canon, it generally takes considerable timeto realize profit from a business as the process of R&D, manu-facturing and sales has to be followed for success. Therefore,management believes that it is important to have sufficientfinancial strength so that the Company does not have to relyon external funds. Canon has continued to reduce its depend-ency on external funds for capital investments in favor ofgenerating the necessary funds from its own operations.Canon Inc. stockholders’ equity to total assets ratio isanother KPI for Canon. Canon believes that its stockholders’equity to total assets ratio measures its long-term sustainabil-ity. Canon also believes that achieving a high or risingstockholders’ equity ratio indicates that Canon has main-tained a strong financial position or further improved itsability to fund debt obligations and other unexpectedexpenses. In the long-term, Canon will be able to maintain ahigh level of stable investments for its future operations anddevelopment. As Canon puts strong emphasis on its R&Dactivities, management believes that it is important to main-tain a stable financial base and, accordingly, a high level ofits stockholders’ equity to total assets ratio. KEY PERFORMANCE INDICATORS20112010200920082007Net sales (Millions of yen)¥3,557,433¥3,706,901¥3,209,201¥4,094,161¥4,481,346Gross profit to net sales ratio48.8%48.1%44.5%47.3%50.1%R&D expense to net sales ratio8.7%8.5%9.5%9.1%8.2%Operating profit to net sales ratio10.6%10.5%6.8%12.1%16.9%Inventory turnover measured in days46 days35 days39 days47 days44 daysDebt to total assets ratio0.3%0.3%0.3%0.4%0.6%Canon Inc. stockholders#equity to total assets ratio64.9%66.4%69.9%67.0%64.8%Note: Inventory turnover measured in days; Inventory divided by net sales for the previous six months, multiplied by 182.5.40FINANCIAL SECTION>FINANCIAL OVERVIEWCRITICAL ACCOUNTING POLICIES ANDESTIMATESThe consolidated financial 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 makesignificant estimates and assumptions. Canon believes thatthe following are the more critical judgment areas in theapplication of its accounting policies that currently affect itsfinancial condition and results of operations.Revenue recognitionCanon generates revenue principally through the sale ofconsumer products, equipment, supplies, and related serv-ices under separate contractual arrangements. Canonrecognizes revenue when persuasive evidence of an arrange-ment exists, delivery has occurred and title and risk of losshave been transferred to the customer or services have beenrendered, the sales price is fixed or determinable, and col-lectibility is probable.Revenue from sales of office products, such as office net-work digital multifunction devices and laser printers, andconsumer products, such as digital cameras and inkjet multi-function printers, is recognized upon shipment or delivery,depending upon when title and risk of loss transfer to thecustomer.Revenue from sales of optical equipment, such as semi-conductor lithography equipment and LCD lithographyequipment that are sold with customer acceptance provi-sions related to their functionality, is recognized when theequipment is installed at the customer site and the specificcriteria of the equipment functionality are successfullytested and demonstrated by Canon. Service revenue isderived primarily from separately priced product mainte-nance contracts on equipment sold to customers and ismeasured at the stated amount of the contract and recog-nized as services are provided.Canon also offers separately priced product maintenancecontracts for most office imaging products, for which the cus-tomer typically pays a stated base service fee plus a variableamount based on usage. Revenue from these service mainte-nance contracts is measured at the stated amount of thecontract and recognized as services are provided and variableamounts are earned.Revenue from the sale of equipment under sales-typeleases is recognized at the inception of the lease. Income onsales-type leases and direct-financing leases is recognized overthe life of each respective lease using the interest method.Leases not qualifying as sales-type leases or direct-financingleases are accounted for as operating leases and the relatedrevenue is recognized ratably over the lease term. Whenequipment leases are bundled with product maintenancecontracts, revenue is first allocated considering the relativefair value of the lease and non-lease deliverables based uponthe estimated relative fair values of each element. Lease deliv-erables generally include equipment, financing andexecutory costs, while non-lease deliverables generally consistof product maintenance contracts and supplies. For all other arrangements with multiple elements, Canonallocates revenue to each element based on its relative sellingprice if such element meets the criteria for treatment as aseparate unit of accounting. Otherwise, revenue is deferreduntil the undelivered elements are fulfilled and accountedfor as a single unit of accounting.Canon records estimated reductions to sales at the time ofsale for sales incentive programs including product discounts,customer promotions and volume-based rebates. Estimatedreductions in sales are based upon historical trends and otherknown factors at the time of sale. In addition, Canon providesprice protection to certain resellers of its products, andrecords reductions to sales for the estimated impact of priceprotection obligations when announced.Estimated product warranty costs are recorded at the timerevenue is recognized and are included in selling, general andadministrative expenses. Estimates for accrued product war-ranty costs are based on historical experience, and are affectedby ongoing product failure rates, specific product class fail-ures outside of the baseline experience, material usage andservice delivery costs incurred in correcting a product failure.Allowance for doubtful receivables Allowance for doubtful receivables is determined using a com-bination of factors to ensure that Canon’s trade and financingreceivables are not overstated due to uncollectibility. Thesefactors include the length of time receivables are past due, thecredit quality of customers, macroeconomic conditions andhistorical experience. Also, Canon records specific reserves forindividual accounts when Canon becomes aware of a cus-tomer’s inability to meet its financial obligations to Canon,such as in the case of bankruptcy filings or deterioration inthe customer’s operating results or financial position. If cir-cumstances related to customers change, estimates of therecoverability of receivables would be further adjusted.Valuation of inventoriesInventories are stated at the lower of cost or market value.Cost is determined by the average method for domesticinventories and principally the first-in, first-out method foroverseas inventories. Market value is the estimated sellingprice in the ordinary course of business less the estimatedcosts of completion and the estimated costs necessary tomake a sale. Canon routinely reviews its inventories for theirsalability and for indications of obsolescence to determine ifinventories should be written-down to market value.Judgments and estimates must be made and used in connec-tion with establishing such allowances in any accountingperiod. In estimating the market value of its inventories,Canon considers the age of the inventories and the likelihoodof spoilage or changes in market demand for its inventories.Impairment of long-lived assetsLong-lived assets, such as property, plant and equipment, andacquired intangibles subject to amortization, are reviewedfor impairment whenever events or changes in circumstancesStrategyBusiness UnitsManagement SystemFINANCIAL SECTION41!37!101FINANCIAL SECTIONindicate that the carrying amount of an asset may not berecoverable. If the carrying amount of the asset exceeds itsestimated undiscounted future cash flows, an impairmentcharge is recognized in the amount by which the carryingamount of the asset exceeds the fair value of the asset.Determining the fair value of the asset involves the use ofestimates and assumptions. These estimates and assumptionsinclude future market conditions, net sales growth rate, grossmargin and discount rate. Though Canon believes that theestimates and assumptions are reasonable, actual futureresults may differ from these estimates and assumptions.Property, plant and equipmentProperty, plant and equipment are stated at cost.Depreciation is calculated principally by the declining-bal-ance method, except for certain assets which are depreciatedby the straight-line method over the estimated useful lives ofthe assets. Goodwill and other intangible assetsGoodwill and other intangible assets with indefinite usefullives are not amortized, but are instead tested for impair-ment annually in the fourth quarter of each year, or morefrequently if indicators of potential impairment exist. Canonperforms its impairment test of goodwill using the two-stepapproach at the reporting unit level, which is one level belowthe operating segment level. All goodwill is assigned to thereporting unit or units that benefit from the synergies arisingfrom each business combination. If the carrying amountassigned to the reporting unit exceeds the fair value of thereporting unit, Canon performs the second step to measurean impairment charge in the amount by which the carryingamount of a reporting unit’s goodwill exceeds its implied fairvalue. Intangible assets with finite useful lives consist prima-rily of software, license fees, patented technologies andcustomer relationships. Software and license fees are amor-tized using the straight-line method over the estimateduseful lives, which range from 3 years to 5 years for softwareand 5 years to 10 years for license fees. Patented technologiesare amortized using the straight-line method principally overthe estimated useful life of 3 years. Customer relationshipsare amortized principally using the declining-balancemethod over the estimated useful life of 5 years. Income taxesCanon considers many factors when evaluating and estimat-ing income tax uncertainties. These factors include anevaluation of the technical merits of the tax positions as wellas the amounts and probabilities of the outcomes that couldbe realized upon settlement. The actual resolutions of thoseuncertainties will inevitably differ from those estimates, andsuch differences may be material to the financial statements. Valuation of deferred tax assetsCanon currently has significant deferred tax assets, which aresubject to periodic recoverability assessments. Realization ofCanon’s deferred tax assets is principally dependent upon itsachievement of projected future taxable income. Canon’s judg-ments regarding future profitability may change due to futuremarket conditions, its ability to continue to successfully exe-cute its operating restructuring activities and other factors.Any changes in these factors may require possible recognitionof significant valuation allowances to reduce the net carryingvalue of these deferred tax asset balances. When Canon deter-mines that certain deferred tax assets may not be recoverable,the amounts, which may not be realized, are charged toincome tax expense and will adversely affect net income.Employee retirement and severance benefit plansCanon has significant employee retirement and severancebenefit obligations that are recognized based on actuarial val-uations. Inherent in these valuations are key assumptions,including discount rates and expected return on plan assets.Management must consider current market conditions,including changes in interest rates, in selecting theseassumptions. Other assumptions include assumed rate ofincrease in compensation levels, mortality rate, and with-drawal rate. Changes in these assumptions inherent in thevaluation are reasonably likely to occur from period toperiod. Actual results that differ from the assumptions areaccumulated and amortized over future periods and, there-fore, generally affect future pension expenses. Whilemanagement believes that the assumptions used are appro-priate, the differences may affect employee retirement andseverance benefit costs in the future.In preparing its financial statements for fiscal 2011, Canonestimated a weighted-average discount rate of 2.1% forJapanese plans and 4.9% for foreign plans and a weighted-average expected long-term rate of return on plan assets of3.6% for Japanese plans and 5.7% for foreign plans. In estimat-ing the discount rate, Canon uses available informationabout rates of return on high-quality fixed-income govern-mental and corporate bonds currently available and expectedto be available during the period to the maturity of the pen-sion benefits. Canon establishes the expected long-term rateof return on plan assets based on management’s expectationsof the long-term return of the various plan asset categories inwhich it invests. Management develops expectations withrespect to each plan asset category based on actual historicalreturns and its current expectations for future returns.Decreases in discount rates lead to increases in actuarialpension benefit obligations which, in turn, could lead to anincrease in service cost and amortization cost through amor-tization of actuarial gain or loss, a decrease in interest cost,and vice versa. A decrease of 50 basis points in the discountrate increases the projected benefit obligation by approxi-mately 8%. The net effect of changes in the discount rate, aswell as the net effect of other changes in actuarial assump-tions and experience, is deferred until subsequent periods. Decreases in expected returns on plan assets may increasenet periodic benefit cost by decreasing the expected returnamounts, while differences between expected value andactual fair value of those assets could affect pension expensein the following years, and vice versa. For fiscal 2011, a42FINANCIAL SECTION>FINANCIAL OVERVIEWchange of 50 basis points in the expected long-term rate ofreturn on plan assets would cause a change of approximately¥3,204 million in net periodic benefit cost. Canon multipliesmanagement’s expected long-term rate of return on planassets by the value of its plan assets, to arrive at the expectedreturn on plan assets that is included in pension expense.Canon defers recognition of the difference between thisexpected return on plan assets and the actual return on planassets. The net deferral affects future pension expense.Canon recognizes the funded status (i.e., the differencebetween the fair value of plan assets and the projected bene-fit obligations) of its pension plans in its consolidated balancesheets, with a corresponding adjustment to accumulatedother comprehensive income (loss), net of tax.CONSOLIDATED RESULTS OF OPERATIONSSalesCanon’s consolidated net sales in fiscal 2011 totaled¥3,557,433 million (U.S.$45,608 million), representing a 4.0%decrease from the previous fiscal year. This decrease of saleswas owing to the historically high valuation of the yen com-bined with the effects of the earthquake and floods. All ofCanon’s businesses faced extremely demanding conditionsthroughout the year.Overseas operations are significant to Canon’s operatingresults and generated 80.5% of total net sales in fiscal 2011.Such sales are denominated in the applicable local currencyand are subject to fluctuations in the value of the yen tothose currencies. Despite efforts to reduce the impact of cur-rency fluctuations on operating results, includinglocalization of manufacturing in some regions along withprocuring parts and materials from overseas suppliers,Canon believes such fluctuations have had and will continueto have a significant effect on its results of operations.The average value of the yen in fiscal 2011 was ¥79.55 tothe U.S. dollar, and ¥110.72 to the euro, representing a signif-icant appreciation of about ¥8 or 9% to the U.S. dollar, and anappreciation of approximately ¥4 or 4% against the euro,compared with the previous year. The effects of foreignexchange rate fluctuations negatively affected net sales byapproximately ¥161,900 million in 2011. This unfavorableimpact consisted of approximately ¥111,600 million for U.S.dollar denominated sales, ¥40,600 million for euro denomi-nated sales and ¥9,700 million for other foreign currencydenominated sales.Cost of salesCost of sales principally reflects the cost of raw materials,parts and labor used by Canon in the manufacture of its prod-ucts. A portion of the raw materials used by Canon isimported or includes imported materials. Many of these rawmaterials are subject to fluctuations in world market pricesaccompanied by fluctuations in exchange rates that mayRETURN ON SALES(%)1296302011201020092008200710.97.67.06.74.1SUMMARY OF OPERATIONSThousands ofMillions of yenU.S. dollars2011change2010change20092011Net sales¥3,557,433-4.0%¥3,706,901+15.5%¥3,209,201$45,608,115Operating profit378,071-2.4%387,552+78.6%217,0554,847,064Income before income taxes374,524-4.7%392,863+79.1%219,3554,801,590Net income attributable to Canon Inc.248,630+0.8%246,603+87.3%131,6473,187,564affect Canon’s cost of sales. Other components of cost of salesinclude depreciation expenses from plants, maintenanceexpenses, light and fuel expenses along with rent expenses.The ratio of cost of sales to net sales for fiscal 2011 and 2010was 51.2% and 51.9%, respectively.Gross profit Canon’s gross profit in fiscal 2011 decreased by 2.6% to¥1,736,763 million (U.S.$22,266 million) from fiscal 2010. Thegross profit ratio, however, rose by 0.7 points year on year to48.8%. Despite the significant negative impact of the strongyen and the effects of the earthquake and floods, this grossprofit ratio improvement was achieved due to the furtheracceleration of production innovation activities.Operating expensesThe major components of operating expenses are payroll,R&D, advertising expenses and other marketing expenses.Owing to thorough spending cuts across the Canon Groupimplemented after the earthquake to control expenses moreStrategyBusiness UnitsManagement SystemFINANCIAL SECTION43!37!101FINANCIAL SECTIONSALES BY SEGMENTThousands ofMillions of yenU.S. dollars2011change2010change20092011Office¥1,917,943-3.5%¥1,987,269+20.8%¥1,645,076$24,589,013Consumer1,312,044-5.7%1,391,327+6.9%1,301,16016,821,077Industry and Others420,863-2.8%432,958+20.9%357,9985,395,679Eliminations(93,417)—(104,653)—(95,033)(1,197,654)Total¥3,557,433-4.0%¥3,706,901+15.5%¥3,209,201$45,608,115SALES BY SEGMENT(Millions of yen)Office Business UnitConsumer Business UnitIndustry and OthersBusiness UnitEliminations5,000,0004,000,0003,000,0002,000,0001,000,0000201120102009200820074,481,3463,706,9013,557,4333,209,2014,094,161SALES BY GEOGRAPHIC AREA(Millions of yen)JapanAmericasEuropeAsia and Oceania5,000,0004,000,0003,000,0002,000,0001,000,0000201120102009200820074,481,3463,706,9013,557,4333,209,2014,094,161efficiently, total operating expenses decreased by 2.6% to¥1,358,692 million (U.S.$17,419 million) in fiscal 2011.Operating profitOperating profit in fiscal 2011 decreased 2.4% to a total of¥378,071 million (U.S.$4,847 million) from fiscal 2010. Theratio of operating profit to net sales increased 0.1% to 10.6%from fiscal 2010.Other income (deductions)Other income (deductions) for fiscal 2011 decreased ¥8,858million (U.S.$114 million) to ¥(3,547) million (U.S.$45 mil-lion), mainly due to foreign currency exchange losses andearnings and losses on investments in affiliated companies.Income before income taxesIncome before income taxes in fiscal 2011 was ¥374,524 mil-lion (U.S.$4,802 million), a decrease of 4.7% from fiscal 2010,and constituted 10.5% of net sales.Income taxesProvision for income taxes in fiscal 2011 decreased by¥19,745 million (U.S.$253 million) from fiscal 2010. The effec-tive tax rate during fiscal 2011 dropped by 3.5% comparedwith fiscal 2010.Net income attributable to Canon Inc.As a result, net income attributable to Canon Inc. in fiscal2011 increased by 0.8% to ¥248,630 million (U.S.$3,188 mil-lion), which represents a 7.0% return on net sales.Segment informationCanon divides its businesses into three segments: the OfficeBusiness Unit, the Consumer Business Unit and the Industryand Others Business Unit.!The Office Business Unitmainly includes Office network digi-tal MFDs / Color network digital MFDs / Personal-use networkdigital MFDs / Office copying machines / Full-color copyingmachines / Personal-use copying machines / Laser printers /Large format inkjet printers/ Digital production printers!The Consumer Business Unitmainly includes Digital SLRcameras / Compact digital cameras / Interchangeable lenses /Digital video camcorders / Inkjet multifunction printers /Single function inkjet printers / Image scanners / Broadcastequipment/ Calculators!The Industry and Others Business Unitmainly includesSemiconductor lithography equipment / LCD lithographyequipment / Medical image recording equipment /Ophthalmic products / Magnetic heads / Micromotors /Computers / Handy terminals / Document scannersSales by segment Please refer to the table of sales by segment in Note 23 of the Notes to Consolidated Financial Statements. Canon’s sales by segment are summarized as follows:44FINANCIAL SECTION>FINANCIAL OVERVIEWSALES BY REGIONThousands ofMillions of yenU.S. dollars2011change2010change20092011Japan¥694,450-0.2%¥695,749-0.9%¥702,344$8,903,205Americas961,955-6.0%1,023,299+14.4%894,15412,332,756Europe1,113,065-5.1%1,172,474+17.8%995,15014,270,064Asia and Oceania787,963-3.4%815,379+32.0%617,55310,102,090Total¥3,557,433-4.0%¥3,706,901+15.5%¥3,209,201$45,608,115Note: This summary of net sales by geographic area is determined by the location where the product is shipped to the customers.Sales of the Office Business Unitconstituting 53.9% of con-solidated net sales. Sales volume of color and monochromenetwork digital MFDs continued to increase. As for laserprinters, while booming demand in emerging economiesfueled steady unit sales growth of primarily monochromemodels in the first half of the year, demand slowed in the sec-ond half, mainly in European markets. However, theappreciation of the yen also significantly impacted sales forthe segment, resulting a decrease in sales by 3.5% to¥1,917,943 million (U.S.$24,589 million) in fiscal 2011.Sales of the Consumer Business Unitconstituting 36.9% ofconsolidated net sales. Although Canon was affected by sup-ply shortages caused by the quake and flooding, efforts toramp up production and boost sales in response to robustdemand resulted in significant increases in year-on-year salesvolumes for such digital SLR cameras as the competitivelypriced EOS Digital Rebel T3i/T2i/T3, along with the EOS 5DMark II and the new EOS 60D advanced-amateur models. Asfor compact digital cameras, while such models as thePowerShot ELPH 100 HS/300 HS, PowerShot SX230 HS andPowerShot ELPH 310 HS recorded healthy sales, unit sales forthe year declined due to sluggish markets in developed coun-tries and the impact on production following the earthquakeand floods. With respect to inkjet printers, although thefloods in Thailand had a negative impact on production, unitsales increased year on year, largely owing to growth inemerging markets. As a result, sales for the segment, whichwere also negatively affected by the strong yen, dropped 5.7%in fiscal 2011 to ¥1,312,044 million (U.S.$16,821 million). Sales of the Industry and Others Business Unitdecreasedby 2.8% in fiscal 2011, to ¥420,863 million (U.S.$5,396 mil-lion). Within this segment, i-line steppers recorded healthysales thanks to active investment in semiconductor lithogra-phy equipment for the manufacture of digital semiconductordevices, which are used in smartphones and environmentallyfriendly products. Unit sales of LCD lithography equipment,on the other hand, dropped substantially in the face of shrink-ing demand for equipment used in the production oflarge-size panels. Sales of the Industry and Others BusinessUnit constituted 11.8% of consolidated net sales in fiscal 2011.Intersegment sales of ¥93,417 million (U.S.$1,198 million), rep-resenting 2.6% of total sales, are eliminated from the total salesof the three segments, and are described as !Eliminations."Sales by geographic areaPlease refer to the table of sales by geographic area in Note 23of the Notes to Consolidated Financial Statements.A geographical analysis indicates that net sales in fiscal2011 decreased in all geographic areas.In Japan, sales decreased by 0.2% in fiscal 2011.In the Americas, net sales decreased by 6.0% on yen basisin fiscal 2011, due to foreign currency exchange losses. Netsales in local currency basis increased by 2.5%. In Europe, net sales decreased by 5.1% on yen basis in fis-cal 2011, mainly due to sluggish demand for laser printers.Sales in Asia and Oceania decreased by 3.4% on a yen basisin fiscal 2011, largely due to shrinking demand for LCD lithog-raphy equipment and foreign currency exchange losses.A summary of net sales by geographic area is provided below.Operating profit by segmentPlease refer to the table of segment information in Note 23 ofthe Notes to Consolidated Financial Statements.Operating profit for the Office Business Unitin fiscal 2011decreased by ¥34,057 million (U.S.