Canon
Annual Report 2012

Plain-text annual report

C A N O N A N N U A L R E P O R T 2 0 1 2 F i s c a l Ye a r E n d e d D e c e m b e r 3 1 , 2 0 1 2 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) 2012 2011 Change (%) 2012 Net sales Operating profit ¥ 3,479,788 ¥ 3,557,433 323,856 378,071 Income before income taxes 342,557 374,524 Net income attributable to Canon Inc. 224,564 248,630 Net income attributable to Canon Inc. stockholders per share: —Basic —Diluted Total assets ¥ 191.34 ¥ 204.49 191.34 204.48 ¥ 3,955,503 ¥ 3,930,727 Canon Inc. stockholders’ equity ¥ 2,598,026 ¥ 2,551,132 -2.2 -14.3 -8.5 -9.7 -6.4 -6.4 +0.6 +1.8 $ 39,997,563 3,722,483 3,937,437 2,581,195 $ 2.20 2.20 $ 45,465,552 $ 29,862,368 Notes: 1. Canon’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 JPY87=U.S.$1, the approximate exchange rate on the Tokyo Foreign Exchange Market as of December 28, 2012, solely for the convenience of the reader. 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 0 300.00 200.00 100.00 0.00 Net Sales (Millions of yen) 4,094,161 3,706,901 3,557,433 3,479,788 3,209,201 Net Income Attributable to Canon Inc. (Millions of yen) 309,148 131,647 246,603 248,630 224,564 400,000 300,000 200,000 100,000 0 2008 2009 2010 2011 2012 2008 2009 2010 2011 2012 Net Income Attributable to Canon Inc. Stockholders per Share (Yen) 246.21 246.20 204.49 204.48 199.71 199.70 191.34 191.34 106.64 106.64 ROE/ROA (%) 11.1 7.3 12.0 10.0 8.0 6.0 4.0 0 4.9 3.4 9.2 9.6 6.3 6.3 8.7 5.7 2008 2009 2010 2011 2012 2008 2009 2010 2011 2012 Basic Diluted ROE ROA 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 01 Canon develops, manufactures and markets a growing lineup of copy- STRATEGY 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’s corporate philosophy is kyosei. A concise definition of this word 20 20 24 would be “Living and working together for the common good.” But Canon’s PRODUCTION ing 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 overwhelm- ing No. 1 position in its existing core businesses and expand related and peripheral businesses by strengthening its advanced solutions busi- ness, centered on innovative products, and through other measures. At the same time, Canon is nurturing its operations in the fields of medi- cal equipment and industrial equipment, the latter including intelligent robots, to establish new core businesses. The Company is working to ful- fill its responsibilities to investors and society, emphasizing sound cor- porate governance and stepping up the implementation of activities that contribute to environmental and social sustainability. definition is broader: kyosei is “All people, regardless of race, religion or culture, harmoniously living and working together into the future.” Unfortunately, the presence of imbalances in the world in such areas as trade, income levels and the environment hinders the achievement of kyosei. Addressing these imbalances is an ongoing mission, and Canon is doing its part by actively pursuing kyosei. 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’s goal is to contribute to global prosperity and to people’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 continu- ously reinforced through the implementation of the plan, Canon aims to join the ranks of the world’s top 100 companies in terms of major man- agement indicators. TO OUR STOCKHOLDERS 02 AT A GLANCE OFFICE BUSINESS UNIT 02 BUSINESS UNITS 10 10 IMAGING SYSTEM BUSINESS UNIT INDUSTRY AND OTHERS BUSINESS UNIT 12 2012 TOPICS 14 16 18 MANAGEMENT SYSTEM CORPORATE GOVERNANCE RESEARCH & DEVELOPMENT 26 FINANCIAL SECTION 33 SALES & MARKETING CORPORATE SOCIAL RESPONSIBILITY 28 30 TRANSFER AND REGISTRAR’S OFFICE STOCKHOLDER INFORMATION 96 96 MAJOR CONSOLIDATED SUBSIDIARIES 97 Cover Photo: The EOS-1D X, the fl agship EOS model, is an interchange- able-lens digital camera that provides a high-level of image quality performance as well as high speed. Canon retains the top position in global sales volume of interchangeable-lens digital cameras by catering to the diverse needs of a broad array of users ranging from beginners to advanced amateurs and professional photographers. 02 STRATEGY Business Units Management System Financial Section T O O U R S T O C K H O L D E R S Fujio Mitarai Chairman & CEO Canon Inc. In the face of the current turbulent business environment, Canon will decisively implement reforms and achieve sound business growth. TO OUR STOCKHOLDERS 03 P E R F O R M A N C E I N 2 0 1 2 reliable indicator of financial stability, rose 1.0 percent- Looking at the global economy in fiscal 2012, ended age point, from 65% in 2011 to 66% in 2012. At fiscal December 31, while the United States continued to year-end, cash and cash equivalents stood at around enjoy a relatively solid economic recovery, the European ¥670 billion, equivalent to approximately 2.3 months of economy struggled in the face of financial instability net sales, which we regard as an adequate level. and clouds began to appear over growth in China and Consequently, although we were not able to avoid the other emerging nations. The Japanese economy realized decline in business performance, our corporate strength moderate expansion driven by internal demand, but the remains intact in terms of our product competitiveness rate of growth slowed somewhat in the second half of and retaining a sound financial structure. Moreover, the year. As for foreign exchange markets, the yen