$437 million) to ¥259,265million (U.S.$3,324 million). This decrease resulted primarilyfrom the decrease in sales.Operating profit for the Consumer Business Unitin fiscal2011 decreased by ¥26,771million (U.S.$343 million) to¥211,294 million (U.S.$2,709 million). This decrease resultedprimarily from the decrease in sales.Operating profit for the Industry and Others BusinessUnitin fiscal 2011 recorded a profit of ¥24,300 million(U.S.$312 million) a turnaround from fiscal 2010, largelyowing to the improvement of the gross profit ratio.StrategyBusiness UnitsManagement SystemFINANCIAL SECTION45!37!101FINANCIAL SECTIONFOREIGN OPERATIONS AND FOREIGN CURRENCYTRANSACTIONSCanon’s marketing activities are performed by subsidiaries invarious regions in local currencies, while the cost of sales isgenerally in yen. Given Canon’s current operating structure,appreciation of the yen has a negative impact on net salesand the gross profit ratio. To reduce the financial risks fromchanges in foreign exchange rates, Canon utilizes derivativefinancial instruments, which consist principally of forwardcurrency exchange contracts.The operating profit on foreign operation sales is usuallylower than that from domestic operations because foreignoperations consist mainly of marketing activities. Marketingactivities are generally less profitable than production activi-ties, which are mainly conducted by the Company and itsdomestic subsidiaries. Please refer to the table of geographicinformation in Note 23 of the Notes to ConsolidatedFinancial Statements.LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalentsin fiscal 2011 decreased by¥67,352 million (U.S.$863 million) to ¥773,227 million(U.S.$9,913 million), compared with ¥840,579 million in fis-cal 2010 and ¥795,034 million in fiscal 2009. Canon’s cashand cash equivalents are typically denominated both inJapanese yen and in U.S. dollar, with the remainder denomi-nated in foreign currencies. Net cash provided by operating activities in fiscal 2011decreased by ¥274,851 million (U.S.$3,524 million) from theprevious year to ¥469,562 million (U.S.$6,020 million). Cashflow from operating activities consisted of the following keycomponents: the major component of Canon’s cash inflowis cash received from customers, and the major componentsof Canon’s cash outflow are payments for parts and materi-als, selling, general and administrative expenses, andincome taxes. For fiscal 2011, cash inflow from cash received from cus-tomers decreased due to the decrease of sales. There were nosignificant changes in Canon’s collection rates. Cash out-flow for payments for parts and materials increased, as aresult of our efforts to optimize inventory levels in order toavoid losing potential sales opportunities while simultane-ously increasing flexibility in response to unexpected risksand events. Cash outflow for payments for selling, generaland administrative expenses decreased owing to thoroughspending cuts across the Canon Group implemented afterthe earthquake to control expenses more efficiently. Cashout flow for income taxes decreased due to decrease of tax-able income.Net cash used in investing activities in fiscal 2011 was¥256,543 million (U.S.$3,289 million), decreased by ¥85,590(U.S.$1,097 million) million from ¥342,133 million in fiscal2010, mainly as a result of corporate acquisition conductedin the previous year. The purchases of fixed assets, whichtotaled ¥238,129 million (U.S.$3,053 million) in fiscal 2011,were focused on items relevant to raising production capacityand reducing production cost.Canon defines !free cash flow"by deducting the cash flowsfrom investing activities from the cash flows from operatingactivities. For fiscal 2011, free cash flow totaled ¥213,019 mil-lion (U.S.$2,731 million) as compared with ¥402,280 millionfor fiscal 2010. Canon’s management recognizes that con-stant and intensive investment in facilities and R&D isrequired to maintain and strengthen the competitiveness ofits products. Canon’s management seeks to meet its capitalrequirements with cash flow principally earned from its oper-ations, therefore, its capital resources are primarily sourcedfrom internally generated funds. Accordingly, Canon hasincluded the information with regard to free cash flow as itsmanagement frequently monitors this indicator, and believesthat such indicator is beneficial to the understanding ofinvestors. Furthermore, Canon’s management believes thatthis indicator is significant in understanding Canon’s currentliquidity and the alternatives of use in financing activitiesbecause it takes into consideration its operating and invest-ing activities. Canon refers to this indicator together withrelevant U.S. GAAP financial measures shown in its consoli-dated statements of cash flows and consolidated balancesheets for cash availability analysis. Net cash used in financing activities totaled ¥257,513 mil-lion (U.S.$3,301 million) in fiscal 2011, mainly resulting fromthe dividend payout of ¥152,784 million (U.S.$1,959 million),and repurchase of treasury stock. The Company paid divi-dends in fiscal 2011 of ¥125.00 (U.S.$1.60) per share. To the extent Canon relies on external funding for its liq-uidity and capital requirements, it generally has access tovarious funding sources, including the issuance of addi-tional share capital, long-term debt or short-term loans.While Canon has been able to obtain funding from its tradi-tional financing sources and from the capital markets, andbelieves it will continue to be able to do so in the future,there can be no assurance that adverse economic or otherconditions will not affect Canon’s liquidity or long-termfunding in the future. Short-term loans (including the current portion of long-term debt) amounted to ¥8,343 million (U.S.$107 million) atDecember 31, 2011 compared with ¥7,200 million atDecember 31, 2010. Long-term debt (excluding the currentportion) amounted to ¥3,368 million (U.S.$43 million) atDecember 31, 2011 compared with ¥4,131 million atDecember 31, 2010.Canon’s long-term debt (excluding the current portion)mainly consists of lease obligations. In order to facilitate access to global capital markets,Canon obtains credit ratings from two rating agencies:Moody’s Investors Services, Inc. (!Moody’s") and Standard andPoor’s Ratings Services (!S&P"). In addition, Canon maintainsa rating from Rating and Investment Information, Inc.(!R&I"), a rating agency in Japan, for access to the Japanesecapital market.46FINANCIAL SECTION>FINANCIAL OVERVIEWAs of March 15, 2012, Canon’s debt ratings are: Moody’s:Aa1 (long-term); S&P: AA (long-term), A-1+ (short-term); andR&I: AA+ (long-term). Canon does not have any rating down-grade triggers that would accelerate the maturity of amaterial amount of its debt. A downgrade in Canon’s creditratings or outlook could, however, increase the cost of its bor-rowings.Increase in property, plant and equipmenton an accrualbasis in fiscal 2011 amounted to ¥226,869 million (U.S.$2,909million) compared with ¥158,976 million in fiscal 2010 and¥216,128 million in fiscal 2009. For fiscal 2012, Canon proj-ects its increase in property, plant and equipment will beapproximately ¥300,000 million (U.S.$3,846 million).Employer contributionsto Canon’s worldwide defined ben-efit pension plans were ¥30,510 million (U.S.$391 million) infiscal 2011, ¥21,435 million in fiscal 2010 and ¥18,232 mil-lion in fiscal 2009. In addition, employer contributions toCanon’s worldwide defined contribution pension plans were¥12,511 million (U.S.$160 million) in fiscal 2011, ¥11,780 mil-lion in fiscal 2010, and ¥9,148 million in fiscal 2009.Working capitalin fiscal 2011 increased by ¥25,969 million(U.S.$333 million), to ¥1,259,457 million (U.S.$16,147 mil-lion), compared with ¥1,233,488 million in fiscal 2010 and¥1,234,089 million in fiscal 2009. Canon believes its workingcapital will be sufficient for its requirements for the foresee-able future. Canon’s capital requirements are primarilydependent on management’s business plans regarding thelevels and timing of purchases of fixed assets and invest-ments. The working capital ratio (ratio of current assets tocurrent liabilities) for fiscal 2011 was 2.41 compared to 2.38for fiscal 2010 and to 2.57 for fiscal 2009.Return on assets(net income attributable to Canon Inc.divided by the average of total assets) was 6.3% in fiscal 2011,compared to 6.3% in fiscal 2010 and 3.4% in fiscal 2009.Return on Canon Inc. stockholders’ equity(net incomeattributable to Canon Inc. divided by the average of totalCanon Inc. stockholders’ equity) was 9.6% in fiscal 2011 com-pared with 9.2% in fiscal 2010 and 4.9% in fiscal 2009. Debt to total assets ratiowas 0.3%, 0.3% and 0.3% as ofDecember 31, 2011, 2010 and 2009, respectively. Canon hadshort-term loans and long-term debt of ¥11,711 million(U.S.$150 million) as of December 31, 2011, ¥11,331 millionas of December 31, 2010 and ¥9,781 million as of December31, 2009.OFF-BALANCE SHEET ARRANGEMENTS As part of its ongoing business, Canon does not participate intransactions that generate relationships with unconsolidatedentities or financial partnerships, such as entities oftenreferred to as structured finance or special purpose entities,which would have been established for the purpose of facili-tating off-balance sheet arrangements or other contractuallynarrow or limited purposes. Canon provides guarantees for bank loans of its employ-ees, affiliates and other companies. Canon would have toperform under a guarantee if the borrower defaults on a pay-ment within the contract periods of 1 year to 30 years in thecase of employees with housing loans, and 1 year to 10 yearsin the case of affiliates and other companies. The maximumamount of undiscounted payments Canon would have had tomake in the event of default by all borrowers was ¥15,245million (U.S.$195 million) at December 31, 2011. The carryingamounts of the liabilities recognized for Canon’s obligationsas a guarantor under those guarantees were insignificant.INCREASE IN PROPERTY,PLANT AND EQUIPMENT(Millions of yen)500,000400,000300,000200,0000100,00020112010200920082007428,549361,988226,869158,976216,128WORKING CAPITAL RATIO3.02.52.01.51.000.5201120102009200820072.082.192.412.382.57RETURN ON CANON INC.STOCKHOLDERS’ EQUITY(%)201510502011201020092008200716.511.19.69.24.9StrategyBusiness UnitsManagement SystemFINANCIAL SECTION47!37!101FINANCIAL SECTIONPayments due by periodMillions of yenTotalLess than 1year1-3 years3-5 yearsMore than 5 yearsContractual obligations:Long-term debt:Capital lease obligations¥4,597¥2,026 ¥2,055 ¥398 ¥118Other long-term debt2,4731,676605 16428 Operating lease obligations72,79822,259 27,47512,59310,471Purchase commitments for:Property, plant and equipment66,28766,287———Parts and raw materials75,82375,823———Other long-term liabilities:Contribution to defined benefit pension plans30,87730,877 ———Total¥252,855 ¥198,948 ¥30,135 ¥13,155 ¥10,617Note:The table does not include provisions for uncertain tax positions and related accrued interest and penalties, as the specific timing of future paymentsrelated tothese obligations cannot be projected with reasonable certainty. See Note 13, Income Taxes in the Notes to Consolidated FinancialStatements for further details. Contribution to defined benefit pension plans reflects the expected amount only for the next fiscal year, since contribu-tions beyond the next fiscal year are not currently determinable due to uncertainties related to changes in actuarial assumptions, returns on planassets and changes to plan membership. Payments due by periodThousands of U.S. dollarsTotalLess than 1year1-3 years3-5 yearsMore than 5 yearsContractual obligations:Long-term debt:Capital lease obligations$58,936$25,975$26,346$5,102$1,513 Other long-term debt31,70521,4877,7562,103359Operating lease obligations933,308285,372 352,243161,449134,244Purchase commitments for:Property, plant and equipment849,833849,833———Parts and raw materials972,090972,090———Other long-term liabilities:Contribution to defined benefit pension plans395,859395,859———Total$3,241,731$2,550,616$386,345 $168,654 $136,116CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTSThe following summarizes Canon’s contractual obligations at December 31, 2011.48FINANCIAL SECTION>FINANCIAL OVERVIEWCanon provides warranties of generally less than one yearagainst defects in materials and workmanship on most of itsconsumer products. Estimated product warranty related costsare established at the time revenue are recognized and areincluded in selling, general and administrative expenses.Estimates for accrued product warranty costs are primarilybased on historical experience, and are affected by ongoingproduct failure rates, specific product class failures outside ofthe baseline experience, material usage and service deliverycosts incurred in correcting a product failure. As of December31, 2011, accrued product warranty costs amounted to¥11,691 million (U.S.$150 million).At December 31, 2011, commitments outstanding for thepurchase of property, plant and equipment were approxi-mately ¥66,287 million (U.S.$850 million), and commitmentsoutstanding for the purchase of parts and raw materials wereapproximately ¥75,823 million (U.S.$972 million), both foruse in the ordinary course of its business. Canon anticipatesthat funds needed to fulfill these commitments will be gener-ated internally through operations.During fiscal 2012, Canon expects to contribute ¥21,946million (U.S.$281 million) to its Japanese defined benefit pen-sion plans and ¥8,931 million (U.S.$115 million) to its foreigndefined benefit pension plans.Canon’s management believes that current financialresources, cash generated from operations and Canon’s poten-tial capacity for additional debt and/or equity financing willbe sufficient to fund current and future capital requirements.RESEARCH AND DEVELOPMENT, PATENTS ANDLICENSESYear 2011 marks the first year of the Excellent GlobalCorporation Plan, its 5-year (2011-2015) management plan.The slogan of the fourth phase (!Phase IV") is !Aiming for theSummit$Speed & Sound Growth"and there are three corestrategies related to R&D:%Achieve the overwhelming No.1 position in all core busi-nesses and related and peripheral businesses;%Develop new business through globalized diversificationand establish the Three Regional Headquarters manage-ment system; and%Build the foundations of an environmentally advancedcorporationCanon has been striving to implement the three R&Drelated strategies as follows:%Achieve the overwhelming No.1 position in all core busi-nesses and related and peripheral businesses: Continue tointroduce competitive products through innovation andshift to a business that can gain profit through solutionsand services.%Develop new business through globalized diversificationand establish the Three Regional Headquarters manage-ment system: Reinforce capability to create innovativeproducts and systems of commercial printing sector,medical imaging sector, industrial equipment sector andsecurity and safety sector. Expand our innovation centerby enhancing research and development operations inEurope and the United States. Seek M&A opportunities toaccelerate this strategy.%Build the foundations of an environmentally advancedcorporation; Focus our attention on energy- and resource-conserving technologies to create products with thehighest environmental performance.Canon has developed and strengthened relationships withuniversities and other research institutes, such as KyotoUniversity, Tokyo Institute of Technology, StanfordUniversity, the University of Arizona, the New Energy andIndustrial Technology Development Organization and theNational Institute of Advanced Industrial Science andTechnology to assist with fundamental research and todevelop cutting-edge technologies. Canon has fully introduced 3D-CAD systems across theCanon group, boosting R&D efficiency to curtail productdevelopment times and costs. Moreover, Canon enhancedand evolved its simulation, measurement, and analysis tech-nologies by establishing leading-edge facilities, including oneof Japan’s highest-performance cluster computers. As such,Canon has succeeded in further reducing the need for proto-types, dramatically lowering costs and shortening productdevelopment lead times. Canon has R&D centers worldwide. Each R&D center is col-laborating with other centers to achieve synergies, and iscultivating closer ties in fields ranging from basic research toproduct development. Canon’s consolidated R&D expenses were ¥307,800 million(U.S.$3,946 million) in fiscal 2011, ¥315,817 million in fiscal2010 and ¥304,600 million in fiscal 2009. The ratios of R&Dexpenses to the consolidated total net sales for fiscal 2011,2010 and 2009 were 8.7%, 8.5% and 9.5%, respectively. Canon believes that new products protected by patentswill not easily allow competitors to compete with them, andwill give them an advantage in establishing standards in themarket and industry. According to the United States patentannual list, which IFI CLAIMS&Patent Services released,Canon obtained the third greatest number of private sectorpatents in 2011.R&D EXPENSES(Millions of yen)400,000300,000200,000100,000020112010200920082007368,261374,025307,800315,817304,600StrategyBusiness UnitsManagement SystemFINANCIAL SECTION49!37!101FINANCIAL SECTIONMARKET RISK EXPOSURECanon is exposed to market risks, including changes in for-eign currency exchange rates, interest rates and prices ofmarketable securities and investments. In order to hedge therisks of changes in foreign currency exchange rates, Canonuses derivative financial instruments. Equity price riskCanon holds marketable securities included in current assets,which consist generally of highly-liquid and low-risk instru-ments. Investments included in noncurrent assets are held aslong-term investments. Canon does not hold marketable secu-rities and investments for trading purposes.Maturities and fair values of such marketable securitiesand investments with original maturities of more than threemonths, all of which were classified as available-for-sale secu-rities, were as follows at December 31, 2011 and 2010.Millions of yenThousands of U.S. dollarsAvailable-for-sale securitiesCostFair valueCostFair valueDue within one year¥20¥20$256$256Due after one year through five years96292612,33311,872Due after five years through ten years1,6461,60821,10320,615Equity securities15,91117,724203,987227,231¥18,539¥20,278$237,679$259,974 Foreign currency exchange rate and interest rate riskCanon operates internationally, exposing it to the risk ofchanges in foreign currency exchange rates. Derivative finan-cial instruments are comprised principally of foreigncurrency exchange contracts utilized by the Company andcertain of its subsidiaries to reduce the risk. Canon assessesforeign currency exchange rate risk by continually monitor-ing changes in the exposures and by evaluating hedgingopportunities. Canon does not hold or issue derivative finan-cial instruments for trading purposes. Canon is also exposedto credit-related losses in the event of non-performance bycounterparties to derivative financial instruments, but it isnot expected that any counterparties will fail to meet theirobligations. Most of the counterparties are internationallyrecognized financial institutions and selected by Canon tak-ing into account their financial condition, and contracts arediversified across a number of major financial institutions.Canon’s international operations expose Canon to the riskof changes in foreign currency exchange rates. Canon usesforeign exchange contracts to manage certain foreign cur-rency exchange exposures principally from the exchange ofU.S. dollars and euros into Japanese yen. These contracts areprimarily used to hedge the foreign currency exposure offorecasted intercompany sales and intercompany tradereceivables which are denominated in foreign currencies. Inaccordance with Canon’s policy, a specific portion of foreigncurrency exposure resulting from forecasted intercompanysales are hedged using foreign exchange contracts whichprincipally mature within three months.The following table provides information about Canon’smajor derivative financial instruments related to foreigncurrency exchange transactions existing at December 31,2011. All of the foreign exchange contracts described in thefollowing table have a contractual maturity date in 2012.Millions of yenU.S.$EuroOthersTotalForwards to sell foreign currencies:Contract amounts¥217,566 ¥148,478¥25,411¥391,455 Estimated fair value(1,033)4,796 (80)3,683 Forwards to buy foreign currencies:Contract amounts¥33,081¥41,935 ¥—¥75,016Estimated fair value175 (1,750)—(1,575)Thousands of U.S. dollarsU.S.$EuroOthersTotalForwards to sell foreign currencies:Contract amounts$2,789,308 $1,903,564$325,782 $5,018,654 Estimated fair value(13,244)61,487 (1,025)47,218 Forwards to buy foreign currencies:Contract amounts$424,116$537,628$’$961,744 Estimated fair value2,244(22,436)’(20,192)50FINANCIAL SECTION>FINANCIAL OVERVIEWAll of Canon’s long-term debt is fixed rate debt. Canonexpects that fair value changes and cash flows resulting fromreasonable near-term changes in interest rates will be imma-terial. Accordingly, Canon believes interest rate risk isinsignificant. See also Note 10 of the Notes to ConsolidatedFinancial Statements.Changes in the fair value of derivative financial instru-ments designated as cash flow hedges, including foreignexchange contracts associated with forecasted intercompanysales, are reported in accumulated other comprehensiveincome (loss). These amounts are subsequently reclassifiedinto earnings through other income (deductions) in the sameperiod as the hedged items affect earnings. Substantially allsuch amounts recorded in accumulated other comprehensiveincome (loss) at year-end are expected to be recognized inearnings over the next twelve months. Canon excludes thetime value component from the assessment of hedge effec-tiveness. Changes in the fair value of a foreign exchangecontract for the period between the date that the forecastedintercompany sales occur and its maturity date are recog-nized in earnings and not considered hedge ineffectiveness.The amount of the hedging ineffectiveness was not mate-rial for the years ended December 31, 2011, 2010 and 2009.The amounts of net losses excluded from the assessment ofhedge effectiveness (time value component) which wasrecorded in other income (deductions) was ¥457 million(U.S.$6 million), ¥302 million and ¥462 million for the yearsended December 31, 2011, 2010 and 2009, respectively.Canon has entered into certain foreign currency exchangecontracts to manage its foreign currency exposures. These for-eign currency exchange contracts have not been designatedas hedges. Accordingly, the changes in fair values of thesecontracts are recorded in earnings immediately.LOOKING FORWARDLooking at prospects for the global economy, considerabletime will likely be required before the economies of devel-oped nations such as the United States and Europe see anaccelerated economic recovery. As for emerging markets,although these economies are expected to continue growing,the pace of growth will likely slow down slightly. As forJapan, the economy is expected to move towards a gradualrecovery, supported by reconstruction-based demand.Amid these conditions, in 2012, the second year of PhaseIV (2011-2015) of our Excellent Global Corporation Plan,Canon aims to again return to a path of growth, overcomingsuch challenges as the earthquake and flooding. TheCompany’s basic policy for this year is to pursue fundamentalreforms, embracing the challenging environment as anopportunity to leap forward. Under this theme, we hope tobuild a solid foundation for growth as a means to achieve ourPhase IV goals.In order to achieve our targets, Canon has set and willactively pursue the following eight priority goals.%Boost the competitiveness of current core products, byrefining and further accelerating development anddesign capabilities with the aid of information technolo-gies to enable planning and timely launch of exceptionalproducts and services that are unmatched by the compe-tition. We expect to focus on the creation of products andservices that integrate cloud computing to quickly seizebusiness opportunities in this new era.%Launch and expand new businesses, by carving out newbusiness segments through the launch of strategic prod-ucts, such as DreamLabo and the Cinema EOS System. Asfor the practical application of promising new technolo-gies, we aim to realize rapid commercialization and willactively make use of M&A opportunities as needed.%Strengthen sales capacity in accordance with marketcharacteristics, by expanding market share in developedcountries and expanding profits by strengthening directsales of Group companies, solutions, and service busi-nesses. In emerging countries, we aim to achieve salesgrowth that exceeds the pace of market growth by realiz-ing sales methods and systems tailored to the actualmarket conditions in each country.%Pursue cost reductions while accelerating the opti-mization of global production, by continuing to pursuethe strategies we have implemented to date, such as auto-mated production and in-house production, and explorecost-reduction methods based on new ideas and innova-tive technologies. In addition, we will work to minimizetransportation costs while, at the same time, strive toposition manufacturing bases and allocate production inways that minimize costs and risks from a comprehen-sive perspective, taking into account such factors asexchange rates, tax policies, labor costs, procurementand logistics.StrategyBusiness UnitsManagement SystemFINANCIAL SECTION51!37!101FINANCIAL SECTION%Establish an R&D structure and cultivate technologiesthat will open future possibilities, by establishing R&Dcenters in the United States and Europe with the aim ofcreating continuous innovation in concert with efforts inJapan. In addition, cultivating basic technologies in themedical and industrial equipment fields, areas posi-tioned as next-generation business domains.%Achieve optimization of company-wide businessprocesses, by thoroughly utilizing Canon’s company-wide integrated IT systems, pursuing total optimizationof all business processes, including development, produc-tion, sales and service.%Further instill a commitment to !quality first,"by tar-geting the elimination of quality problems, advancingthe methods used to manage material defects and work-ing to embed quality from the upstream stages ofproduct planning and design.%Strengthen foundation as an excellent company, bystrengthening global management functions and culti-vating human resources to lead these reforms, andpromoting thorough compliance and executing Canon’senvironmental vision based on its newly drafted CSRactivity policy.Office Business Unit In 2011, despite disruptions in our supply chain due to theGreat East Japan Earthquake and collateral events, andnotwithstanding a persistently strong yen and the global eco-nomic downturn triggered by the Eurozone crisis, Canon wasable to maintain its sales of copying machines and MFD busi-nesses on par with the 2010 levels in constant currency.The importance of providing added value in the form ofnetworking, integration, color printing, multifunction andsolutions has grown in the office imaging products business.Canon seeks to maintain its leading position in both theprinting and in the office markets. Canon has matched its business strategy to market trendsby strengthening its lineup of digital network MFDs andprint-on-demand machines. In 2011, Canon further expandedthe imageRUNNER series with the introduction of Canon’sfirst mid-to-high speed letter-sized devices and low-end ledger-sized models. We also launched the imagePRESS C7010VPSseries, a digital color press jointly developed with Oc(, inte-grating Canon’s digital color technology and Oc(’s workflowinnovation. To maintain and enhance its competitive edgeand to meet increasingly sophisticated customer demands,Canon will continue reinforcing its hardware and softwareproduct lineups and solutions capability. Canon’s laser printer business has a strong market posi-tion. However, due to the global economic downturninitiated by Europe, the sense of uncertainty about the futureof the market has been heightened.In the monochrome laser printer market, the transition toa low price category is expected to expand sales in the micro-office/ home office market and in emerging markets.The color laser printer market is expected to grow over thelong term, while temporary negative growth was observeddue to the global-scale economic recession. Competition hasintensified as competitors have pursued aggressive pricingstrategies to establish market share. Canon is promoting technological development in thismarket in order to provide competitive products in all cate-gories with a focus on introducing new and improvedproduct offerings to market in a well-timed manner.In 2011, the large format inkjet printer market has beenon a continuous recovery trend, despite the earthquake, thefloods in Thailand and the economic downturn in developednations triggered by the Eurozone Crisis. Canon recorded ahigher growth rate than the overall industry in large formatinkjet printer main unit sales in 2011. This growth is attribut-able to demand from emerging markets and particularlystrong demand from the graphic art market. In the CAD mar-ket for large format inkjet printers, unit sales to emergingcountries increased primarily due to an expansion in thesales area. In addition, improved penetration in theposter/proof market for large format inkjet printers has beenachieved by the launch of eight color models with new pig-ment ink, LUCIA EX for the graphic art market. Canonexpects to continuously introduce competitive large formatinkjet printer products currently under development inresponse to market demand and competitive trends.Consumer Business Unit The demand for high-resolution digital photos remainedhigh, and as a result the interchangeable lens digital cameramarket continued to show robust growth in 2011. By marketcategory, growth remained strong in developed countries,and was particularly robust in Asia outside Japan and otheremerging markets, contributing strongly to an overall globalgrowth rate. By product category, the digital single-lens-reflex(!SLR") camera market showed steady growth, while mirror-less cameras represented a new category stimulatingconsumer demand.In terms of interchangeable lens digital cameras, on top ofthe need for higher resolution and more compact and light-weight sizes, there is also consumer demand for videorecording functions which manufacturers are meeting with afull high definition (HD) format and which is becoming astandard feature. We believe there remains considerableroom for future growth in this category through develop-ment of new products based on state-of-the-art technology. Inemerging markets, sales volumes of interchangeable lens dig-ital cameras are increasing rapidly, and there is a pressingneed for improvement of sales and support frameworks inthese regions.As for the interchangeable lens market, interchangeablelens digital cameras have made dramatic advances in popu-larity, and further growth is expected in the future. Canonwill continue to endeavor to market products that meetcustomer needs, such as lenses equipped with image stabi-52FINANCIAL SECTION>FINANCIAL OVERVIEWlization function, so as to expand sales and market share.Overall, the compact digital camera market shrank year-on-year due to the ongoing economic stagnation in the developedworld, but there was considerable growth led by SoutheastAsia and other emerging markets. Notwithstanding the GreatEast Japan Earthquake and collateral events, as well as thefloods in Thailand, Canon managed to maintain a high mar-ket share consistent with that of the previous fiscal year. Thesize of the compact digital camera market in 2012 is expectedto be consistent with that of the previous fiscal year in thedeveloped world, while positive growth is expected to con-tinue in emerging markets, adding up to a slight expansion inmarket size worldwide.In the digital camera market, Canon faced intense pricecompetition. This combined with the value of the yenremaining at historical highs throughout the year, placedserious constraints on our profit margins. Throughout theindustry, there has been a strong tendency toward relianceon EMS (electronic manufacturing services), and intenseprice competition is expected to continue for the foresee-able future. Canon’s strategies to address these challengesinclude boosting the added value of products, pressing for-ward with 100% internal production leveraging theeconomies of scale that come with being the industryleader, and building an optimum cost structure to combatthe pressures of the strong yen.In the digital video camcorder market, there was at onepoint rapid diversification on a global scale of recordingmedia such as DVD, HDD and flash memory. During fiscalyear 2011, it became clear that flash memory was becomingthe dominant format, and that the move toward high defini-tion would continue to progress. Despite the global economicstagnation that began in the second half of 2008, the marketsfor HD and flash memory have continued to grow steadilyyear-on-year. At the same time, in the North American mar-ket and elsewhere, a new product category, web cameraspriced at under $200, has emerged, and sales of such camerashave been increasing. Canon will aim to expand sales in thismarket with a powerful product lineup including higheradded value based around our distinctive high-definition,high-resolution technologies.In the business-use digital video camcorder field, Canonannounced its full-fledged entry into digital high-resolutionmotion picture production by launching !Cinema EOSSystem,"which consists of new interchangeable lens digitalcinema camcorders. EOS Movie has rapidly expanded thedemand for interchangeable lens digital cameras in the digitalcinema market. By introducing a new series of interchangeablelens cinema camcorders and cinema lenses to the market asthe !Cinema EOS System,"Canon is aiming to solidify its topposition in the motion picture production market.In 2011, we experienced robust growth in the field of pro-jectors for business applications, and in particular thetransition to wide format. In this wide-format market, welaunched the new install-type WUX4000 prior with great suc-cess in 2011. Moving forward, Canon expects to extend itscompetitive product lineup based around the optical technol-ogy on which the company prides itself, and push forexpanded sales. In the field of network cameras for video surveillance andmonitoring applications, the fiscal year 2011 showed double-digit growth compared to 2010. In the second half of 2011,Canon introduced four HD-compatible models to the market,building on improvements in image resolution and imageanalysis technology and industry-wide action command stan-dardization. As a result, Canon achieved double-digityear-on-year growth in terms of both units sold and monetaryamount in 2011.There was gradual recovery overall in the broadcast TVlens market. While specialized demand due to digitalizationof broadcast formats, and market growth in emergingeconomies, contributed to increased revenue, the persistentlystrong yen and the progressive lowering of equipment pricesaccompanying downsizing meant that profits in 2011 werenearly flat year-on-year. From 2012 onward, while specializeddemand is expected to drop off due to the switchover to digi-tal broadcasting in developed countries, continued marketgrowth in emerging markets means that the overall globalmarket is expected to show gradual expansion.In 2011, the inkjet printer market was declined slightlycompared to 2010 due primarily to downward pressure bythe economic stagnation in Europe and other regions, as wellas the effect of the Great East Japan Earthquake and thefloods in Thailand. Vendors expanded their lineup of prod-ucts to meet increased demands for cloud solutions andwireless networking functions in this market. In response,Canon enhanced its lineup introducing new models whichmake printer operation more user-friendly for diversifiedusers. With an advanced printer lineup, Canon expanded itsunit sales and its consumables excluding adverse affects fromcurrency fluctuations compared to 2010.In 2011, the Canon inkjet printer business was adverselyaffected both in terms of sales and production by the GreatEast Japan Earthquake and collateral events, as well as thefloods in Thailand. Canon was able to limit the affect fromthe earthquake by implementing expediting recoveryactions. In addition, although some factories were forced toclose operations as a result of the floods in Thailand, Canonhas taken prompt measures to switch production to otherfactories and implemented recovery measures to restoreaffected factories. Owing to the swift actions, production atthe damaged facilities was resumed within the year.Industry and Others Business Unit In fiscal 2011, the semiconductor device market continued torecover strongly from the economic downturn which beganin the second half of fiscal 2008. There were noteworthyimprovements for semiconductor device market categoriessuch as NAND-flash memories and image sensors, due tostrong sales of smartphones and media tablets, as well as theso-called !green"products such LEDs and power devicesattracting attention in the environment-related fields. Thiswas partially offset by the fact that DRAM makers tended toreduce equipment procurements in 2011 due to the continu-StrategyBusiness UnitsManagement SystemFINANCIAL SECTION53!37!101FINANCIAL SECTIONous fall in DRAM prices.In the market for semiconductor lithography equipment,the recovery trend from 2010 continued and grew stronglyin 2011. By the type of lighting source, cutting-edge equip-ment using ArF immersion now account for roughlyone-third of the market as memory makers and foundrieshave been aggressively investing in miniaturization. At thesame time, manufacturers are starting to invest in equip-ment using i-line for small diameter wafers used in imagesensors, power devices and LEDs, as well as for new marketssuch as 3D mountings for TSV connections.As a result, our shipments of semiconductor lithographyequipment in 2011 significantly increased compared to 2010.By region, sales in South Korea have been increasing steadily,while in Japan demand has significantly increased sales ofthe equipment for sensors and image devices.In 2011, the market for LCD lithography equipmentremained relatively flat compared to the previous year. Themarket for LCD lithography equipment under 5.5th genera-tion grew significantly in 2011 from the previous year due tothe rapid growth in the markets for smartphones and mediatablets. However, the market for LCD lithography equipmentover 6th generation decreased in 2011 from the previous yeardue to weak investment in 2011 resulting from aggressiveinvestment in 2010, and price reductions for large LCD pan-els. In China, although the 8th generation production lines ofLCD panels launched in 2011 led to a significant expansion inthe Chinese market, the growth could not fully absorb theeffects of decreased demand in the overall LCD lithographyequipment market. In 2011, our shipments of LCD lithography equipmentmarkedly fell compared to the previous year due primarily tothe shrinkage of the over 6th generation market, whereCanon is particularly competitive, and the delay of develop-ment of LCD lithography equipment under 5.5th generation,for which the market has been growing rapidly.The market for static digital X-ray equipment has beenexpanding, although competition has become more severethrough the entry of computed radiography manufacturersinto the market. The medical equipment market in Asia(mainly China) is expanding rapidly, and the static digital X-ray equipment market has followed this trend. In 2011, Canon’s overall sales in market for static digital X-ray equipment increased steadily compared to the previousfiscal year. The thin and lightweight CXDI-70C Wireless digi-tal radiography system, which we released in 2010,contributed to the increase of sales. We also focused onemerging markets and have been successful in increasingsales there, especially in China. In addition, Canon acceler-ated sales of CXDI-50RF dynamic/static digital radiographysystem in Europe and the United States. During 2011, newproducts, CXDI-401C/G, CXDI-401C/G COMPACT, CXDI-501C/Gand CXDI-80C Wireless were launched. Regarding the ophthalmic products, the optical coherencetomography (!OCT") market has been expanding year by year.In order to keep pace with these trends, Canon is striving toincrease sales by expanding competitive lineup of products togain the market acceptance.Our sales of TX-20/TX-20P full auto tonometer, which wasreleased in 2011, and our CR-2 compact non-mydriatic retinalcamera increased steadily and contributed to our 2011 result.Moreover, in 2011 we released CR-2 Plus digital non-mydriaticretinal camera with a Fundus Autofluorescence (FAF) modeand aim to increase sales in this market.Sales in 2011 of document scanners manufactured byCanon Electronics Inc. declined at a level in line with thedecline recorded in 2010, primarily due to stagnation insales of check scanners (i.e., image scanners specialized forscanning bills and checks) to North American financialinstitutions, which was partially offset by higher sales inJapan, Europe and other regions.Sales of organic EL display manufacturing equipmentmade by Canon Tokki Corporation recorded significantgains in 2011 deriving primarily from robust capital invest-ments by organic EL panel manufacturers.Die bonders made by Canon Machinery Inc. booked lowersales in 2011 as semiconductor manufacturers reduced capi-tal investments, but FA system-related devices recorded asignificant sales increase, due primarily to the continuationof strong demand trend which began in 2010 for facilitiesrelated to secondary automobile batteries in places likeChina and South Korea.In 2011, Canon ANELVA Corporation sales of film deposi-tion equipment for magnetic heads and discs fell, while LEDfilm deposition equipment rose and semiconductor filmdeposition equipment maintained levels recorded in 2010.Forward looking statements The foregoing discussion and other disclosure in this reportcontains forward-looking statements that reflect manage-ment’s current views with respect to certain future eventsand financial performance. Actual results may differ materi-ally from those projected or implied in the forward-lookingstatements. Further, certain forward-looking statements arebased upon assumptions of future events that may not proveto be accurate. The following important factors could causeactual results to differ materially from those projected orimplied in any forward-looking statements: foreign currencyexchange rate fluctuations; the uncertainty of Canon’s abil-ity to implement its plans to localize production and othermeasures to reduce the impact of foreign currency exchangerate fluctuations; uncertainty as to economic conditions inCanon’s major markets; uncertainty of continued demandfor Canon’s high-value-added products; Canon’s ability tocontinue to develop products and to market products thatincorporate new technology on a timely basis, are competi-tively priced, and achieve market acceptance; the possibilityof losses resulting from foreign currency transactionsdesigned to reduce financial risks from changes in foreigncurrency exchange rates; and inventory risk due to shifts inmarket demand.54FINANCIAL SECTION>TEN-YEAR FINANCIAL SUMMARYTEN-YEAR FINANCIAL SUMMARYNet sales:DomesticOverseasTotalPercentage of previous yearNet income attributable to Canon Inc.Percentage of salesAdvertisingResearch and development expensesDepreciation of property, plant and equipmentIncrease in property, plant and equipmentLong-term debt, excluding current installmentsCanon Inc. stockholders#equityTotal assetsPer share data:Income before cumulative effect of changein accounting principle:BasicDilutedNet income attributable to Canon Inc.stockholders per share:BasicDilutedDividends per shareStock price:HighLowAverage number of common shares in thousandsNumber of employees¥694,450 2,862,983 3,557,433 96.0%248,630 7.0%81,232 307,800 210,179 226,869 ¥3,368 2,551,132 3,930,727 ¥204.49 204.48 204.49 204.48 120.00 4,280 3,220 1,215,832 198,307 ¥695,749 3,011,152 3,706,901 115.5%246,603 6.7%94,794 315,817 232,327 158,976 ¥4,131 2,645,782 3,983,820 ¥199.71 199.70 199.71 199.70 120.00 4,520 3,205 1,234,817 197,386 ¥702,3442,506,8573,209,20178.4%131,6474.1%78,009304,600277,399216,128¥4,9122,688,1093,847,557¥106.64106.64106.64106.64110.004,0702,1151,234,482168,879¥868,2803,225,8814,094,16191.4%309,1487.6%112,810374,025304,622361,988¥8,4232,659,7923,969,934¥246.21246.20246.21246.20110.005,8202,2151,255,626166,9802011Millions of yen (except per share amounts)201020092008COMMON STOCK PRICE RANGE (Tokyo Stock Exchange)(Yen)8,0006,0004,0002,00007,0005,0003,0001,0002006200520042003200220112010200920082007StrategyBusiness UnitsManagement SystemFINANCIAL SECTION55!37!101FINANCIAL SECTION2007200620052004200320022011Thousands of U.S. dollars(except per share amounts)Notes:1.U.S. dollar amounts are translated from yen at the rate of U.S.$1 = JPY78, the approximate exchange rate on the Tokyo Foreign Exchange Market as ofDecember 30, 2011.2.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 thestock split have been adjusted to reflect the stock split.¥947,5873,533,7594,481,346107.8%488,33210.9%132,429368,261309,815428,549¥8,6802,922,3364,512,625¥377.59377.53377.59377.53110.007,4505,1901,293,296131,352¥932,2903,224,4694,156,759110.7%455,32511.0%116,809308,307235,804379,657¥15,7892,986,6064,521,915¥341.95341.84341.95341.8483.336,7804,5671,331,542118,499¥856,2052,897,9863,754,191108.3%384,09610.2%106,250286,476205,727383,784¥27,0822,604,6824,043,553¥288.63288.36288.63288.3666.674,7803,4601,330,761115,583¥849,7342,618,1193,467,853108.4%343,3449.9%111,770275,300174,397318,730¥28,6512,209,8963,587,021¥258.53257.85258.53257.8543.333,8803,2731,328,048108,257¥801,4002,396,6723,198,072108.8%275,7308.6%100,278259,140168,636210,038¥59,2601,865,5453,182,148¥209.21207.17209.21207.1733.334,1402,6071,317,974102,567¥732,5512,207,5772,940,128101.1%190,7376.5%71,725233,669158,469198,702¥81,3491,591,9502,942,706¥145.04143.20145.04143.2020.003,5002,4131,315,07497,802$8,903,205 36,704,910 45,608,115 96.0%3,187,564 7.0%1,041,436 3,946,154 2,694,603 2,908,577 $43,179 32,706,821 50,393,936 $2.62 2.62 2.62 2.62 1.54 54.87 41.28 56FINANCIAL SECTION>CONSOLIDATED BALANCE SHEETS/CONSOLIDATED STATEMENTS OF INCOMECONSOLIDATED BALANCE SHEETSCanon Inc. and SubsidiariesDecember 31, 2011 and 2010Current 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, 13 and 18)Total current assetsNoncurrent receivables (Note 19)Investments (Note 3)Property, plant and equipment, net (Notes 6, 7 and 10)Intangible assets, net (Note 9)Other assets (Notes 7, 9, 12 and 13)Total assetsLIABILITIES AND EQUITYCurrent liabilities:Short-term loans and current portion of long-term debt (Note 10)Trade payables (Note 11)Accrued income taxes (Note 13)Accrued expenses (Notes 12 and 19)Other current liabilities (Notes 6, 13 and 18)Total current liabilitiesLong-term debt, excluding current installments (Note 10)Accrued pension and severance cost (Note 12)Other noncurrent liabilities (Note 13)Total liabilitiesCommitments and contingent liabilities (Note 19)Equity:Canon Inc. stockholders’ equity:Common stockAuthorized 3,000,000,000 shares;issued 1,333,763,464 shares in 2011 and 2010Additional paid-in capitalLegal reserve (Note 14)Retained earnings (Note 14)Accumulated other comprehensive income (loss) (Note 15)Treasury stock, at cost; 132,231,296 shares in 2011 and105,295,975 shares in 2010Total Canon Inc. stockholders’ equityNoncontrolling interestsTotal equityTotal liabilities and equity¥773,227125,517533,208476,704244,6492,153,30516,77251,7901,190,836138,030379,994¥3,930,727¥8,343380,53245,900299,422159,651893,8483,368249,60470,2401,217,060174,762401,57259,0043,059,298(481,773)(661,731)2,551,132162,5352,713,667¥3,930,727¥840,57996,815557,504384,777250,7542,130,42916,77181,5291,201,968153,021400,102¥3,983,820¥7,200383,25172,482299,710134,298896,9414,131197,60975,5021,174,183174,762400,42557,9302,965,237(390,459)(562,113)2,645,782163,8552,809,637¥3,983,820$9,913,1671,609,1926,836,0006,111,5903,136,52527,606,474215,026663,97415,267,1281,769,6154,871,719$50,393,936$106,9624,878,615588,4623,838,7442,046,80711,459,59043,1793,200,051900,51315,603,3332,240,5385,148,359756,46239,221,769(6,176,577)(8,483,730)32,706,8212,083,78234,790,603$50,393,936Millions of yenThousands ofU.S. dollars (Note 2)201120102011See accompanying Notes to Consolidated Financial Statements.ASSETSStrategyBusiness UnitsManagement SystemFINANCIAL SECTION57!37!101FINANCIAL SECTIONCONSOLIDATED STATEMENTS OF INCOMECanon Inc. and SubsidiariesYears ended December 31, 2011, 2010 and 2009Net salesCost of sales (Notes 6, 9, 12 and 19)Gross profitOperating expenses (Notes 1, 6, 9, 12, 16 and 19):Selling, general and administrative expenses Research and development expensesOperating profitOther income (deductions):Interest and dividend incomeInterest expenseOther, net (Notes 1, 3, 18 and 21)Income before income taxesIncome taxes (Note 13)Consolidated net incomeLess: Net income attributable to noncontrolling interestsNet income attributable to Canon Inc.Net income attributable to Canon Inc. stockholders per share (Note 17):BasicDilutedCash dividends per share¥3,557,4331,820,6701,736,7631,050,892307,8001,358,692378,0718,432(988)(10,991)(3,547)374,524120,415254,1095,479¥248,630¥204.49204.48120.00¥3,706,9011,923,8131,783,0881,079,719315,8171,395,536387,5526,022(1,931)1,2205,311392,863140,160252,7036,100¥246,603¥199.71199.70120.00¥3,209,2011,781,8081,427,393905,738304,6001,210,338217,0555,202(336)(2,566)2,300219,35584,122135,2333,586¥131,647¥106.64106.64110.00$45,608,11523,341,92322,266,19213,472,9743,946,15417,419,1284,847,064108,103(12,667)(140,910)(45,474)4,801,5901,543,7823,257,80870,244$3,187,564$2.622.621.54Millions of yenThousands ofU.S. dollars (Note 2)2011201020092011See accompanying Notes to Consolidated Financial Statements.YenU.S. dollars (Note 2)58FINANCIAL SECTION>CONSOLIDATED STATEMENTS OF EQUITYCONSOLIDATED STATEMENTS OF EQUITYCanon Inc. and SubsidiariesBalance at December 31, 2008Equity transactions with noncontrollinginterests and otherDividends paid to Canon Inc. stockholdersDividends paid to noncontrolling interestsTransfer to legal reserveComprehensive income:Net incomeOther comprehensive income (loss), net of tax (Note 15):Foreign currency translation adjustmentsNet unrealized gains and losses on securitiesNet gains and losses on derivative instrumentsPension liability adjustmentsTotal comprehensive incomeRepurchase of treasury stock, netBalance at December 31, 2009Acquisition of subsidiariesEquity transactions with noncontrollinginterests and otherDividends paid to Canon Inc. stockholdersDividends paid to noncontrolling interestsTransfer to legal reserveComprehensive income (loss):Net incomeOther comprehensive income (loss), net of tax (Note 15):Foreign currency translation adjustmentsNet unrealized gains and losseson securitiesNet gains and losses on derivative instrumentsPension liability adjustmentsTotal comprehensive income (loss)Repurchase of treasury stock, netBalance at December 31, 2010Equity transactions with noncontrollinginterests and otherDividends paid to Canon Inc. stockholdersDividends paid to noncontrolling interestsTransfer to legal reserveComprehensive income:Net incomeOther comprehensive income (loss), net of tax (Note 15):Foreign currency translation adjustmentsNet unrealized gains and losses on securitiesNet gains and losses on derivative instrumentsPension liability adjustmentsTotal comprehensive incomeRepurchase of treasury stock, netBalance at December 31, 2011CommonstockAdditionalpaid-incapitalLegalreserveRetainedearningsAccumulatedothercomprehensiveincome (loss)TreasurystockTotalCanon Inc.stockholders!equityNoncontrollinginterestsTotalequity¥174,762174,762174,762¥174,762¥403,790503404,293(3,787)(81)400,4251,193(46)¥401,572¥53,70698154,6873,24357,9301,074¥59,004¥2,876,576(135,793)(981)131,647(12)2,871,437(13,453)(136,103)(3,243)246,603(4)2,965,237(609)(152,784)(1,074)248,630(102)¥3,059,298¥(292,820)33,3402,150(1,422)(2,066)(260,818)(680)(122,667)(222)833(6,905)(390,459)(53,251)(2,017)(462)(35,584)¥(481,773)¥(556,222)(30)(556,252)55,250(61,111)(562,113)(99,618)¥(661,731)¥2,659,792503(135,793)—131,64733,3402,150(1,422)(2,066)163,649(42)2,688,10937,330(136,103)—246,603(122,667)(222)833(6,905)117,642(61,196)2,645,782584(152,784)—248,630(53,251)(2,017)(462)(35,584)157,316(99,766)¥2,551,132¥191,190(1,376)(3,326)3,5863067(1)1,1214,803191,29119,168(43,214)(2,827)6,100(4,251)76(66)(2,422)(563)163,855(247)(2,838)5,479(835)(99)13(2,793)1,765¥162,535¥2,850,982(873)(135,793)(3,326)—135,23333,3702,217(1,423)(945)168,452(42)2,879,40019,168(5,884)(136,103)(2,827)—252,703(126,918)(146)767(9,327)117,079(61,196)2,809,637337(152,784)(2,838)—254,109(54,086)(2,116)(449)(38,377)159,081(99,766)¥2,713,667Millions of yenStrategyBusiness UnitsManagement SystemFINANCIAL SECTION59!37!101FINANCIAL SECTIONBalance at December 31, 2010Equity transactions with noncontrollinginterests and otherDividends paid to Canon Inc. stockholdersDividends paid to noncontrolling interestsTransfer to legal reserveComprehensive income:Net incomeOther comprehensive income (loss), net of tax (Note 15):Foreign currency translation adjustmentsNet unrealized gains and losses on securitiesNet gains and losses on derivative instrumentsPension liability adjustmentsTotal comprehensive incomeRepurchase of treasury stock, netBalance at December 31, 2011CommonstockAdditionalpaid-incapitalLegalreserveRetainedearningsAccumulatedothercomprehensiveincome (loss)TreasurystockTotalCanon Inc.stockholders!equityNoncontrollinginterestsTotalequity$2,240,538$2,240,538$5,133,65415,295(590)$5,148,359$742,69313,769$756,462$38,015,859(7,808)(1,958,769)(13,769)3,187,564(1,308)$39,221,769$(5,005,885)(682,705)(25,859)(5,923)(456,205)$(6,176,577)$(7,206,577)(1,277,153)$(8,483,730)$33,920,2827,487(1,958,769)—3,187,564(682,705)(25,859)(5,923)(456,205)2,016,872(1,279,051)$32,706,821$2,100,705(3,166)(36,385)70,244(10,705)(1,269)166(35,808)22,628$2,083,782$36,020,9874,321(1,958,769)(36,385)—3,257,808(693,410)(27,128)(5,757)(492,013)2,039,500(1,279,051)$34,790,603Thousands of U.S. dollars (Note 2)See accompanying Notes to Consolidated Financial Statements.60FINANCIAL SECTION>CONSOLIDATED STATEMENTS OF CASH FLOWS/NOTES TO CONSOLIDATED FINANCIAL STATEMENTSCONSOLIDATED STATEMENTS OF CASH FLOWSCanon Inc. and SubsidiariesYears ended December 31, 2011, 2010 and 2009Cash flows from operating activities:Consolidated net incomeAdjustments to reconcile consolidated net income to net cash provided by operating activities:Depreciation and amortizationLoss on disposal of fixed assetsImpairment loss of fixed assets (Note 6)Impairment loss of investmentsEquity in (earnings) losses of affiliated companiesDeferred income taxes(Increase) decrease in trade receivables(Increase) decrease in inventoriesIncrease (decrease) in trade payablesIncrease (decrease) in accrued income taxesIncrease (decrease) in accrued expensesIncrease (decrease) in accrued (prepaid) pension and severance costOther, netNet cash provided by operating activitiesCash flows from investing activities:Purchases of fixed assets (Note 6)Proceeds from sale of fixed assets (Note 6)Purchases of available-for-sale securitiesProceeds from sale and maturity of available-for-sale securitiesIncrease in time deposits, netAcquisitions of subsidiaries, net of cash acquiredPurchases of other investmentsOther, netNet cash used in investing activitiesCash flows from financing activities:Proceeds from issuance of long-term debtRepayments of long-term debtIncrease (decrease) in short-term loans, netDividends paidRepurchases of treasury stock, netOther, netNet cash used in financing activitiesEffect of exchange rate changes on cash and cash equivalentsNet change in cash and cash equivalentsCash and cash equivalents at beginning of yearCash and cash equivalents at end of yearSupplemental disclosure for cash flow information (Note 22):Cash paid during the year for:InterestIncome taxes¥254,109261,3438,9375988,1307,36829,1299,991(109,983)35,766(25,653)8,938(2,315)(16,796)469,562(238,129)3,273(2,160)1,934(34,111)29(373)12,994(256,543)725(4,670)2,466(152,784)(99,766)(3,484)(257,513)(22,858)(67,352)840,579¥773,227¥914120,696¥252,703276,19321,1201,28823,330(10,471)29,381(6,671)(17,532)115,72625,228774,14729,894744,413(199,152)3,303(10,891)3,910(80,904)(55,686)(1,955)(758)(342,133)5,902(5,739)(74,933)(136,103)(61,196)(7,828)(279,897)(76,838)45,545795,034¥840,579¥1,92480,212¥135,233315,3938,21515,4662,39812,64920,71248,244143,580(76,843)(21,023)(9,827)4,76512,273611,235(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)17,226115,838679,196¥795,034¥38482,906$3,257,8083,350,551114,5777,667104,23194,461373,449128,090(1,410,038)458,538(328,885)114,590(29,679)(215,334)6,020,026(3,052,936)41,962(27,692)24,795(437,321)372(4,782)166,589(3,289,013)9,295(59,872)31,615(1,958,769)(1,279,051)(44,667)(3,301,449)(293,051)(863,487)10,776,654$9,913,167$11,7181,547,385Millions of yenThousands ofU.S. dollars (Note 2)2011201020092011See accompanying Notes to Consolidated Financial Statements.StrategyBusiness UnitsManagement SystemFINANCIAL SECTION61!37!101FINANCIAL SECTIONNOTESTO CONSOLIDATED FINANCIAL STATEMENTSCanon Inc. and Subsidiaries1.BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES(a)Description of BusinessCanon Inc. (the !Company") and subsidiaries (collectively!Canon") is one of the world’s leading manufacturers in suchfields as office products, consumer products and industryand other products. Office products consist mainly of net-work digital multifunction devices (!MFDs"), copyingmachines, laser printers, large format inkjet printers and dig-ital production printers. Consumer products consist mainlyof digital single-lens reflex (!SLR") cameras, compact digitalcameras, interchangeable lenses, digital video camcorders,inkjet multifunction printers, single function inkjet printers,image scanners and broadcast equipment. Industry and otherproducts consist mainly of semiconductor lithography equip-ment, lithography equipment for liquid crystal display(!LCD") panels, and medical equipment. Canon’s consolidatednet sales for the years ended December 31, 2011, 2010 and2009 were distributed as follows: the Office Business Unit53.9%, 53.6% and 51.3%, the Consumer Business Unit 36.9%,37.5% and 40.5%, the Industry and Others Business Unit11.8%, 11.7% and 11.2%, and elimination between segments2.6%, 2.8% and 3.0%, respectively. These percentages werecomputed by dividing segment net sales, including interseg-ment sales, by consolidated net sales, based on the segmentoperating results described in Note 23.Sales are made principally under the Canon brand name,almost entirely through sales subsidiaries. These subsidiariesare responsible for marketing and distribution, and primarilysell to retail dealers in their geographic area. 80.5%, 81.2%and 78.1% of consolidated net sales for the years endedDecember 31, 2011, 2010 and 2009 were generated outsideJapan, with 27.0%, 27.6% and 27.9% in the Americas, 31.3%,31.6% and 31.0% in Europe, and 22.2%, 22.0% and 19.2% inAsia and Oceania, respectively.Canon sells laser printers on an OEM basis to Hewlett-Packard Company; such sales constituted 19.3%, 20.1% and20.0% of consolidated net sales for the years ended December31, 2011, 2010 and 2009, respectively, and are included in theOffice Business Unit.Canon’s manufacturing operations are conducted prima-rily at 27 plants in Japan and 17 overseas plants which arelocated in countries or regions such as the United States,Germany, France, Netherlands, Taiwan, China, Malaysia,Thailand and Vietnam.(b)Basis of PresentationThe Company and its domestic subsidiaries maintain theirbooks of account in conformity with financial accountingstandards of Japan. Foreign subsidiaries maintain their booksof account in conformity with financial accounting standardsof the countries of their domicile.Certain adjustments and reclassifications have been incor-porated in the accompanying consolidated financialstatements to conform with U.S. generally accepted account-ing principles (!GAAP"). These adjustments were not recordedin the statutory books of account.(c)Principles of ConsolidationThe consolidated financial statements include the accountsof the Company, its majority owned subsidiaries and thosevariable interest entities where the Company or its consoli-dated subsidiaries are the primary beneficiaries. Allsignificant intercompany balances and transactions havebeen eliminated.(d)Use of EstimatesThe preparation of the consolidated financial statements inconformity with U.S. GAAP requires management to makeestimates and assumptions that affect the reported amountsof assets and liabilities and the disclosure of contingent assetsand liabilities at the date of the consolidated financial state-ments and the reported amounts of revenues and expensesduring the period. Significant estimates and assumptions arereflected in valuation and disclosure of revenue recognition,allowance for doubtful receivables, valuation of inventories,impairment of long-lived assets, environmental liabilities, val-uation of deferred tax assets, uncertain tax positions andemployee retirement and severance benefit obligations.Actual results could differ materially from those estimates.(e)Translation of Foreign CurrenciesAssets and liabilities of the Company’s subsidiaries locatedoutside Japan with functional currencies other than Japaneseyen are translated into Japanese yen at the rates of exchangein effect at the balance sheet date. Income and expense itemsare translated at the average exchange rates prevailing dur-ing the year. Gains and losses resulting from translation offinancial statements are excluded from earnings and arereported in other comprehensive income (loss).Gains and losses resulting from foreign currency transac-tions, including foreign exchange contracts, and translationof assets and liabilities denominated in foreign currencies areincluded in other income (deductions) in the consolidatedstatements of income. Foreign currency exchange gains andlosses was a net loss of ¥3,287 million ($42,141 thousand) forthe year ended December 31, 2011, and were net gains of¥3,089 million and ¥1,842 million for the years endedDecember 31, 2010 and 2009, respectively.(f)Cash EquivalentsAll highly liquid investments acquired with original maturi-62FINANCIAL SECTION>NOTES TO CONSOLIDATED FINANCIAL STATEMENTSties of three months or less are considered to be cash equiva-lents. Certain debt securities with original maturities of lessthan three months classified as available-for-sale securities of¥204,307 million ($2,619,321 thousand) and ¥249,907 millionat December 31, 2011 and 2010, respectively, are included incash and cash equivalents in the consolidated balance sheets.Additionally, certain debt securities with original maturitiesof less than three months classified as held-to-maturity securi-ties of ¥1,000 million at December 31, 2010 were alsoincluded in cash and cash equivalents. Fair value for thesesecurities approximates their costs.(g)InvestmentsInvestments consist primarily of time deposits with originalmaturities of more than three months, debt and marketableequity securities, investments in affiliated companies andnon-marketable equity securities. Canon reports invest-ments with maturities of less than one year as short-terminvestments.Canon classifies investments in debt and marketable equitysecurities as available-for-sale or held-to-maturity securities.Canon does not hold any trading securities, which are boughtand held primarily for the purpose of sale in the near term.Available-for-sale securities are recorded at fair value. Fairvalue is determined based on quoted market prices, projecteddiscounted cash flows or other valuation techniques as appro-priate. Unrealized holding gains and losses, net of the relatedtax effect, are reported as a separate component of other com-prehensive income (loss) until realized. Held-to-maturitysecurities are recorded at amortized cost, adjusted for amorti-zation of premiums and accretion of discounts.Available-for-sale and held-to-maturity securities are regu-larly reviewed for other-than-temporary declines in thecarrying amount based on criteria that include the lengthof time and the extent to which the market value has beenless than cost, the financial condition and near-termprospects of the issuer and Canon’s intent and ability toretain the investment for a period of time sufficient toallow for any anticipated recovery in market value. For debtsecurities for which the declines are deemed to be other-than-temporary and there is no intent to sell, impairmentsare separated into the amount related to credit loss, whichis recognized in earnings, and the amount related to allother factors, which is recognized in other comprehensiveincome (loss). For debt securities for which the declines aredeemed to be other-than-temporary and there is an intent tosell, impairments in their entirety are recognized in earn-ings. For equity securities for which the declines aredeemed to be other-than-temporary, impairments in theirentirety are recognized in earnings. Canon recognizes animpairment loss to the extent by which the cost basis of theinvestment exceeds the fair value of the investment. Realized gains and losses are determined by the averagecost method and reflected in earnings.Investments in affiliated companies over which Canonhas the ability to exercise significant influence, but does nothold a controlling financial interest, are accounted for bythe equity method.Non-marketable equity securities in companies over whichCanon does not have the ability to exercise significant influ-ence are stated at cost and reviewed periodically forimpairment.(h)Allowance for Doubtful ReceivablesAllowance for doubtful trade and finance receivables is main-tained for all customers based on a combination of factors,including aging analysis, macroeconomic conditions and his-torical experience. An additional reserve for individualaccounts is recorded when Canon becomes aware of a cus-tomer’s inability to meet its financial obligations, such as inthe case of bankruptcy filings. If circumstances related to cus-tomers change, estimates of the recoverability of receivableswould be further adjusted. When all collection options areexhausted including legal recourse, the accounts or portionsthereof are deemed to be uncollectable and charged againstthe allowance.(i)InventoriesInventories are stated at the lower of cost or market value.Cost is determined by the average method for domesticinventories and principally by the first-in, first-out methodfor overseas inventories.(j)Impairment of Long-Lived AssetsLong-lived assets, such as property, plant and equipment, andacquired intangibles subject to amortization, are reviewedfor impairment whenever events or changes in circumstancesindicate that the carrying amount of an asset may not berecoverable. Recoverability of assets to be held and used ismeasured by a comparison of the carrying amount of theasset and the estimated undiscounted future cash flowsexpected to be generated by the asset. If the carrying amountof the asset exceeds its estimated undiscounted future cashflows, an impairment charge is recognized in the amount bywhich the carrying amount of the asset exceeds the fair valueof the asset. Assets to be disposed of by sale are reported atthe lower of the carrying amount or fair value less costs tosell, and are no longer depreciated.(k)Property, Plant and EquipmentProperty, plant and equipment are stated at cost. Depreciationis calculated principally by the declining-balance method,except for certain assets which are depreciated by thestraight-line method over the estimated useful lives of theassets. The depreciation period ranges from 3 years to 60 years forbuildings and 1 year to 20 years for machinery and equipment.Assets leased to others under operating leases are stated atcost and depreciated to the estimated residual value of theassets by the straight-line method over the lease term, gener-ally from 2 years to 5 years.(l)Goodwill and Other Intangible AssetsGoodwill and other intangible assets with indefinite usefulStrategyBusiness UnitsManagement SystemFINANCIAL SECTION63!37!101FINANCIAL SECTIONlives are not amortized, but are instead tested for impairmentannually in the fourth quarter of each year, or more frequentlyif indicators of potential impairment exist. Canon performs itsimpairment test of goodwill using the two-step approach at thereporting unit level, which is one level below the operating seg-ment level. All goodwill is assigned to the reporting unit orunits that benefit from the synergies arising from each busi-ness combination. If the carrying amount assigned to thereporting unit exceeds the fair value of the reporting unit,Canon performs the second step to measure an impairmentcharge in the amount by which the carrying amount of areporting unit’s goodwill exceeds its implied fair value.Intangible assets with finite useful lives consist primarily ofsoftware, license fees, patented technologies and customerrelationships. Software and license fees are amortized usingthe straight-line method over the estimated useful lives, whichrange from 3 years to 5 years for software and 5 years to 10years for license fees. Patented technologies are amortizedusing the straight-line method principally over the estimateduseful life of 3 years. Customer relationships are amortizedprincipally using the declining-balance method over the esti-mated useful life of 5 years. Certain costs incurred inconnection with developing or obtaining internal use softwareare capitalized. These costs consist primarily of paymentsmade to third parties and the salaries of employees working onsuch software development. Costs incurred in connection withdeveloping internal use software are capitalized at the applica-tion development stage. In addition, Canon develops or obtainscertain software to be sold where related costs are capitalizedafter establishment of technological feasibility.(m) Environmental LiabilitiesLiabilities for environmental remediation and other environ-mental costs are accrued when environmental assessments orremedial efforts are probable and the costs can be reasonablyestimated. Such liabilities are adjusted as further informa-tion develops or circumstances change. Costs of futureobligations are not discounted to their present values.(n)Income TaxesDeferred tax assets and liabilities are recognized for the esti-mated future tax consequences attributable to differencesbetween the financial statement carrying amounts of existingassets and liabilities and their respective tax bases and operat-ing loss and tax credit carryforwards. Deferred tax assets andliabilities are measured using enacted tax rates expected toapply to taxable income in the years in which those tempo-rary differences are expected to be recovered or settled. Theeffect on deferred tax assets and liabilities of a change in taxrates is recognized in income in the period that includes theenactment date. Canon records a valuation allowance toreduce the deferred tax assets to the amount that is morelikely than not realizable.Canon recognizes the financial statement effects of taxpositions when it is more likely than not, based on the tech-nical merits, that the tax positions will be sustained uponexamination by the tax authorities. Benefits from tax posi-tions that meet the more-likely-than-not recognition thresh-old are measured at the largest amount of benefit that isgreater than 50% likely of being realized upon settlement.Interest and penalties accrued related to unrecognized taxbenefits are included in income taxes in the consolidatedstatements of income.(o)Stock-Based CompensationCanon measures stock-based compensation cost at the grantdate, based on the fair value of the award, and recognizes thecost on a straight-line basis over the requisite service period,which is the vesting period.(p)Net Income Attributable to Canon Inc.Stockholders per ShareBasic net income attributable to Canon Inc. stockholders pershare is computed by dividing net income attributable toCanon Inc. by the weighted-average number of commonshares outstanding during each year. Diluted net incomeattributable to Canon Inc. stockholders per share includes theeffect from potential issuances of common stock based on theassumptions that all stock options were exercised.(q)Revenue RecognitionCanon generates revenue principally through the sale ofoffice and consumer products, equipment, supplies, andrelated services under separate contractual arrangements.Canon recognizes revenue when persuasive evidence of anarrangement exists, delivery has occurred and title and riskof loss have been transferred to the customer or services havebeen rendered, the sales price is fixed or determinable, andcollectibility is probable.Revenue from sales of office products, such as office net-work digital MFDs and laser printers, and consumer products,such as digital cameras and inkjet multifunction printers, isrecognized upon shipment or delivery, depending upon whentitle and risk of loss transfer to the customer.Revenue from sales of optical equipment, such as semicon-ductor lithography equipment and LCD lithography equipmentthat are sold with customer acceptance provisions related totheir functionality, is recognized when the equipment isinstalled at the customer site and the specific criteria of theequipment functionality are successfully tested and demon-strated by Canon. Service revenue is derived primarily fromseparately priced product maintenance contracts on equip-ment sold to customers and is measured at the stated amountof the contract and recognized as services are provided.Canon also offers separately priced product maintenancecontracts for most office products, for which the customertypically pays a stated base service fee plus a variableamount based on usage. Revenue from these service mainte-nance contracts is measured at the stated amount of thecontract and recognized as services are provided and vari-able amounts are earned.Revenue from the sale of equipment under sales-typeleases is recognized at the inception of the lease. Income onsales-type leases and direct-financing leases is recognized over64FINANCIAL SECTION>NOTES TO CONSOLIDATED FINANCIAL STATEMENTSthe life of each respective lease using the interest method.Leases not qualifying as sales-type leases or direct-financingleases are accounted for as operating leases and related rev-enue is recognized ratably over the lease term. Whenequipment leases are bundled with product maintenancecontracts, revenue is first allocated considering the relativefair value of the lease and non-lease deliverables based uponthe estimated relative fair values of each element. Lease deliv-erables generally include equipment, financing andexecutory costs, while non-lease deliverables generally consistof product maintenance contracts and supplies.For all other arrangements with multiple elements, Canonallocates revenue to each element based on its relative sellingprice if such element meets the criteria for treatment as aseparate unit of accounting. Otherwise, revenue is deferreduntil the undelivered elements are fulfilled and accountedfor as a single unit of accounting.Canon records estimated reductions to sales at the time ofsale for sales incentive programs including product dis-counts, customer promotions and volume-based rebates.Estimated reductions in sales are based upon historicaltrends and other known factors at the time of sale. In addi-tion, Canon provides price protection to certain resellers ofits products, and records reductions to sales for the estimatedimpact of price protection obligations when announced.Estimated product warranty costs are recorded at the timerevenue is recognized and are included in selling, generaland administrative expenses in the consolidated statementsof income. Estimates for accrued product warranty costs arebased on historical experience, and are affected by ongoingproduct failure rates, specific product class failures outside ofthe baseline experience, material usage and service deliverycosts incurred in correcting a product failure.Taxes collected from customers and remitted to govern-mental authorities are excluded from revenues in theconsolidated statements of income.(r)Research and Development CostsResearch and development costs are expensed as incurred.(s)Advertising CostsAdvertising costs are expensed as incurred. Advertisingexpenses were ¥81,232 million ($1,041,436 thousand),¥94,794 million and ¥78,009 million for the years endedDecember 31, 2011, 2010 and 2009, respectively.(t)Shipping and Handling CostsShipping and handling costs totaled ¥43,308 million($555,231 thousand), ¥56,306 million and ¥45,966 million forthe years ended December 31, 2011, 2010 and 2009, respec-tively, and are included in selling, general and administrativeexpenses in the consolidated statements of income.(u)Derivative Financial InstrumentsAll derivatives are recognized at fair value and are includedin prepaid expenses and other current assets, or other cur-rent liabilities in the consolidated balance sheets. Canon uses and designates certain derivatives as a hedgeof a forecasted transaction or the variability of cash flows tobe received or paid related to a recognized asset or liability(!cash flow"hedge). Canon formally documents all relation-ships between hedging instruments and hedged items, aswell as its risk-management objective and strategy for under-taking various hedge transactions. Canon also formallyassesses, both at the hedge’s inception and on an ongoingbasis, whether the derivatives that are used in hedging trans-actions are highly effective in offsetting changes in cash flowsof hedged items. When it is determined that a derivative isnot highly effective as a hedge or that it has ceased to be ahighly effective hedge, Canon discontinues hedge accountingprospectively. Changes in the fair value of a derivative that isdesignated and qualifies as a cash flow hedge are recorded inother comprehensive income (loss), until earnings areaffected by the variability in cash flows of the hedged item.Gains and losses from hedging ineffectiveness are included inother income (deductions). Gains and losses related to thecomponents of hedging instruments excluded from theassessment of hedge effectiveness are included in otherincome (deductions).Canon also uses certain derivative financial instrumentswhich are not designated as hedges. The changes in fair val-ues of these derivative financial instruments are immediatelyrecorded in earnings.Canon classifies cash flows from derivatives as cash flowsfrom operating activities in the consolidated statements ofcash flows.(v)GuaranteesCanon recognizes, at the inception of a guarantee, a liabilityfor the fair value of the obligation it has undertaken in issu-ing guarantees. (w)Recently Issued Accounting GuidanceIn October 2009, the Financial Accounting Standards Board(!FASB") issued new accounting guidance for revenue recogni-tion under multiple-deliverable arrangements. This guidancemodifies the criteria for separating consideration under mul-tiple-deliverable arrangements and requires allocation of theoverall consideration to each deliverable using the estimatedselling price in the absence of vendor-specific objective evi-dence or third-party evidence of selling price for deliverables.As a result, the residual method of allocating arrangementconsideration will no longer be permitted. The guidance alsorequires additional disclosures about how a vendor allocatesrevenue in its arrangements and about the significant judg-ments made and their impact on revenue recognition. Thisguidance is effective for fiscal years beginning on or afterJune 15, 2010 and was adopted by Canon from the quarterbeginning January 1, 2011. This adoption did not have amaterial impact on Canon’s consolidated results of opera-tions and financial condition.In October 2009, the FASB issued new accounting guid-ance for software revenue recognition. This guidancemodifies the scope of the software revenue recognition guid-StrategyBusiness UnitsManagement SystemFINANCIAL SECTION65!37!101FINANCIAL SECTION2011:Current:Corporate bondsNoncurrent:Government bondsCorporate bondsFund trustsEquity securitiesCostGross unrealizedholding gainsGross unrealizedholding lossesFair valueDecember 31Millions of yen¥20¥1725691,86715,911¥18,519¥—¥—7323,200¥3,275¥—¥2284431,387¥1,536¥20¥1505581,82617,724¥20,2582010:Current:Government bondsCorporate bondsNoncurrent:Government bondsCorporate bondsFund trustsEquity securitiesCostGross unrealizedholding gainsGross unrealizedholding lossesFair valueMillions of yen¥11,000¥1,001¥1831,0171,77818,288¥21,266¥——¥—¥—42205,768¥5,830¥——¥—¥2265—654¥741¥11,000¥1,001¥1619941,79823,402¥26,355ance to exclude from its requirements non-software compo-nents of tangible products and software components oftangible products that are sold, licensed, or leased with tangi-ble products when the software components andnon-software components of the tangible product functiontogether to deliver the tangible product’s essential function-ality. This guidance is effective for fiscal years beginning onor after June 15, 2010 and was adopted by Canon from thequarter beginning January 1, 2011. This adoption did nothave a material impact on Canon’s consolidated results ofoperations and financial condition.In June 2011, the FASB issued an amendment whichrequires presentation of net income and other comprehen-sive income in one continuous statement or in two separatebut consecutive statements, which will be applied retrospec-tively for all periods presented. Canon will adopt thisamended guidance from the quarter beginning January 1,2012, and does not expect the adoption of this guidance tohave a material impact on Canon’s consolidated results ofoperations and financial condition.2.BASIS OF FINANCIAL STATEMENT TRANSLATIONThe consolidated financial statements presented herein areexpressed in Japanese yen and, solely for the convenience ofthe reader, have been translated into United States dollarsat the rate of ¥78 = U.S.$1, the approximate exchange rateprevailing on the Tokyo Foreign Exchange Market onDecember 30, 2011. This translation should not be construedas a representation that the amounts shown could be con-verted into United States dollars at such rate.3.INVESTMENTSThe cost, gross unrealized holding gains, gross unrealized holding losses and fair value for available-for-sale securitiesincluded in short-term investments and investments by major security type at December 31, 2011 and 2010 were as follows:66FINANCIAL SECTION>NOTES TO CONSOLIDATED FINANCIAL STATEMENTS22001111::Current:Corporate bondsNoncurrent:Government bondsCorporate bondsFund trustsEquity securitiesCostGross unrealizedholding gainsGross unrealizedholding lossesFair valueDecember 31Thousands of U.S. dollars$256$2,2057,29523,936203,987$237,423$—$—9362541,026$41,987$—$2821,07755117,782$19,692$256$1,9237,15423,410227,231$259,718Maturities of available-for-sale debt securities and fund trusts included in short-term investments and investments in theaccompanying consolidated balance sheets were as follows at December 31, 2011:Due within one yearDue after one year through five yearsDue after five years through ten yearsCostFair valueCostMillions of yenThousands of U.S. dollarsFair value¥209621,646¥2,628¥209261,608¥2,554$25612,33321,103$33,692$25611,87220,615$32,743Gross realized gains were ¥204 million ($2,615 thousand),¥641 million and ¥277 million for the years ended December31, 2011, 2010 and 2009, respectively. Gross realized losses,including write-downs for impairments that were other-than-temporary, were ¥4,281 million ($54,885 thousand), ¥1,961million and ¥2,482 million for the years ended December 31,2011, 2010 and 2009, respectively.At December 31, 2011, substantially all of the available-for-sale securities with unrealized losses had been in acontinuous unrealized loss position for less than twelvemonths.Time deposits with original maturities of more than threemonths are ¥125,497 million ($1,608,936 thousand) and¥95,814 million at December 31, 2011 and 2010, respectively,and are included in short-term investments in the accompa-nying consolidated balance sheets.Aggregate cost of non-marketable equity securitiesaccounted for under the cost method totaled ¥14,583 million($186,962 thousand) and ¥26,475 million at December 31,2011 and 2010, respectively. Investments with an aggregatecost of ¥14,583 million ($186,962 thousand) and ¥24,053 mil-lion were not evaluated for impairment at December 31,2011 and 2010, respectively, because (a) Canon did not esti-mate the fair value of those investments as it was notpracticable to estimate the fair value of the investments and(b) Canon did not identify any events or changes in circum-stances that might have had significant adverse effects on thefair value of those investments.Investments in affiliated companies accounted for by theequity method amounted to ¥15,776 million ($202,256 thou-sand) and ¥26,817 million at December 31, 2011 and 2010,respectively. Canon’s share of the net earnings (losses) in affil-iated companies accounted for by the equity method,included in other income (deductions), were losses of ¥7,368million ($94,461 thousand), earnings of ¥10,471 million andlosses of ¥12,649 million for the years ended December 31,2011, 2010 and 2009, respectively.StrategyBusiness UnitsManagement SystemFINANCIAL SECTION67!37!101FINANCIAL SECTION4.TRADE RECEIVABLESTrade receivables are summarized as follows:NotesAccountsLess allowance for doubtful receivables20112010Millions of yenThousands ofU.S. dollars2011¥16,739528,032544,771(11,563)¥533,208¥15,441556,983572,424(14,920)¥557,504$214,6036,769,6416,984,244(148,244)$6,836,000December 315.INVENTORIESInventories are summarized as follows:Finished goodsWork in processRaw materials20112010Millions of yenThousands ofU.S. dollars2011¥291,023166,07619,605¥476,704¥232,584116,67935,514¥384,777$3,731,0642,129,180251,346$6,111,590December 316.PROPERTY, PLANT AND EQUIPMENTProperty, plant and equipment are stated at cost less accumulated depreciation and are summarized as follows:LandBuildingsMachinery and equipmentConstruction in progressLess accumulated depreciation20112010Millions of yenThousands ofU.S. dollars2011¥268,4931,367,1871,499,33194,5073,229,518(2,038,682)¥1,190,836¥266,6311,320,1211,439,24685,6733,111,671(1,909,703)¥1,201,968$3,442,21817,528,03819,222,1921,211,62941,404,077(26,136,949)$15,267,128December 31Depreciation expense for the years ended December 31,2011, 2010 and 2009 was ¥210,179 million ($2,694,602 thou-sand), ¥232,327 million and ¥277,399 million, respectively.Amounts due for purchases of property, plant and equip-ment were ¥47,690 million ($611,410 thousand) and¥23,306 million at December 31, 2011 and 2010, respec-tively, and are included in other current liabilities in theaccompanying consolidated balance sheets. Fixed assets pre-sented in the consolidated statements of cash flows includeproperty, plant and equipment and intangible assets.As a result of continued sluggish demand in the semicon-ductor manufacturing industry and diminishedprofitability of the semiconductor lithography equipmentbusiness, Canon recognized impairment losses related pri-marily to property, plant and equipment of itssemiconductor lithography equipment business, which areincluded in the results of the Industry and Others BusinessUnit for the year ended December 31, 2009. Long-livedassets with a carrying amount of ¥15,390 million were writ-ten down to their fair value of zero, which was estimatedusing discounted future cash flows expected to be gener-ated over their remaining useful life. The impairment losseswere included in selling, general and administrativeexpenses in the consolidated statement of income.68FINANCIAL SECTION>NOTES TO CONSOLIDATED FINANCIAL STATEMENTSTotal minimum lease payments receivableUnguaranteed residual valuesExecutory costsUnearned incomeLess allowance for doubtful receivablesLess current portion20112010Millions of yenThousands ofU.S. dollars2011¥204,3268,195(2,275)(24,955)185,291(7,039)178,252(66,337)¥111,915¥215,92511,120(2,063)(27,891)197,091(7,983)189,108(71,500)¥117,608$2,619,564105,064(29,166)(319,936)2,375,526(90,244)2,285,282(850,474)$1,434,808December 31Balance at beginning of yearCharge-offsProvisionOtherBalance at end of year¥9,023(3,103)1,995 68 ¥7,983¥7,983(1,937)2,052(1,059)¥7,039$102,346(24,833)26,308(13,577)$90,244Years ended December 3120122013201420152016ThereafterFinancing leasesOperating leasesFinancing leasesMillions of yenThousands of U.S. dollarsOperating leases¥80,41158,39637,17719,3178,486539¥204,326¥7,6102,3672,0451,6321,559248¥15,461$1,030,910748,667476,628247,654108,7956,910$2,619,564$97,56430,34626,21820,92319,9873,180$198,218Year ending December 31:7.FINANCE RECEIVABLES AND OPERATING LEASESFinance receivables represent financing leases which consistof sales-type leases and direct-financing leases resultingfrom the marketing of Canon’s and complementary third-party products primarily in foreign countries. Thesereceivables typically have terms ranging from 1 year to 8years. The components of the finance receivables, which areincluded in prepaid expenses and other current assets, andother assets in the accompanying consolidated balancesheets, are as follows:The activity in the allowance for credit losses is as follows:20112010Millions of yenThousands ofU.S. dollars2011Canon has policies in place to ensure that its productsare sold to customers with an appropriate credit history,and continuously monitors its customers’ credit qualitybased on information including length of period in arrears,macroeconomic conditions, initiation of legal proceedingsagainst customers and bankruptcy filings. The allowance forcredit losses of finance receivables are evaluated collectivelybased on historical experience of credit losses. An additionalreserve for individual accounts is recorded when Canonbecomes aware of a customer’s inability to meet its finan-cial obligations, such as in the case of bankruptcy filings.Finance receivables which are past due or individually eval-uated for impairment at December 31, 2011 and 2010 arenot significant.The cost of equipment leased to customers under operat-ing leases included in property, plant and equipment, net atDecember 31, 2011 and 2010 was ¥75,391 million ($966,551thousand) and ¥63,239 million, respectively. Accumulateddepreciation on equipment under operating leases atDecember 31, 2011 and 2010 was ¥54,791 million ($702,449thousand) and ¥43,829 million, respectively.The following is a schedule by year of the future minimumlease payments to be received under financing leases andnon-cancelable operating leases at December 31, 2011.StrategyBusiness UnitsManagement SystemFINANCIAL SECTION69!37!101FINANCIAL SECTION8.ACQUISITIONSIn March 2010, Canon acquired 45.2% of the total outstand-ing shares of Oc(N.V. (!Oc("), which is listed on NYSEEuronext Amsterdam, principally through a fully self-fundedpublic cash tender offer for consideration of ¥50,374 million,in addition to the 22.9% interest Canon held before the pub-lic cash tender offer. In addition, Canon acquired Oc(’sconvertible cumulative financing preference shares repre-senting 19.1% of the total outstanding shares of Oc(forconsideration of ¥8,027 million. As a result, Canon’s aggre-gate interest represents 87.2% of the total outstanding sharesof Oc(. The fair value of the 12.8% noncontrolling interest inOc(of ¥18,245 million was measured based on the quotedprice of Oc(’s common stock on the acquisition date.The acquisition was accounted for using the acquisitionmethod. Prior to the March 2010 acquisition date, Canonaccounted for its 22.9% interest in Oc(using the equitymethod. The acquisition-date fair value of the previous equityinterest of ¥25,508 million was remeasured using the quotedprice of Oc(’s common stock on the acquisition date andincluded in the measurement of the total acquisition consid-eration. In connection with the acquisition, Canon repaid¥55,378 million of Oc(’s existing bank debt and ¥22,936 mil-lion of Oc(’s existing United States Private Placement notes,which are included in decrease in short-term loans in theconsolidated statement of cash flows. Oc(is engaged in research and development, manufactureand sale of document management systems, printing systemsfor professionals and high-speed, wide format digital printingsystems. Canon and Oc(have complementary technologiesand products and would benefit from this strong businessrelationship. Amid the increasingly competitive printingindustry, Canon is further strengthening its business founda-tion in order to solidify its position as one of the globalleaders. Canon aims to provide diversified solutions to its cus-tomers in the printing industry by making Oc(aconsolidated subsidiary.The following table summarizes the estimated fair values ofthe assets acquired and liabilities assumed at acquisition date. Current assetsProperty, plant and equipmentIntangible assetsGoodwillOther noncurrent assetsNon-current assetsTotal acquired assetsTotal assumed liabilitiesNet assets acquiredMillions of yen¥122,24851,15656,29777,25342,658227,364349,612247,458¥102,154Intangible assets acquired, which are subject to amortiza-tion, consist of customer relationships of ¥32,747 million,patented technologies of ¥11,316 million, and other intangi-ble assets of ¥12,234 million. Canon has estimated theamortization period for the customer relationships andpatented technologies to be 5 years and 3 years, respec-tively. The weighted average amortization period for allintangible assets is approximately 4.4 years. Goodwill recognized, which is assigned to the OfficeBusiness Unit for impairment testing, is attributable prima-rily to expected synergies from combining operations of Oc(and Canon. None of the goodwill is expected to bedeductible for income tax purposes.The amount of net sales of Oc(included in Canon’s con-solidated statement of income from the acquisition date forthe year ended December 31, 2010 was ¥246,518 million.The unaudited pro forma net sales as if Oc(had beenincluded in Canon’s consolidated statements of incomefrom the beginning of the years ended December 31, 2010and 2009 were ¥3,772,425 million and ¥3,554,316 million,respectively. Pro forma net income was not disclosedbecause the impact on Canon’s consolidated statements ofincome was not material.Canon acquired businesses other than those describedabove during the years ended December 31, 2011, 2010,and 2009 that were not material to its consolidated finan-cial statements. 70FINANCIAL SECTION>NOTES TO CONSOLIDATED FINANCIAL STATEMENTSSoftwareCustomer relationshipsPatented technologiesLicense feesOtherGross carryingamountAccumulatedamortization2011$2,631,218448,167312,077261,859246,602$3,899,923$1,476,038240,051170,731164,96287,910$2,139,692Thousands of U.S. dollars2011:Balance at beginning of yearTranslation adjustments and otherBalance at end of yearOfficeConsumerIndustry andOthersTotalYears ended December 31Millions of yen¥107,301(5,241)¥102,060¥12,386(298)¥12,088¥5,502(629)¥4,873¥125,189(6,168)¥119,0212010:Balance at beginning of yearGoodwill acquired during the yearTranslation adjustments and otherBalance at end of yearOfficeConsumerIndustry andOthersTotalMillions of yen¥39,84579,156(11,700)¥107,301¥13,303—(917)¥12,386¥2,7233,719(940)¥5,502¥55,87182,875(13,557)¥125,189SoftwareCustomer relationshipsPatented technologiesLicense feesOtherGross carryingamountAccumulatedamortizationGross carryingamount20112010Accumulatedamortization¥205,23534,95724,34220,42519,235¥304,194¥115,13118,72413,31712,8676,857¥166,896¥200,24537,63725,42522,10816,686¥302,101¥109,20012,1079,37714,4364,641¥149,761December 31Millions of yen9. GOODWILL AND OTHER INTANGIBLE ASSETS Intangible assets developed or acquired during the yearended December 31, 2011 totaled ¥35,994 million ($461,462thousand), which are subject to amortization and primarilyconsist of software of ¥33,217 million ($425,859 thousand),which is mainly for internal use. The weighted average amor-tization period for software and intangible assets in total isapproximately 4 years and 5 years, respectively.The components of intangible assets subject to amortiza-tion at December 31, 2011 and 2010 were as follows:Aggregate amortization expense for the years endedDecember 31, 2011, 2010 and 2009 was ¥51,164 million($655,949 thousand), ¥43,866 million and ¥37,994 million,respectively. Estimated amortization expense for intangibleassets currently held for the next five years ending December31 is ¥44,931 million ($576,038 thousand) in 2012, ¥33,864million ($434,154 thousand) in 2013, ¥23,759 million($304,603 thousand) in 2014, ¥11,482 million ($147,205 thou-sand) in 2015, and ¥6,134 million ($78,641 thousand) in 2016.Intangible assets not subject to amortization other thangoodwill at December 31, 2011 and 2010 were not significant.For management reporting purposes, goodwill is not allo-cated to the segments. Goodwill has been allocated to itsrespective segment for impairment testing. The changes in the carrying amount of goodwill by seg-ment, which is included in other assets in the consolidatedbalance sheets, for the years ended December 31, 2011 and2010 were as follows:StrategyBusiness UnitsManagement SystemFINANCIAL SECTION71!37!101FINANCIAL SECTION2011:Balance at beginning of yearTranslation adjustments and otherBalance at end of yearOfficeConsumerIndustry andOthersTotalThousands of U.S. dollars$1,375,654(67,192)$1,308,462$158,795(3,821)$154,974$70,538(8,064)$62,474$1,604,987(79,077)$1,525,91010. SHORT-TERM LOANS AND LONG-TERM DEBTShort-term loans consisting of bank borrowings at December 31, 2011 and 2010 were ¥4,641 million ($59,500 thousand) and¥2,071 million, respectively. The weighted average interest rates on short-term loans outstanding at December 31, 2011 and2010 were 2.72% and 1.46%, respectively.Long-term debt consisted of the following:Loans, principally from banks, maturing in installments through 2020; bearing weighted average interest of 1.68% and 1.83% at December 31, 2011 and 2010, respectively0.75% Japanese yen notes, due 20120.84% Japanese yen notes, due 2013Capital lease obligationsLess current portion20112010Millions of yenThousands ofU.S. dollars2011¥1,297 1,0201564,5977,070(3,702)¥3,368 ¥1,013——8,2479,260(5,129)¥4,131$16,62813,0772,00058,93690,641(47,462)$43,179December 3120122013201420152016ThereafterMillions of yenThousands ofU.S. dollars¥3,702 1,5281,132457105146¥7,070$47,462 19,58914,5135,8591,3461,872$90,641Year ending December 31:Certain property, plant and equipment with a net bookcarrying value of ¥2,913 million ($37,346 thousand) atDecember 31, 2011 were mortgaged primarily to secureloans from banks.Both short-term and long-term bank loans are madeunder general agreements which provide that security andguarantees for present and future indebtedness will begiven upon request of the bank, and that the bank shallhave the right to offset cash deposits against obligationsthat have become due or, in the event of default, against allobligations due to the bank. The aggregate annual maturities of long-term debt outstanding at December 31, 2011 were as follows:72FINANCIAL SECTION>NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNotesAccounts20112010Millions of yenThousands ofU.S. dollars2011¥16,519364,013¥380,532¥13,676369,575¥383,251$211,7824,666,833$4,878,615December 31Change in benefit obligations:Benefit obligations at beginning of yearService costInterest costPlan participants’ contributionsAmendmentsActuarial (gain) lossBenefits paidAcquisitionForeign currency exchange rate changesBenefit obligations at end of yearChange in plan assets:Fair value of plan assets at beginning of yearActual return on plan assetsEmployer contributionsPlan participants’ contributionsBenefits paidAcquisitionForeign currency exchange rate changesFair value of plan assets at end of yearFunded status at end of year201120102011201120102011¥593,27425,87512,354—(1,913)14,845(17,511)——626,924460,090(17,285)22,282—(16,351)——448,736¥(178,188)¥551,32023,33112,636—(423)22,290(15,880)——593,274457,2084,53313,283—(14,934)——460,090¥(133,184)$7,606,077331,731158,385—(24,526)190,321(224,500)——8,037,4885,898,590(221,603)285,667—(209,628)——5,753,026$(2,284,462)¥261,1305,75612,7482,680—3,872(8,234)—(15,822)262,130197,8352,3358,2282,680(8,201)—(10,844)192,033¥(70,097)¥94,1705,66011,7922,460(149)(5,946)(7,458)198,754(38,153)261,13075,05819,3078,1522,460(7,413)128,043(27,772)197,835¥(63,295)$3,347,82173,795163,43634,359—49,641(105,564)—(202,847)3,360,6412,536,34629,936105,48734,359(105,141)—(139,025)2,461,962$(898,679)Years ended December 31Millions of yenThousands ofU.S. dollarsMillions of yenThousands ofU.S. dollarsJapanese plansForeign plans11. TRADE PAYABLESTrade payables are summarized as follows:12. EMPLOYEE RETIREMENT AND SEVERANCE BENEFITSThe Company and certain of its subsidiaries have contribu-tory and noncontributory defined benefit pension planscovering substantially all of their employees. Benefitspayable under the plans are based on employee earningsand years of service. The Company and certain of its sub-sidiaries also have defined contribution pension planscovering substantially all of their employees.The amounts of cost recognized for the defined contribu-tion pension plans of the Company and certain of itssubsidiaries for the years ended December 31, 2011, 2010 and2009 were ¥12,511 million ($160,397 thousand), ¥11,780 mil-lion and ¥9,148 million, respectively.Obligations and funded statusReconciliations of beginning and ending balances of the benefit obligations and the fair value of the plan assets are as follows:StrategyBusiness UnitsManagement SystemFINANCIAL SECTION73!37!101FINANCIAL SECTIONAmounts recognized in the consolidated balance sheets at December 31, 2011 and 2010 are as follows:Other assetsAccrued expensesAccrued pension and severance cost201120102011201120102011¥54—(178,242)¥(178,188)¥345—(133,529)¥(133,184)$692—(2,285,154)$(2,284,462)¥1,397(132)(71,362)¥(70,097)¥1,318(533)(64,080)¥(63,295)$17,910(1,692)(914,897)$(898,679)December 31Millions of yenThousands ofU.S. dollarsMillions of yenThousands ofU.S. dollarsJapanese plansForeign plansActuarial lossPrior service creditNet transition obligation201120102011201120102011¥291,778(130,712)—¥161,066¥257,625(142,473)722¥115,874$3,740,744(1,675,795)—$2,064,949¥16,095(345)—¥15,750¥3,538(486)—¥3,052$206,346(4,423)—$201,923December 31Millions of yenThousands ofU.S. dollarsMillions of yenThousands ofU.S. dollarsJapanese plansForeign plansAccumulated benefit obligation201120102011201120102011¥595,689¥565,406$7,637,038¥238,675¥216,239$3,059,936December 31Millions of yenThousands ofU.S. dollarsMillions of yenThousands ofU.S. dollarsJapanese plansForeign plansPlans with projected benefit obligationsin excess of plan assets:Projected benefit obligationsFair value of plan assetsPlans with accumulated benefit obligations in excess of plan assets:Accumulated benefit obligationsFair value of plan assets201120102011201120102011¥622,645444,403¥591,830444,403¥589,391455,862¥559,468453,342$7,982,6285,697,474$7,587,5645,697,474¥259,517188,023¥160,941111,527¥258,326193,713¥144,225122,590$3,327,1402,410,551$2,063,3461,429,833December 31Millions of yenThousands ofU.S. dollarsMillions of yenThousands ofU.S. dollarsJapanese plansForeign plansAmounts recognized in accumulated other comprehensive income (loss) at December 31, 2011 and 2010 before the effect ofincome taxes are as follows:The accumulated benefit obligation for all defined benefit plans was as follows:The projected benefit obligations and the fair value of planassets for the pension plans with projected benefit obliga-tions in excess of plan assets, and the accumulated benefitobligations and the fair value of plan assets for the pensionplans with accumulated benefit obligations in excess of planassets are as follows:74FINANCIAL SECTION>NOTES TO CONSOLIDATED FINANCIAL STATEMENTSService costInterest costExpected return on plan assetsAmortization ofnet transition obligationAmortization ofprior service creditAmortization of actuarial loss20112010200920112011201020092011¥25,87512,354(16,485)722(13,674)14,462¥23,254¥23,33112,636(16,591)722(13,878)14,545¥20,765¥21,75912,535(15,808)722(13,650)13,923¥19,481$331,731158,385(211,346)9,257(175,308)185,410$298,129¥5,75612,748(12,112)—(93)621¥6,920¥5,66011,792(10,540)—(116)1,050¥7,846¥2,4264,251(4,211)—(98)1,014¥3,382$73,795163,436(155,282)—(1,193)7,962$88,718Years ended December 31Millions of yenThousands ofU.S. dollarsMillions of yenThousands ofU.S. dollarsJapanese plansForeign plansCurrent year actuarial (gain) lossAmortization of actuarial lossPrior service credit due to amendmentsAmortization of prior service creditAmortization of net transition obligation201120102011201120102011¥48,615 (14,462)(1,913)13,674(722)¥45,192 ¥34,348(14,545)(423)13,878(722)¥32,536$623,270(185,410)(24,526)175,308(9,257)$579,385¥13,649(621)—93—¥13,121¥(14,713)(1,050)(149)116—¥(15,796)$174,987(7,962)—1,193—$168,218Years ended December 31Millions of yenThousands ofU.S. dollarsMillions of yenThousands ofU.S. dollarsJapanese plansForeign plansPrior service creditActuarial loss¥(13,137)16,708$(168,423)214,205¥(130)986$(1,667)12,641Millions of yenThousands ofU.S. dollarsMillions of yenThousands ofU.S. dollarsJapanese plansForeign plansDiscount rateAssumed rate of increase in future compensation levels1.9%3.0%2.1%3.0%4.6%2.4%4.9%2.9%December 312011201020112010Japanese plansForeign plansComponents of net periodic benefit cost and other amounts recognized in other comprehensive income (loss)Net periodic benefit cost for Canon’s employee retirement and severance defined benefit plans for the years ended December31, 2011, 2010 and 2009 consisted of the following components:Other changes in plan assets and benefit obligations recognized in other comprehensive income (loss) for the years endedDecember 31, 2011 and 2010 are summarized as follows:The estimated prior service credit and actuarial loss for the defined benefit pension plans that will be amortized from accu-mulated other comprehensive income (loss) into net periodic benefit cost over the next year are summarized as follows:AssumptionsWeighted-average assumptions used to determine benefit obligations are as follows:StrategyBusiness UnitsManagement SystemFINANCIAL SECTION75!37!101FINANCIAL SECTIONWeighted-average assumptions used to determine net periodic benefit cost are as follows:Discount rateAssumed rate of increase in future compensation levelsExpected long-term rate of return on plan assets2.1%3.0%3.6%2.4%3.0%3.7%4.9%2.9%5.7%5.3%3.1%6.2%2.3%3.0%3.6%4.9%2.8%6.1%Years ended December 31201120102011201020092009Japanese plansForeign plansCanon determines the expected long-term rate of returnbased on the expected long-term return of the various assetcategories in which it invests. Canon considers the currentexpectations for future returns and the actual historicalreturns of each plan asset category.Plan assetsCanon’s investment policies are designed to ensure ade-quate plan assets are available to provide future paymentsof pension benefits to eligible participants. Taking intoaccount the expected long-term rate of return on planassets, Canon formulates a !model"portfolio comprised ofthe optimal combination of equity securities and debt secu-rities. Plan assets are invested in individual equity and debtsecurities using the guidelines of the !model"portfolio inorder to produce a total return that will match the expectedreturn on a mid-term to long-term basis. Canon evaluatesthe gap between expected return and actual return ofinvested plan assets on an annual basis to determine if suchdifferences necessitate a revision in the formulation of the!model"portfolio. Canon revises the !model"portfolio whenand to the extent considered necessary to achieve theexpected long-term rate of return on plan assets.Canon’s model portfolio for Japanese plans consists ofthree major components: approximately 30% is invested inequity securities, approximately 50% is invested in debtsecurities, and approximately 20% is invested in otherinvestment vehicles, primarily consisting of investments inlife insurance company general accounts.Outside Japan, investment policies vary by country, butthe long-term investment objectives and strategies remainconsistent. Canon’s model portfolio for foreign plans hasbeen developed as follows: approximately 40% is invested inequity securities, approximately 55% is invested in debtsecurities, and approximately 5% is invested in other invest-ment vehicles, primarily consisting of investments in realestate assets.The equity securities are selected primarily from stocksthat are listed on the securities exchanges. Prior to invest-ing, Canon has investigated the business condition of theinvestee companies, and appropriately diversified invest-ments by type of industry and other relevant factors. Thedebt securities are selected primarily from governmentbonds, public debt instruments, and corporate bonds. Priorto investing, Canon has investigated the quality of the issue,including rating, interest rate, and repayment dates, andhas appropriately diversified the investments. Pooled fundsare selected using strategies consistent with the equity anddebt securities described above. As for investments in lifeinsurance company general accounts, the contracts withthe insurance companies include a guaranteed interest rateand return of capital. With respect to investments in for-eign investment vehicles, Canon has investigated thestability of the underlying governments and economies, themarket characteristics such as settlement systems and thetaxation systems. For each such investment, Canon hasselected the appropriate investment country and currency.76FINANCIAL SECTION>NOTES TO CONSOLIDATED FINANCIAL STATEMENTSEquity securities:Japanese companies (a)Foreign companiesPooled funds (b)Debt securities:Government bonds (c)Municipal bondsCorporate bondsPooled funds (d)Mortgage backed securities(and other asset backedsecurities)Life insurance companygeneral accountsOther assetsLevel 1Level 2Level 3TotalLevel 1Level 2Level 3Total¥37,8754,804—17,951——————¥60,630¥——82,380—8648,170190,8324,84292,7007,171¥386,959¥—————————1,147¥1,147¥37,8754,80482,38017,9518648,170190,8324,84292,7008,318¥448,736¥—3,779—2,326——————¥6,105¥——47,779—19—92,6532,726—42,751¥185,928¥——————————¥—¥—3,77947,7792,32619—92,6532,726—42,751¥192,033December 31, 2011Millions of yenJapanese plansForeign plansEquity securities:Japanese companies (e)Foreign companiesPooled funds (f)Debt securities:Government bonds (g)Municipal bondsCorporate bondsPooled funds (h)Mortgage backed securities(and other asset backedsecurities)Life insurance companygeneral accountsOther assetsLevel 1Level 2Level 3TotalLevel 1Level 2Level 3Total¥50,1775,352—9,687——————¥65,216¥——90,597—3236,518194,2861,98091,6108,521¥393,835¥—————————1,039¥1,039¥50,1775,35290,5979,6873236,518194,2861,98091,6109,560¥460,090¥—3,474—2,074——————¥5,548¥——80,666———104,650232—6,739¥192,287¥——————————¥—¥—3,47480,6662,074——104,650232—6,739¥197,835December 31, 2010Millions of yenJapanese plansForeign plansThe three levels of input used to measure fair value are more fully described in Note 21. The fair values of Canon’s pensionplan assets at December 31, 2011 and 2010, by asset category, are as follows:StrategyBusiness UnitsManagement SystemFINANCIAL SECTION77!37!101FINANCIAL SECTIONEquity securities:Japanese companies (a)Foreign companiesPooled funds (b)Debt securities:Government bonds (c)Municipal bondsCorporate bondsPooled funds (d)Mortgage backed securities(and other asset backedsecurities)Life insurance companygeneral accountsOther assetsLevel 1Level 2Level 3TotalLevel 1Level 2Level 3Total$485,57761,590—230,141——————$777,308$——1,056,154—11,077104,7442,446,56462,0771,188,46291,935$4,961,013$—————————14,705$14,705$485,57761,5901,056,154230,14111,077104,7442,446,56462,0771,188,462106,640$5,753,026$—48,449—29,820——————$78,269$——612,551—244—1,187,85934,949—548,090$2,383,693$——————————$—$—48,449612,55129,820244—1,187,85934,949—548,090$2,461,962December 31, 2011Thousands of U.S. dollarsJapanese plansForeign plans(a)The plan’s equity securities include common stock of theCompany and certain of its subsidiaries in the amountsof ¥1,129 million ($14,474 thousand).(b)These funds invest in listed equity securities consistingof approximately 50% Japanese companies and 50% for-eign companies for Japanese plans, and mainly foreigncompanies for foreign plans.(c)This class includes approximately 30% Japanese govern-ment bonds and 70% foreign government bonds.(d)These funds invest in approximately 75% Japanese gov-ernment bonds, 15% foreign government bonds, 5%Japanese municipal bonds, and 5% corporate bonds forJapanese plans. These funds invest in approximately 40%foreign government bonds and 60% corporate bonds forforeign plans.(e)The plan’s equity securities include common stock of theCompany and certain of its subsidiaries in the amountsof ¥1,044 million.(f)These funds invest in listed equity securities consistingof approximately 50% Japanese companies and 50% for-eign companies for Japanese plans, and mainly foreigncompanies for foreign plans.(g)This class includes approximately 50% Japanese govern-ment bonds and 50% foreign government bonds.(h)These funds invest in approximately 60% Japanese gov-ernment bonds, 20% foreign government bonds, 10%Japanese municipal bonds, and 10% corporate bonds forJapanese plans. These funds invest in approximately 40%foreign government bonds and 60% corporate bonds forforeign plans.Each level into which assets are categorized is based oninputs used to measure the fair value of the assets, and doesnot necessarily indicate the risks or ratings of the assets.Level 1 assets are comprised principally of equity securi-ties and government bonds, which are valued usingunadjusted quoted market prices in active markets with suf-ficient volume and frequency of transactions. Level 2 assetsare comprised principally of pooled funds that invest inequity and debt securities, corporate bonds and investmentsin life insurance company general accounts. Pooled fundsare valued at their net asset values that are calculated bythe sponsor of the fund and have daily liquidity. Corporatebonds are valued using quoted prices for identical assets inmarkets that are not active. Investments in life insurancecompany general accounts are valued at conversion value.The fair value of Level 3 assets, consisting of hedge funds,was ¥1,147 million ($14,705 thousand) and ¥1,039 millionat December 31, 2011 and 2010, respectively. Amounts ofactual returns on, and purchases and sales of, these assetsduring the years ended December 31, 2011 and 2010 werenot significant.78FINANCIAL SECTION>NOTES TO CONSOLIDATED FINANCIAL STATEMENTS201220132014201520162017-2021Japanese plansForeign plansMillions of yenThousands ofU.S. dollarsMillions of yenThousands ofU.S. dollars¥15,10016,13717,30119,16020,893130,449$193,590206,885221,808245,641267,8591,672,423¥8,7508,5428,7639,2289,99360,255$112,179109,513112,346118,308128,115772,500Year ending December 31:2011:Income before income taxesIncome taxes:CurrentDeferred2010:Income before income taxesIncome taxes:CurrentDeferred2009:Income before income taxesIncome taxes:CurrentDeferredJapaneseForeignMillions of yenTotal¥287,592¥67,67121,047¥88,718¥302,965¥78,35935,496¥113,855¥130,857¥45,07915,415¥60,494¥86,932¥23,6158,082¥31,697¥89,898¥32,420(6,115)¥26,305¥88,498¥18,3315,297¥23,628¥374,524¥91,28629,129¥120,415¥392,863¥110,77929,381¥140,160¥219,355¥63,41020,712¥84,122Years ended December 312011:Income before income taxesIncome taxes:CurrentDeferredJapaneseForeignThousands of U.S. dollarsTotal$3,687,077$867,577269,833$1,137,410$1,114,513$302,756 103,616$406,372$4,801,590$1,170,333373,449$1,543,782ContributionsCanon expects to contribute ¥21,946 million ($281,359 thousand) to its Japanese defined benefit pension plans and ¥8,931 mil-lion ($114,500 thousand) to its foreign defined benefit pension plans for the year ending December 31, 2012.Estimated future benefit paymentsThe following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:13. INCOME TAXESDomestic and foreign components of income before income taxes and the current and deferred income tax expense (bene-fit) attributable to such income are summarized as follows:StrategyBusiness UnitsManagement SystemFINANCIAL SECTION79!37!101FINANCIAL SECTIONThe Company and its domestic subsidiaries are subject toa number of income taxes, which, in the aggregate, repre-sent a statutory income tax rate of approximately 40% forthe years ended December 31, 2011, 2010 and 2009.Amendments to the Japanese tax regulations wereenacted into law on November 30, 2011. As a result of theseamendments, the statutory income tax rate will be reducedfrom approximately 40% to 38% effective from the yearbeginning January 1, 2013, and to approximately 35% effec-tive from the year beginning January 1, 2016 thereafter.Consequently, the statutory income tax rate utilized fordeferred tax assets and liabilities expected to be settled orrealized in the period from January 1, 2013 to December 31,2015 is approximately 38% and for periods subsequent toDecember 31, 2015 the rate is approximately 35%. Theadjustments of deferred tax assets and liabilities for thischange in the tax rate amounted to ¥6,599 million ($84,603thousand) and have been reflected in income taxes in theconsolidated statement of income for the year endedDecember 31, 2011.A reconciliation of the Japanese statutory income tax rate and the effective income tax rate as a percentage of incomebefore income taxes is as follows:Japanese statutory income tax rateIncrease (reduction) in income taxes resulting from:Expenses not deductible for tax purposesIncome of foreign subsidiaries taxed at lower than Japanese statutory tax rateTax credit for research and development expensesChange in valuation allowance Effect of enacted changes in tax laws and rates on Japanese taxOtherEffective income tax rate20112010200940.0%0.6(4.3)(3.9)(0.5)1.8(1.5)32.2%40.0%0.8(3.5)(5.1)2.8—0.735.7%40.0%0.9(5.4)(2.8)5.4—0.238.3%Years ended December 31Net deferred income tax assets and liabilities are included in the accompanying consolidated balance sheets under thefollowing captions:Prepaid expenses and other current assetsOther assetsOther current liabilitiesOther noncurrent liabilities20112010Millions of yenThousands ofU.S. dollars2011¥61,961130,582(1,735)(43,542)¥147,266¥69,197136,727(2,149)(47,827)¥155,948$794,3721,674,128(22,244)(558,231)$1,888,025December 3180FINANCIAL SECTION>NOTES TO CONSOLIDATED FINANCIAL STATEMENTSDeferred tax assets:InventoriesAccrued business taxAccrued pension and severance costResearch and development’costs capitalized for tax purposesProperty, plant and equipmentAccrued expensesNet operating losses carried forwardOtherLess valuation allowanceTotal deferred tax assetsDeferred tax liabilities:Undistributed earnings of foreign subsidiariesNet unrealized gains on securitiesTax deductible reserveFinancing lease revenuePrepaid pension and severance costOtherTotal deferred tax liabilitiesNet deferred tax assets20112010Millions of yenThousands ofU.S. dollars2011¥18,8853,22790,02512,89831,62437,99231,96738,220264,838(33,788)231,050(6,783)(1,180)(6,385)(40,878)(2,224)(26,334)(83,784)¥147,266¥23,8366,20078,55214,74041,73735,82328,37352,869282,130(35,307)246,823(8,215)(2,119)(6,038)(37,353)(2,018)(35,132)(90,875)¥155,948$242,11541,3721,154,167165,359405,436487,077409,833489,9993,395,358(433,179)2,962,179(86,962)(15,128)(81,859)(524,077)(28,513)(337,615)(1,074,154)$1,888,025December 31Within one yearAfter one year through five yearsAfter five years through ten yearsAfter ten years through twenty yearsIndefinite periodTotalMillions of yenThousands ofU.S. dollars¥2,588 5,09737,19942,40229,295¥116,581$33,17965,346476,910543,615375,578$1,494,628The tax effects of temporary differences that give rise to the deferred tax assets and deferred tax liabilities at December31, 2011 and 2010 are presented below:The net changes in the total valuation allowance were adecrease of ¥1,519 million ($19,474 thousand) for the yearended December 31, 2011, and increases of ¥13,119 millionand ¥11,371 million for the years ended December 31, 2010and 2009, respectively.Based upon the level of historical taxable income andprojections for future taxable income over the periodswhich the net deductible temporary differences areexpected to reverse, management believes it is more likelythan not that Canon will realize the benefits of thesedeferred tax assets, net of the existing valuation allowance,at December 31, 2011.At December 31, 2011, Canon had net operating losseswhich can be carried forward for income tax purposes of¥116,581 million ($1,494,628 thousand) to reduce futuretaxable income. Periods available to reduce future taxableincome vary in each tax jurisdiction and generally rangefrom one year to twenty years as follows:StrategyBusiness UnitsManagement SystemFINANCIAL SECTION81!37!101FINANCIAL SECTIONIncome taxes have not been accrued on undistributedearnings of domestic subsidiaries as the tax law provides ameans by which the dividends from a domestic subsidiarycan be received tax free.Canon has not recognized deferred tax liabilities of¥18,112 million ($232,205 thousand) for a portion of undis-tributed earnings of foreign subsidiaries that arose for theyear ended December 31, 2011 and prior years becauseCanon currently does not expect to have such amounts dis-tributed or paid as dividends to the Company in theforeseeable future. Deferred tax liabilities will be recognizedwhen Canon expects that it will realize those undistributedearnings in a taxable manner, such as through receipt ofdividends or sale of the investments. At December 31, 2011,such undistributed earnings of these subsidiaries were¥869,064 million ($11,141,846 thousand).A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:Balance at beginning of yearAdditions for tax positions of the current yearAdditions for tax positions of prior yearsReductions for tax positions of prior yearsSettlements with tax authoritiesAdditions from acquisitionsOtherBalance at end of year20102009Millions of yenThousands ofU.S. dollars2011¥13,23573805(8,354)(2,471)4,066(1,319)¥6,0352011¥6,035149431(2,139)(1,264)—(279)¥2,933¥12,689—1,442(1,106)——210¥13,235$77,3721,9105,526(27,423)(16,205)—(3,577)$37,603Years ended December 31The total amounts of unrecognized tax benefits thatwould reduce the effective tax rate, if recognized, are ¥2,809million ($36,013 thousand) and ¥6,035 million at December31, 2011 and 2010, respectively.Although Canon believes its estimates and assumptionsof unrecognized tax benefits are reasonable, uncertaintyregarding the final determination of tax audit settlementsand any related litigation could affect the effective tax ratein the future period. Based on each of the items of whichCanon is aware at December 31, 2011, no significantchanges to the unrecognized tax benefits are expectedwithin the next twelve months.Canon recognizes interest and penalties accrued related tounrecognized tax benefits in income taxes. Both interest andpenalties accrued at December 31, 2011 and 2010, and inter-est and penalties included in income taxes for the yearsended December 31, 2011, 2010 and 2009 are not material.Canon files income tax returns in Japan and various for-eign tax jurisdictions. In Japan, Canon is no longer subject toregular income tax examinations by the tax authority foryears before 2010. While there has been no specific indicationby the tax authority that Canon will be subject to a transferpricing examination in the near future, the tax authoritycould conduct a transfer pricing examination for years after2003. In other major foreign tax jurisdictions, including theUnited States and Netherlands, Canon is no longer subject toincome tax examinations by tax authorities for years before2004 with few exceptions. The tax authorities are currentlyconducting income tax examinations of Canon’s income taxreturns for years after 2003 in major foreign tax jurisdictions.14. LEGAL RESERVE AND RETAINED EARNINGSThe Corporation Law of Japan provides that an amount equalto 10% of distributions from retained earnings paid by theCompany and its Japanese subsidiaries be appropriated as alegal reserve. No further appropriations are required whenthe total amount of the additional paid-in capital and thelegal reserve equals 25% of their respective stated capital. TheCorporation Law of Japan also provides that additional paid-in capital and legal reserve are available for appropriationsby the resolution of the stockholders. Certain foreign sub-sidiaries are also required to appropriate their earnings tolegal reserves under the laws of the respective countries.Cash dividends and appropriations to the legal reservecharged to retained earnings for the years ended December31, 2011, 2010 and 2009 represent dividends paid out duringthose years and the related appropriations to the legalreserve. Retained earnings at December 31, 2011 did notreflect current year-end dividends in the amount of ¥72,092million ($924,256 thousand) which were approved by thestockholders in March 2012.The amount available for dividends under the CorporationLaw of Japan is based on the amount recorded in the Company’snonconsolidated books of account in accordance with financialaccounting standards of Japan. Such amount was ¥1,223,401million ($15,684,628 thousand) at December 31, 2011.Retained earnings at December 31, 2011 included Canon’sequity in undistributed earnings of affiliated companiesaccounted for by the equity method in the amount of ¥16,217million ($207,910 thousand).82FINANCIAL SECTION>NOTES TO CONSOLIDATED FINANCIAL STATEMENTSForeign currency translation adjustments:Balance at beginning of yearAdjustments for the yearBalance at end of yearNet unrealized gains and losses on securities:Balance at beginning of yearAdjustments for the yearBalance at end of yearNet gains and losses on derivative instruments:Balance at beginning of yearAdjustments for the yearBalance at end of yearPension liability adjustments:Balance at beginning of yearAdjustments for the yearBalance at end of yearTotal accumulated other comprehensive income (loss):Balance at beginning of yearAdjustments for the yearBalance at end of year20102009Millions of yenThousands ofU.S. dollars2011¥(202,628)(122,984)(325,612)3,285(265)3,02071846917(61,546)(7,238)(68,784)(260,818)(129,641)¥(390,459)2011¥(325,612)(53,251)(378,863)3,020 (2,017)1,003 917 (462)455 (68,784)(35,584)(104,368)(390,459)(91,314)¥(481,773)¥(235,968)33,340(202,628)1,1352,1503,2851,493(1,422)71(59,480)(2,066)(61,546)(292,820)32,002¥(260,818)$(4,174,513)(682,705)(4,857,218)38,718 (25,859)12,859 11,756 (5,923)5,833 (881,846)(456,205)(1,338,051)(5,005,885)(1,170,692)$(6,176,577)Years ended December 3115. OTHER COMPREHENSIVE INCOME (LOSS)Changes in accumulated other comprehensive income (loss) are as follows:StrategyBusiness UnitsManagement SystemFINANCIAL SECTION83!37!101FINANCIAL SECTIONTax effects allocated to each component of other comprehensive income (loss) and reclassification adjustments, includ-ing amounts attributable to noncontrolling interests, are as follows:2011:Foreign currency translation adjustmentsNet unrealized gains and losses on securities:Amount arising during the yearReclassification adjustments for gains and losses realized in net incomeNet change during the yearNet gains and losses on derivative instruments:Amount arising during the yearReclassification adjustments for gains and losses realizedin net incomeNet change during the yearPension liability adjustments:Amount arising during the yearReclassification adjustments for gains and losses realizedin net incomeNet change during the yearOther comprehensive income (loss)2010:Foreign currency translation adjustmentsNet unrealized gains and losses on securities:Amount arising during the yearReclassification adjustments for gains and losses realized in net incomeNet change during the yearNet gains and losses on derivative instruments:Amount arising during the yearReclassification adjustments for gains and losses realized in net incomeNet change during the yearPension liability adjustments:Amount arising during the yearReclassification adjustments for gains and losses realized in net incomeNet change during the yearOther comprehensive income (loss)2009:Foreign currency translation adjustmentsNet unrealized gains and losses on securities:Amount arising during the yearReclassification adjustments for gains and losses realized in net incomeNet change during the yearNet gains and losses on derivative instruments:Amount arising during the yearReclassification adjustments for gains and losses realized in net incomeNet change during the yearPension liability adjustments:Amount arising during the yearReclassification adjustments for gains and losses realized in net incomeNet change during the yearOther comprehensive income (loss)Before-taxamountTax (expense)or benefitMillions of yenNet-of-taxamount¥(53,839)(7,571)4,077 (3,494)4,221(5,006)(785)(59,928) 2,038 (57,890)¥(116,008) ¥(128,271)(2,179)1,320(859)8,409(6,990)1,419(19,170)2,323(16,847)¥(144,558)¥35,4592,2312,2054,436298(2,670)(2,372)(4,115)1,911(2,204)¥35,319¥(247) 3,010(1,632)1,378(1,708)2,04433620,252(739)19,513¥20,980¥1,35367142713(3,573)2,921(652)8,314(794)7,520¥8,934¥(2,089)(1,333)(886)(2,219)(119)1,0689491,891(632)1,259¥(2,100)¥(54,086)(4,561)2,445(2,116)2,513(2,962)(449)(39,676)1,299(38,377)¥(95,028)¥(126,918)(1,508)1,362(146)4,836(4,069)767(10,856)1,529(9,327)¥(135,624)¥33,3708981,3192,217179(1,602)(1,423)(2,224)1,279(945)¥33,219Years ended December 3184FINANCIAL SECTION>NOTES TO CONSOLIDATED FINANCIAL STATEMENTS2011:Foreign currency translation adjustmentsNet unrealized gains and losses on securities:Amount arising during the yearReclassification adjustments for gains and losses realized in net incomeNet change during the yearNet gains and losses on derivative instruments:Amount arising during the yearReclassification adjustments for gains and losses realized in net incomeNet change during the yearPension liability adjustments:Amount arising during the yearReclassification adjustments for gains and losses realized in net incomeNet change during the yearOther comprehensive income (loss)Before-taxamountTax (expense)or benefitThousands of U.S. dollarsNet-of-taxamount$(690,244)(97,065) 52,270 (44,795) 54,115(64,179) (10,064)(768,307)26,128 (742,179)$(1,487,282) $(3,166) 38,590 (20,923)17,667 (21,897) 26,204 4,307 259,640(9,474) 250,166 $268,974 $(693,410) (58,475)31,347(27,128)32,218(37,975)(5,757)(508,667)16,654(492,013)$(1,218,308)16. STOCK-BASED COMPENSATION On May 1, 2011, based on the approval of the stockholders,the Company granted stock options to its directors, executiveofficers and certain employees to acquire 912,000 shares ofcommon stock. These option awards vest after two years ofcontinued service beginning on the grant date and have afour year contractual term. The grant-date fair value pershare of the stock options granted during the year endedDecember 31, 2011 was ¥772 ($9.90).On May 1, 2010, based on the approval of the stockholders,the Company granted stock options to its directors, executiveofficers and certain employees to acquire 890,000 shares ofcommon stock. These option awards vest after two years ofcontinued service beginning on the grant date and have afour year contractual term. The grant-date fair value pershare of the stock options granted during the year endedDecember 31, 2010 was ¥988.On May 1, 2009, based on the approval of the stockholders,the Company granted stock options to its directors, executiveofficers and certain employees to acquire 954,000 shares ofcommon stock. These option awards vest after two years ofcontinued service beginning on the grant date and have afour year contractual term. The grant-date fair value pershare of the stock options granted during the year endedDecember 31, 2009 was ¥699.On May 1, 2008, based on the approval of the stockholders,the Company granted stock options to its directors, executiveofficers and certain employees to acquire 592,000 shares ofcommon stock. These option awards vest after two years ofcontinued service beginning on the grant date and have afour year contractual term. The grant-date fair value pershare of the stock options granted during the year endedDecember 31, 2008 was ¥1,247.The compensation cost recognized for these stockoptions for the years ended December 31, 2011, 2010 and2009 was ¥748 million ($9,590 thousand), ¥643 million and¥564 million, respectively, and is included in selling, gen-eral and administrative expenses in the consolidatedstatements of income.The fair value of each option award was estimated on thedate of grant using the Black-Scholes option pricing modelthat incorporates the assumptions presented below:Expected term of option (in years)Expected volatilityDividend yieldRisk-free interest rate2011201020094.036.44%3.16%0.44%4.038.00%2.53%0.45%4.040.08%3.51%0.64%Years ended December 31StrategyBusiness UnitsManagement SystemFINANCIAL SECTION85!37!101FINANCIAL SECTIONA summary of option activity under the stock option plans as of and for the years ended December 31, 2011, 2010 and2009 is presented below:Outstanding at January 1, 2009GrantedForfeitedOutstanding at December 31, 2009GrantedForfeitedOutstanding at December 31, 2010GrantedExercisedForfeitedOutstanding at December 31, 2011Exercisable at December 31, 2011YenU.S. dollarsYearMillions of yenThousands ofU.S. dollars592,000954,000(34,000)1,512,000890,000(182,000)2,220,000912,000(65,800)(24,000)3,042,2001,274,200¥5,5023,2874,8514,1194,5733,4794,3543,9903,2874,282¥4,268¥4,257$55.8251.1542.1454.90$54.72$54.583.33.02.52.00.9¥—588722¥88¥88$—7,5389,256$1,128$1,128SharesWeighted-averageexercise priceWeighted-averageremainingcontractualtermAggregateintrinsic valueAt December 31, 2011, all outstanding option awards were vested or expected to be vested. A summary of the status of the Company’s nonvested shares at December 31, 2011, and changes during the year endedDecember 31, 2011, is presented below:Nonvested at January 1, 2011GrantedVestedForfeitedNonvested at December 31, 2011yenU.S. dollars1,662,000912,000(782,000)(24,000)1,768,000¥852772699880878$10.929.90 8.9611.2811.26Year ended December 31, 2011SharesWeighted-averagegrant-date fair valueAt December 31, 2011, there was ¥606 million ($7,769thousand) of total unrecognized compensation cost relatedto nonvested stock options. That cost is expected to be rec-ognized over a weighted average period of 0.84 year. Thetotal fair value of shares vested during the years endedDecember 31, 2011 and 2010 was ¥547 million ($7,013 thou-sand) and ¥696 million, respectively. Cash received from theexercise of stock options for the year ended December 31,2011 was ¥216 million ($2,769 thousand). 86FINANCIAL SECTION>NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNet income attributable to Canon Inc.20102009Millions of yenThousands ofU.S. dollars2011¥246,6032011¥248,630¥131,647$3,187,564Years ended December 31Average common shares outstandingEffect of dilutive securities:Stock optionsDiluted common shares outstandingNumber of shares1,234,817,43450,6031,234,868,0371,215,832,41960,5521,215,892,9711,234,481,836—1,234,481,836Net income attributable to Canon Inc.stockholders per share:BasicDilutedYenU.S. dollars¥199.71199.70¥204.49204.48¥106.64106.64$2.622.6217. NET INCOME ATTRIBUTABLE TO CANON INC. STOCKHOLDERS PER SHAREA reconciliation of the numerators and denominators of basic and diluted net income attributable to Canon Inc. stockhold-ers per share computations is as follows:The computation of diluted net income attributable toCanon Inc. stockholders per share for the years endedDecember 31, 2011 and 2010 excludes certain outstandingstock options because the effect would be anti-dilutive. Thecomputation of diluted net income attributable to CanonInc. stockholders per share for the year ended December 31,2009 excludes outstanding stock options because the effectwould be anti-dilutive.18. DERIVATIVES AND HEDGING ACTIVITIESRisk management policyCanon operates internationally, exposing it to the risk ofchanges in foreign currency exchange rates. Derivative finan-cial instruments are comprised principally of foreignexchange contracts utilized by the Company and certain ofits subsidiaries to reduce the risk. Canon assesses foreign cur-rency exchange rate risk by continually monitoring changesin the exposures and by evaluating hedging opportunities.Canon does not hold or issue derivative financial instrumentsfor trading purposes. Canon is also exposed to credit-relatedlosses in the event of non-performance by counterparties toderivative financial instruments, but it is not expected thatany counterparties will fail to meet their obligations. Most ofthe counterparties are internationally recognized financialinstitutions and selected by Canon taking into account theirfinancial condition, and contracts are diversified across anumber of major financial institutions.Foreign currency exchange rate risk managementCanon’s international operations expose Canon to the risk ofchanges in foreign currency exchange rates. Canon uses for-eign exchange contracts to manage certain foreign currencyexchange exposures principally from the exchange of U.S.dollars and euros into Japanese yen. These contracts are pri-marily used to hedge the foreign currency exposure offorecasted intercompany sales and intercompany tradereceivables that are denominated in foreign currencies. Inaccordance with Canon’s policy, a specific portion of foreigncurrency exposure resulting from forecasted intercompanysales are hedged using foreign exchange contracts whichprincipally mature within three months.Cash flow hedgeChanges in the fair value of derivative financial instrumentsdesignated as cash flow hedges, including foreign exchangecontracts associated with forecasted intercompany sales, arereported in accumulated other comprehensive income (loss).These amounts are subsequently reclassified into earningsthrough other income (deductions) in the same period as thehedged items affect earnings. Substantially all amountsrecorded in accumulated other comprehensive income (loss)at year-end are expected to be recognized in earnings over thenext twelve months. Canon excludes the time value compo-nent from the assessment of hedge effectiveness. Changes inthe fair value of a foreign exchange contract for the periodbetween the date that the forecasted intercompany salesoccur and its maturity date are recognized in earnings andnot considered hedge ineffectiveness.StrategyBusiness UnitsManagement SystemFINANCIAL SECTION87!37!101FINANCIAL SECTIONDerivatives not designated as hedgesCanon has entered into certain foreign exchange contracts toprimarily offset the earnings impact related to fluctuationsin foreign currency exchange rates associated with certainassets denominated in foreign currencies. Although these for-eign exchange contracts have not been designated as hedgesas required in order to apply hedge accounting, the contractsare effective from an economic perspective. The changes inthe fair value of these contracts are recorded in earningsimmediately.Contract amounts of foreign exchange contracts atDecember 31, 2011 and 2010 are set forth below:To sell foreign currenciesTo buy foreign currencies2010Millions of yenThousands ofU.S. dollars20112011¥391,45575,016¥466,36148,686$5,018,654961,744December 31Fair value of derivative instruments in the consolidated balance sheetsThe following tables present Canon’s derivative instruments measured at gross fair value as reflected in the consolidatedbalance sheets at December 31, 2011 and 2010.Assets:Foreign exchange contractsPrepaid expenses andother current assetsLiabilities:Foreign exchange contractsOther current liabilities2010Millions of yenThousands ofU.S. dollars20112011¥1,325 1,270¥2,487426$16,98716,282Fair valueBalance sheet locationDerivatives designated as hedging instrumentsAssets:Foreign exchange contractsPrepaid expenses andother current assetsLiabilities:Foreign exchange contractsOther current liabilities2010Millions of yenThousands ofU.S. dollars20112011¥3,3931,340¥9,463487$43,50017,180Fair valueBalance sheet locationDerivatives not designated as hedging instrumentsDecember 31December 3188FINANCIAL SECTION>NOTES TO CONSOLIDATED FINANCIAL STATEMENTSForeign exchange contractsOther, net2009Millions of yenThousands ofU.S. dollars20112010¥50,7942011¥11,168¥(8,638)$143,179Gain (loss) recognized in income on derivativeLocationEffect of derivative instruments in the consolidated statements of incomeThe following tables present the effect of Canon’s derivative instruments in the consolidated statements of income for theyears ended December 31, 2011, 2010 and 2009.Derivatives in cash flow hedging relationships2011:Foreign exchangecontracts2010:Foreign exchangecontracts2009:Foreign exchangecontractsThousands of U.S. dollars2011:Foreign exchangecontractsAmountLocationGain (loss) reclassified fromaccumulated OCI into income(effective portion)Gain (loss) recognized in income(ineffective portion and amount excludedfrom effectiveness testing)Amount¥5,0066,9902,670$64,179LocationOther, netOther, netOther, netOther, netAmount¥(785)1,419(2,372)$(10,064)Other, netOther, netOther, netOther, net¥(457)(302)(462)$(5,859)Years ended December 31Millions of yenGain (loss) recognizedin OCI (effective portion)Derivatives not designated as hedging instruments19. COMMITMENTS AND CONTINGENT LIABILITIESCommitmentsAt December 31, 2011, commitments outstanding for thepurchase of property, plant and equipment approximated¥66,287 million ($849,833 thousand), and commitments out-standing for the purchase of parts and raw materialsapproximated ¥75,823 million ($972,090 thousand).Canon occupies sales offices and other facilities underlease arrangements accounted for as operating leases.Deposits made under such arrangements aggregated ¥14,171million ($181,679 thousand) and ¥13,686 million atDecember 31, 2011 and 2010, respectively, and are includedin noncurrent receivables in the accompanying consolidatedbalance sheets. Rental expenses under such operating leasearrangements amounted to ¥38,167 million ($489,321 thou-sand), ¥40,396 million and ¥36,474 million for the yearsended December 31, 2011, 2010 and 2009, respectively.Future minimum lease payments required under non-cancelable operating leases that have initial or remaininglease terms in excess of one year at December 31, 2011 areas follows:20122013201420152016ThereafterTotal future minimum lease paymentsMillions of yenThousands ofU.S. dollars¥22,25915,84311,6327,1205,47310,471¥72,798$285,372 203,115149,12891,28270,167134,244$933,308Year ending December 31:Years ended December 31StrategyBusiness UnitsManagement SystemFINANCIAL SECTION89!37!101FINANCIAL SECTIONGuaranteesCanon provides guarantees for bank loans of its employees,affiliates and other companies. The guarantees for theemployees are principally made for their housing loans. Theguarantees of loans of its affiliates and other companies aremade to ensure that those companies operate with less finan-cial risk.For each guarantee provided, Canon would have to per-form under a guarantee if the borrower defaults on apayment within the contract periods of 1 year to 30 years, inthe case of employees with housing loans, and of 1 year to 10years, in the case of affiliates and other companies. The maxi-mum amount of undiscounted payments Canon would havehad to make in the event of default is ¥15,245 million($195,449 thousand) at December 31, 2011. The carryingamounts of the liabilities recognized for Canon’s obligationsas a guarantor under those guarantees at December 31, 2011were not significant.Canon also issues contractual product warranties underwhich it generally guarantees the performance of productsdelivered and services rendered for a certain period orterm. Changes in accrued product warranty cost for theyears ended December 31, 2011 and 2010 are summarizedas follows:Balance at beginning of yearAdditionUtilizationOtherBalance at end of year2010Millions of yenThousands ofU.S. dollars20112011¥13,34314,296(14,649)(1,299)¥11,691¥13,94417,605(14,713)(3,493)¥13,343$171,064183,282(187,808)(16,653)$149,885Years ended December 31Legal proceedingsIn Germany, Verwertungsgesellschaft Wort (!VG Wort"), a col-lecting society representing certain copyright holders, hasfiled a series of lawsuits seeking to impose copyright leviesupon digital products such as PCs and printers, that allegedlyenable the reproduction of copyrighted materials, against thecompanies importing and distributing these digital products.VG Wort filed a lawsuit in January 2006 against Canon seek-ing payment of copyright levies on single-function printers,and the court of first instance in D)sseldorf ruled in favor ofthe claim by VG Wort in November 2006. Canon lodged anappeal against such decision in December 2006 before thecourt of appeals in D)sseldorf. Following a decision by thesame court of appeals in D)sseldorf on January 23, 2007 inrelation to a similar court case seeking copyright levies onsingle-function printers of Epson Deutschland GmbH, XeroxGmbH and Kyocera Mita Deutschland GmbH, whereby thecourt rejected such alleged levies, in its judgment ofNovember 13, 2007, the court of appeals rejected VG Wort’sclaim against Canon. VG Wort appealed further against saiddecision of the court of appeals before the Federal SupremeCourt. In December 2007, for a similar Hewlett-PackardGmbH case relating to single-function printers, the FederalSupreme Court delivered its judgment in favor of Hewlett-Packard GmbH and dismissed VG Wort’s claim. VG Wort hasalready filed a constitutional complaint with the FederalConstitutional Court against said judgment of the FederalSupreme Court. Also, after rejection by the Federal SupremeCourt of an appeal by VG Wort in relation to Canon’s single-function printers case in September 2008, VG Wort lodged aclaim before the Federal Constitutional Court. The FederalConstitutional Court, in the same way as the decision givenin the HP case in September 2010, gave its decision in January2011 that the case should be reverted back to the FederalSupreme Court, admitting VG Wort’s claim for lack of *dueprocess#(i.e., insufficient deliberation before judgment on themerits). The hearing of Canon’s case was reverted back to theFederal Supreme Court and it was held in June 2011. Duringthe hearing, the Federal Supreme Court indicated it is possi-ble that Canon’s case would be referred to the EuropeanCourt of Justice for a preliminary ruling. On July 21, 2011,the Federal Supreme Court delivered its decision to refer thiscase to the European Court of Justice for its preliminary rul-ing, upon which the Federal Supreme Court will render itsfinal judgment on this case. The timeline of that proceedingfrom now on is yet to be known. In 2007, an amendment ofGerman copyright law was carried out, and a new law hasbeen effective from January 1, 2008 for both multi-functionprinters and single-function printers. The new law sets forththat the scope and tariff of copyright levies will be agreedbetween industry and the collecting society. Industry and thecollecting society, based on the requirement under the newlaw, reached an agreement in December 2008. This agree-ment is applicable retroactively from January 1, 2008. Thetiming of the final outcome of the court case regarding thesingle-function printers sold in Germany before January 1,2008 remains uncertain.Canon is involved in various claims and legal actions,including those noted above, arising in the ordinary course ofbusiness. Canon has recorded provisions for liabilities whenit is probable that liabilities have been incurred and theamount of loss can be reasonably estimated. Canon reviewsthese provisions at least quarterly and adjusts these provi-sions to reflect the impact of the negotiations, settlements,90FINANCIAL SECTION>NOTES TO CONSOLIDATED FINANCIAL STATEMENTSLong-term debt, including current installmentsForeign exchange contracts:AssetsLiabilitiesCarryingamountEstimatedfair valueCarryingamountEstimatedfair valueCarryingamountEstimatedfair value¥(7,070)4,718(2,610)¥(7,053)4,718(2,610)¥(9,260)11,950(913)¥(9,245)11,950(913)$(90,641)60,487(33,462)$(90,423)60,487(33,462)2010Millions of yenThousands of U.S. dollars20112011December 31rulings, advice of legal counsel and other information andevents pertaining to a particular case. Based on its experi-ence, although litigation is inherently unpredictable, Canonbelieves that any damage amounts claimed in the specificmatters discussed above and other outstanding matters arenot a meaningful indicator of Canon’s potential liability. Inthe opinion of management, any reasonably possible range oflosses from outstanding matters would not have a materialadverse effect on Canon’s consolidated financial position,results of operations, or cash flows. 20. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATIONS OFCREDIT RISKFair value of financial instrumentsThe estimated fair values of Canon’s financial instruments atDecember 31, 2011 and 2010 are set forth below. The follow-ing summary excludes cash and cash equivalents, tradereceivables, finance receivables, noncurrent receivables,short-term loans, trade payables and accrued expenses forwhich fair values approximate their carrying amounts. Thesummary also excludes investments which are disclosed inNote 3.The following methods and assumptions are used to esti-mate the fair value in the above table.Long-term debtThe fair values of Canon’s long-term debt instruments arebased on the present value of future cash flows associatedwith each instrument discounted using current marketborrowing rates for similar debt instruments of compara-ble maturity.Foreign exchange contractsThe fair values of foreign exchange contracts are measuredbased on the market price obtained from financial institutions.Limitations of fair value estimatesFair value estimates are made at a specific point in time,based on relevant market information and informationabout the financial instruments. These estimates are subjec-tive in nature and involve uncertainties and matters ofsignificant judgment and therefore cannot be determinedwith precision. Changes in assumptions could significantlyaffect the estimates.Concentrations of credit riskAt December 31, 2011 and 2010, one customer accounted forapproximately 17% and 21% of consolidated trade receiv-ables, respectively. Although Canon does not expect that thecustomer will fail to meet its obligations, Canon is poten-tially exposed to concentrations of credit risk if the customerfailed to perform according to the terms of the contracts.StrategyBusiness UnitsManagement SystemFINANCIAL SECTION91!37!101FINANCIAL SECTION21. FAIR VALUE MEASUREMENTSFair value is the price that would be received to sell an assetor paid to transfer a liability (an exit price) in the principal ormost advantageous market for the asset or liability in anorderly transaction between market participants at the meas-urement date. A three-level fair value hierarchy thatprioritizes the inputs used to measure fair value is as follows:Level 1’Inputs are quoted prices in active markets foridentical assets or liabilities.Level 2’Inputs are quoted prices for similar assets or liabil-ities in active markets, quoted prices for identicalor similar assets or liabilities in markets that arenot active, inputs other than quoted prices thatare observable, and inputs that are derived princi-pally from or corroborated by observable marketdata by correlation or other means.Level 3’Inputs are derived from valuation techniques inwhich one or more significant inputs or valuedrivers are unobservable, which reflect the report-ing entity’s own assumptions about theassumptions that market participants would usein establishing a price.Assets and liabilities measured at fair value on arecurring basisThe following tables present Canon’s assets and liabilities thatare measured at fair value on a recurring basis consistent withthe fair value hierarchy at December 31, 2011 and 2010.2011:Assets:Cash and cash equivalentsAvailable-for-sale (current):Corporate bondsAvailable-for-sale (noncurrent):Government bondsCorporate bondsFund trustsEquity securitiesDerivativesTotal assetsLiabilities:DerivativesTotal liabilitiesLevel 3TotalLevel 2¥204,307——1041,675—4,718¥210,804¥2,610¥2,610Level 1¥—20150—15117,724—¥18,045¥—¥—¥———454———¥454¥—¥—¥204,307201505581,82617,7244,718¥229,303¥2,610¥2,610December 31Millions of yen2010:Assets:Cash and cash equivalentsAvailable-for-sale (current):Government bondsCorporate bondsAvailable-for-sale (noncurrent):Government bondsCorporate bondsFund trustsEquity securitiesDerivativesTotal assetsLiabilities:DerivativesTotal liabilitiesLevel 3TotalLevel 2¥249,907———441,788—11,950¥263,689¥913¥913Level 1¥—1—161—1023,402—¥23,574¥—¥—¥——1,000—950———¥1,950¥—¥—¥249,90711,0001619941,79823,40211,950¥289,213¥913¥913Millions of yen92FINANCIAL SECTION>NOTES TO CONSOLIDATED FINANCIAL STATEMENTS2011:Assets:Cash and cash equivalentsAvailable-for-sale (current):Corporate bondsAvailable-for-sale (noncurrent):Government bondsCorporate bondsFund trustsEquity securitiesDerivativesTotal assetsLiabilities:DerivativesTotal liabilitiesLevel 3TotalLevel 2$2,619,321——1,33321,474—60,487$2,702,615$33,462$33,462Level 1$—2561,923—1,936227,231—$231,346$—$—$———5,821———$5,821$—$—$2,619,3212561,9237,15423,410227,23160,487$2,939,782$33,462$33,462Thousands of U.S. dollarsBalance at beginning of yearTotal gains or losses (realized or unrealized):Included in earningsIncluded in other comprehensive income (loss)Purchases, issuances, and settlementsBalance at end of year2010Millions of yenThousands ofU.S. dollars20112011¥1,950(2)(12)(1,482)¥454¥1,340(79)(7)696¥1,950$25,000(25)(154)(19,000)$5,821Years ended December 31Level 1 investments are comprised principally of Japaneseequity securities, which are valued using an unadjustedquoted market price in active markets with sufficient volumeand frequency of transactions. Level 2 cash and cash equiva-lents are valued based on market approach, using quotedprices for identical assets in markets that are not active. Level3 investments are mainly comprised of corporate bonds,which are valued based on cost approach, using unobservableinputs as the market for the assets was not active at the meas-urement date.Derivative financial instruments are comprised of foreignexchange contracts. Level 2 derivatives are valued usingquotes obtained from counterparties or third parties, whichare periodically validated by pricing models using observablemarket inputs, such as foreign currency exchange rates andinterest rates, based on market approach.The following table presents the changes in Level 3 assetsmeasured on a recurring basis, consisting primarily of corpo-rate bonds, for the years ended December 31, 2011 and 2010. Gains and losses included in earnings are mainly relatedto corporate bonds still held at December 31, 2011 and 2010,and are reported in !Other, net"in the consolidated state-ments of income.Assets and liabilities measured at fair value on anonrecurring basisDuring the year ended December 31, 2011, equity securitiesaccounted for by the equity method with a carrying amount of¥3,577 million ($45,859 thousand) were written down to theirfair value of zero, resulting in an other-than-temporary impair-ment charge of ¥3,577 million ($45,859 thousand), which wasincluded in earnings. Equity securities accounted for by theequity method were classified as Level 3 instruments and val-ued based on an income approach using unobservable inputssuch as projected income of the investment.During the year ended December 31, 2010, non-marketableequity securities with a carrying amount of ¥5,000 millionwere written down to their fair value of ¥2,422 million andequity securities accounted for by the equity method with acarrying amount of ¥33,984 million were written down totheir fair value of ¥15,164 million, resulting in an other-than-temporary impairment charge totaling ¥21,398 million,which was included in earnings. The non-marketable equitysecurities were classified as Level 2 instruments and valuedbased on a market approach using observable inputs such asunadjusted quoted prices for similar instruments in activemarkets at the measurement date. Equity securities accountedfor by the equity method were classified as Level 3 instru-ments and valued based on a combination of incomeapproach and market approach using both unobservable andobservable inputs including the use of inputs such as financialmetrics, ratios and projected income of the investees andappropriate comparable public companies.StrategyBusiness UnitsManagement SystemFINANCIAL SECTION93!37!101FINANCIAL SECTION22. SUPPLEMENTAL CASH FLOW INFORMATIONDuring the year ended December 31, 2010, the Companyexecuted three separate share exchanges under which theCompany made its three listed subsidiaries, Canon FinetechInc., Canon Machinery Inc. and Tokki Corporation, itswholly owned subsidiaries. The Company issued no newshares, as it issued 10,000,853 shares of treasury stock forthese transactions in total.As a result of the share exchanges, the carrying amountof the Company’s noncontrolling interest in Canon FinetechInc., Canon Machinery Inc. and Tokki Corporation wasdecreased from ¥38,644 million to zero.23. SEGMENT INFORMATIONCanon operates its business in three segments: the OfficeBusiness Unit, the Consumer Business Unit, and the Industryand Others Business Unit, which are based on the organiza-tional structure and information reviewed by Canon’smanagement to evaluate results and allocate resources.The primary products included in each segment are as follows:Office Business Unit:Office network digital MFDs / Color network digital MFDs / Personal-use network digital MFDs / Office copying machines / Full-color copying machines / Personal-usecopying machines / Laser printers / Large format inkjetprinters / Digital production printersConsumer Business Unit:Digital SLR cameras / Compact digital cameras / Interchangeable lenses / Digital video camcorders / Inkjet multifunction printers / Single function inkjetprinters / Image scanners / Broadcast equipment / CalculatorsIndustry and Others Business Unit:Semiconductor lithography equipment / LCD lithography equipment / Medical image recording equipment /Ophthalmic products / Magnetic heads / Micromotors /Computers / Handy terminals / Document scannersThe accounting policies of the segments are substantiallythe same as those described in the significant accounting poli-cies in Note 1. Canon evaluates performance of, and allocatesresources to, each segment based on operating profit. 94FINANCIAL SECTION>NOTES TO CONSOLIDATED FINANCIAL STATEMENTS2011:Net sales:External customersIntersegmentTotalOperating cost and expensesOperating profitTotal assetsDepreciation and amortizationCapital expendituresIndustry andOthersCorporate andeliminationsConsolidated$4,285,8721,109,8075,395,6795,084,141$311,538$4,649,205380,577482,667Consumer$16,807,98713,09016,821,07714,112,180$2,708,897$5,805,244584,731617,846Office$24,514,25674,75724,589,01321,265,103$3,323,910$10,535,6671,194,821690,872$—(1,197,654)(1,197,654)299,627$(1,497,281)$29,403,8201,190,4221,573,756$45,608,115—45,608,11540,761,051$4,847,064$50,393,9363,350,5513,365,141Thousands of U.S. dollarsInformation about operating results and assets for each segment as of and for the years ended December 31, 2011, 2010and 2009 is as follows:2011:Net sales:External customersIntersegmentTotalOperating cost and expensesOperating profitTotal assetsDepreciation and amortizationCapital expenditures2010: Net sales:External customersIntersegmentTotalOperating cost and expensesOperating profit (loss)Total assetsDepreciation and amortizationCapital expenditures2009:Net sales:External customersIntersegmentTotalOperating cost and expensesOperating profit (loss)Total assetsDepreciation and amortizationCapital expendituresIndustry andOthersCorporate andeliminationsConsolidated¥334,29886,565420,863396,563¥24,300¥362,63829,68537,648¥338,33494,624432,958442,789¥(9,831)¥307,02937,38727,105¥274,95183,047357,998433,954¥(75,956)¥359,63560,77025,644Consumer¥1,311,0231,0211,312,0441,100,750¥211,294¥452,80945,60948,192¥1,389,6221,7051,391,3271,153,262¥238,065¥414,02241,66536,266¥1,299,1941,9661,301,1601,117,668¥183,492¥437,16048,70127,503Office¥1,912,1125,8311,917,9431,658,678¥259,265¥821,78293,19653,888¥1,978,9458,3241,987,2691,693,947¥293,322¥855,893103,54853,115¥1,635,05610,0201,645,0761,415,680¥229,396¥745,64690,87896,718¥—(93,417)(93,417)23,371¥(116,788)¥2,293,49892,853122,753¥—(104,653)(104,653)29,351¥(134,004)¥2,406,87693,59377,061¥—(95,033)(95,033)24,844¥(119,877)¥2,305,116115,044108,387¥3,557,433—3,557,4333,179,362¥378,071¥3,930,727261,343262,481¥3,706,901—3,706,9013,319,349¥387,552¥3,983,820276,193193,547¥3,209,201—3,209,2012,992,146¥217,055¥3,847,557315,393258,252Millions of yenStrategyBusiness UnitsManagement SystemFINANCIAL SECTION95!37!101FINANCIAL SECTIONIntersegment sales are recorded at the same prices usedin transactions with third parties. Expenses not directlyassociated with specific segments are allocated based on themost reasonable measures applicable. Corporate expensesinclude certain corporate research and developmentexpenses. Segment assets are based on those directly associ-ated with each segment. Corporate assets primarily consistof cash and cash equivalents, finance receivables, invest-ments, deferred tax assets, goodwill and corporateproperties. Capital expenditures represent the additions toproperty, plant and equipment and intangible assets meas-ured on an accrual basis.Information by major geographic area as of and for the years ended December 31, 2011, 2010 and 2009 is as follows:Net sales:JapanAmericasEuropeAsia and OceaniaTotalLong-lived assets:JapanAmericasEuropeAsia and OceaniaTotal20102009Millions of yenThousands ofU.S. dollars2011¥695,7491,023,2991,172,474815,379¥3,706,901¥1,104,94969,034108,16072,846¥1,354,9892011¥694,450961,9551,113,065787,963¥3,557,433¥1,070,41285,82483,29689,334¥1,328,866¥702,344894,154995,150617,553¥3,209,201¥1,205,88759,27344,87577,146¥1,387,181$8,903,20512,332,75614,270,064 10,102,090$45,608,115$13,723,2301,100,3081,067,8971,145,308$17,036,743Net sales are attributed to areas based on the locationwhere the product is shipped to the customers. Other than inJapan and the United States, Canon does not conduct busi-ness in any individual country in which its sales in thatcountry exceed 10% of consolidated net sales. Net sales in theUnited States are ¥779,652 million ($9,995,538 thousand),¥836,645 million and ¥793,428 million for the years endedDecember 31, 2011, 2010 and 2009, respectively.Long-lived assets represent property, plant and equipmentand intangible assets for each geographic area.96FINANCIAL SECTION>NOTES TO CONSOLIDATED FINANCIAL STATEMENTS/MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING2011:Net sales:External customersIntersegmentTotalOperating cost and expensesOperating profitTotal assets2010:Net sales:External customersIntersegmentTotalOperating cost and expensesOperating profitTotal assets2009:Net sales:External customersIntersegmentTotalOperating cost and expensesOperating profitTotal assetsEuropeAsia andOceaniaCorporate andeliminationsConsolidated¥1,109,2564,6811,113,9371,069,489¥44,448¥427,030¥1,163,4523,4891,166,9411,126,521¥40,420¥472,785¥991,336919992,255964,606¥27,649¥378,477Americas¥952,83316,217969,050948,593¥20,457¥250,131¥1,008,2007,9751,016,175993,310¥22,865¥251,587¥871,6331,263872,896860,863¥12,033¥198,094Japan¥807,8831,873,1572,681,0402,273,336¥407,704¥1,236,468¥854,2081,974,5912,828,7992,398,439¥430,360¥1,321,572¥827,7621,714,3752,542,1372,288,471¥253,666¥1,386,511¥687,461744,1791,431,6401,388,580¥43,060¥442,263¥681,041723,4231,404,4641,357,663¥46,801¥421,250¥518,470534,1471,052,6171,019,208¥33,409¥384,795¥—(2,638,234)(2,638,234)(2,500,636)¥(137,598)¥1,574,835¥—(2,709,478)(2,709,478)(2,556,584)¥(152,894)¥1,516,626¥—(2,250,704)(2,250,704)(2,141,002)¥(109,702)¥1,499,680¥3,557,433—3,557,4333,179,362¥378,071¥3,930,727¥3,706,901—3,706,9013,319,349¥387,552¥3,983,820¥3,209,201—3,209,2012,992,146¥217,055¥3,847,557Millions of yen2011:Net sales:External customersIntersegmentTotalOperating cost and expensesOperating profitTotal assetsEuropeAsia andOceaniaCorporate andeliminationsConsolidated$14,221,23160,01314,281,24413,711,398$569,846$5,474,744Americas$12,215,808207,91012,423,71812,161,449$262,269$3,206,808Japan$10,357,47424,014,83434,372,30829,145,334$5,226,974$15,852,154$8,813,6029,540,75718,354,35917,802,308$552,051$5,670,038$—(33,823,514)(33,823,514)(32,059,438)$(1,764,076)$20,190,192$45,608,115—45,608,11540,761,051$4,847,064$50,393,936Thousands of U.S. dollarsThe following information is based on the location of theCompany and its subsidiaries as of and for the years endedDecember 31, 2011, 2010 and 2009. In addition to the dis-closure requirements under U.S. GAAP, Canon discloses thisinformation in order to provide financial statements userswith useful information.24. SUBSEQUENT EVENTOn February 2, 2012, the Board of Directors of the Companyapproved and implemented a plan to repurchase up to 16million shares of the Company’s common stock at a cost ofup to ¥50,000 million ($641,026 thousand) for the periodfrom February 3, 2012 to March 19, 2012. Such repur-chases are intended to improve capital efficiency andensure flexible capital strategy. Common stock repur-chased in the Tokyo Stock Exchange between February 3,2012 and February 16, 2012 under the aforementionedplan was 14,521,600 shares at a cost of ¥50,000 million($641,026 thousand).StrategyBusiness UnitsManagement SystemFINANCIAL SECTION97!37!101FINANCIAL SECTIONMANAGEMENT#S REPORT ONINTERNAL CONTROL OVER FINANCIAL REPORTINGThe management of Canon is responsible for establishing and maintaining adequate internal control over financial report-ing. Internal control over financial reporting is defined in Rule 13a-15(f) promulgated under the Securities Exchange Act of1934, as amended, as a process designed by, or under the supervision of, the company#s principal executive and principalfinancial officers and effected by the company#s board of directors, management and other personnel, to provide reasonableassurance regarding the reliability of financial reporting and the preparation of financial statements for external purposesin accordance with generally accepted accounting principles and includes those policies and procedures that (1) pertain tothe maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of theassets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of thecompany are being made only in accordance with authorizations of management and directors of the company; and (3) pro-vide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of thecompany#s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial 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 inadequatebecause 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 financial reporting as of December 31, 2011. Inmaking this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of theTreadway Commission in Internal Control-Integrated Framework(the !COSO criteria").Based on its assessment, management concluded that, as of December 31, 2011, Canon#s internal control over financialreporting was effective based on the COSO criteria.Canon#s independent registered public accounting firm, Ernst & Young ShinNihon LLC, has issued an audit report on theeffectiveness of our internal control over financial reporting.98FINANCIAL SECTION>REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMThe Board of Directors and Stockholders ofCanon Inc.We have audited the accompanying consolidated balance sheets of Canon Inc. and subsidiaries as of December 31,2011 and 2010, and the related consolidated statements of income, equity, and cash flows for each of the three yearsin the period ended December 31, 2011, all expressed in Japanese yen. These financial statements are the responsi-bility of the Company#s management. Our responsibility is to express an opinion on these financial statementsbased 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 aboutwhether the financial statements are free of material misstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, as well as evaluating the overall finan-cial statement presentation. We believe that our audits provide a reasonable basis for our opinion.In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidatedfinancial position of Canon Inc. and subsidiaries at December 31, 2011 and 2010, and the consolidated results oftheir operations and their cash flows for each of the three years in the period ended December 31, 2011, in conform-ity with U.S. generally accepted accounting principles.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (UnitedStates), Canon Inc. and subsidiaries#internal control over financial reporting as of December 31, 2011, based on cri-teria established in Internal Control’Integrated Framework issued by the Committee of Sponsoring Organizationsof the Treadway Commission and our report dated March 29, 2012 expressed an unqualified opinion thereon.We have also recomputed the translation of the consolidated financial statements as of and for the year endedDecember 31, 2011 into United States dollars. In our opinion, the consolidated financial statements expressed inJapanese yen have been translated into United States dollars on the basis described in Note 2.March 29, 2012REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRMStrategyBusiness UnitsManagement SystemFINANCIAL SECTION99!37!101FINANCIAL SECTIONThe Board of Directors and Stockholders ofCanon Inc.We have audited Canon Inc. and subsidiaries#internal control over financial reporting as of December 31, 2011,based on criteria established in Internal Control’Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (the COSO criteria). Canon Inc. and subsidiaries#management is respon-sible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness ofinternal control over financial reporting included in the accompanying Management#s Report on Internal Controlover Financial Reporting. Our responsibility is to express an opinion on the company#s internal control over finan-cial 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 aboutwhether effective internal control over financial reporting was maintained in all material respects. Our auditincluded obtaining an understanding of internal control over financial reporting, assessing the risk that a materialweakness exists, testing and evaluating the design and operating effectiveness of internal control based on theassessed risk, and performing such other procedures as we considered necessary in the circumstances. We believethat our audit provides a reasonable basis for our opinion.A company#s internal control over financial reporting is a process designed to provide reasonable assurance regard-ing the reliability of financial reporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles. A company#s internal control over financial reportingincludes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation of financial statements in accordancewith generally accepted accounting principles, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of the company; and (3) provide reasonableassurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company#sassets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstate-ments. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree of compliance with the policies or proce-dures may deteriorate.In our opinion, Canon Inc. and subsidiaries maintained, in all material respects, effective internal control overfinancial reporting as of December 31, 2011, based on the COSO criteria.We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (UnitedStates), the consolidated balance sheets of Canon Inc. and subsidiaries as of December 31, 2011 and 2010, and the relatedconsolidated statements of income, equity, and cash flows for each of the three years in the period ended December 31,2011, all expressed in Japanese yen, and our report dated March 29, 2012 expressed an unqualified opinion thereon.March 29, 2012REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM100FINANCIAL SECTION>TRANSFER AND REGISTRAR’S OFFICE/STOCKHOLDER INFORMATION/MAJOR CONSOLIDATED SUBSIDIARIESTRANSFERANDREGISTRAR#S OFFICESTOCKHOLDERINFORMATIONCanon Inc.30-2, Shimomaruko 3-chome, Ohta-ku, Tokyo 146-8501, JapanManager of the Register of StockholdersMizuho Trust & Banking Co., Ltd.2-1, Yaesu 1-chome, Chuo-ku, Tokyo 103-8670, JapanDepositary and Agent with Respect to AmericanDepositary Receipts for Common SharesJPMorgan Chase Bank, N.A.1 Chase Manhattan Plaza, Floor 58, New York, N.Y.10005-1401, U.S.A.Stock Exchange Listings:Tokyo, Osaka, Nagoya, Fukuoka, Sapporo and New Yorkstock exchangesAmerican Depositary Receipts are traded on the New YorkStock Exchange (CAJ).Ordinary General Meeting of Shareholders:March 29, 2012, in TokyoFurther Information:For publications or information, please contact theExternal Relations Headquarters, Canon Inc., Tokyo,or access Canon#s Website atwwwwww..ccaannoonn..ccoommStrategyBusiness UnitsManagement SystemFINANCIAL SECTION101!37!101FINANCIAL SECTIONMAJOR CONSOLIDATED SUBSIDIARIES(As of December 31, 2011)ManufacturingCanon Electronics Inc.Canon Finetech Inc.Nisca CorporationCanon Semiconductor Equipment Inc.Canon Ecology Industry Inc.Canon Chemicals Inc.Canon Components, Inc.Canon Precision Inc.Oita Canon Inc.Nagasaki 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 CorporationTokki Corporation*Canon Imaging Systems Inc.Canon Virginia, Inc.Canon Giessen GmbHCanon Bretagne S.A.S.OPTOPOL Technology S.A.Canon Inc., TaiwanCanon 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 Vietnam Co., Ltd.Canon Electronic Business Machines (H.K.) Co., Ltd.Research & DevelopmentCanon 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.*Tokki Corporation changed its name to !Canon Tokki Corporation,"effec-tive January 1, 2012.Marketing & OtherCanon Marketing Japan Inc.Canon System and Support Inc.Canon IT Solutions Inc.Canon Software Inc.e-System CorporationASPAC Inc.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 Comercio LimitadaCanon 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 GmbHCanon France S.A.S.Canon Italia S.p.A.Canon Espa#a S.A.Canon Nederland N.V.Canon Danmark A/SCanon Belgium N.V./S.A.Canon (Schweiz) AGCanon Austria GmbHCanon Svenska ABCanon OyCanon North-East OyCanon Norge A.S.Canon Ru LLCCanon CEE GmbHCanon Eurasia A.S.Canon Portugal S.A.Oc$N.V.Canon Middle East FZ-LICCanon 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.Canon Optical Industrial Equipment (Shanghai) Inc.Canon Optical Industrial Equipment Service (Shanghai) Inc.C A N O N A N N U A L R E P O R T 2 0 1 1 CANON INC. 30-2, Shimomaruko 3-chome, Ohta-ku, Tokyo 146-8501, Japan BEP021 

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