main- we believe we were successful in maintaining a robust tained its high valuation, remaining mostly unchanged foundation that will enable us to swiftly address future against the U.S. dollar from the previous year but rising changes in the business environment and make neces- significantly against the euro. sary investments in a flexible manner. Canon’s performance was affected by such factors With respect to stockholder return, Canon is being as the worldwide economic slowdown and the histor- more proactive in returning profits to stockholders, ically high yen. For the year, consolidated net sales mainly in the form of dividends, taking into consid- totaled ¥3,479.8 billion, down 2.2% from the previ- eration mid-term profit forecasts, planned future ous year. Despite the highly challenging business investments, cash flow and other factors. Over the 25 conditions, however, we worked hard to boost the com- years since 1988, we have steadily increased dividends petitiveness of our products while striving to maintain without ever having lowered them during this period. and improve our sound financial structure. On a local In fiscal 2012, Canon has decided to pay a full-year cash currency basis, net sales remained mostly unchanged dividend of ¥130.00 per share, a ¥10.00 increase from from fiscal 2011. fiscal 2011. This included a special ¥10.00 dividend to In order to boost the competitive strength of our commemorate our 75th anniversary. products, we made efforts to maintain and further expand market share, further raising competitiveness through such means as launching a greater number 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 P L A N of new products than in previous years. In addition to Canon launched the Excellent Global Corporation Plan enjoying the No. 1 position for laser printers and digital in 1996 and, since that time, we have reinforced our cameras, we maintained strong market positions across business foundation through the plan’s various phases. all our business segments. During Phase I, we began by emphasizing consol- We also strove to maintain and improve our sound idated business management over nonconsolidated financial structure. Our stockholders’ equity ratio, a business management and thoroughly shifted our focus 04 STRATEGY Business Units Management System Financial Section Key Strategies For Phase IV 1 Achieving the overwhelming No.1 position in all core businesses and expanding related and peripheral businesses 2 Developing new business through globalized diversifi cation and establishing 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 befi tting a truly excellent global company from partial to total optimization and on profit rather for the successes that we enjoy today while also effec- than sales. By stressing the importance of cash-flow tively creating a debt-free company. management and comprehensively eliminating waste, During Phase III, we sought to expand Canon’s busi- we were able to reduce our debt by more than half ness scope, broadening our businesses in the printing while also significantly increasing productivity through and medical equipment fields while actively carrying the introduction of the cell production system and out M&A activities. other measures. And in 2011, under the slogan “Aiming for the In Phase II, we focused on reinforcing Canon’s prod- Summit: Speed & Sound Growth,” we embarked uct competitiveness. We fully digitalized our copying on Phase IV, spanning the five-year period through machine and camera offerings, laying the groundwork 2015. Focusing on six key strategies, Phase IV calls for The Excellent Global Corporation Plan Phase I 1996–2000 Phase II 2001–2005 Phase III 2006–2010 Phase IV 2011–2015 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 opti- mization and profitability. Recognized the need for digitalization and raised product competitiveness by enhancing our develop- ment infrastructure and reinforcing key components. Strove to achieve “Sound Growth,” seeking high growth levels by estab- lishing new businesses while raising the profit- ability of existing busi- nesses. 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. 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” TO OUR STOCKHOLDERS 05 proactive, speedy reforms ahead of the dramatic chang- lightweight designs. Accordingly, we were able to retain ing times along with the achievement of sound business our No.1 share worldwide in terms of unit sales. In growth through the further expansion of our corporate September 2012, meanwhile, we unveiled Canon’s first scale while maintaining high profitability. non-reflex camera. Moreover, our Cinema EOS System S T R A T E G Y 1 has attracted warm acclaim throughout the world, cap- turing a high market share in a short time. In October With respect to achieving the overwhelming No.1 posi- 2012, we added to our lineup the EOS C500, a digi- tion in all core businesses and expanding related tal cinema camera capable of shooting high-quality and peripheral businesses, we have comprehensively 4K-resolution video, or four times the resolution of full- upgraded Canon’s office multifunction device (MFD) HD video. and production printing system lineups, from low-speed In February 2012, Canon unveiled the DreamLabo to high-speed models, for both monochrome and color 5000 commercial photo printer, marking our entry into devices. In addition to fully rounding out the imag- the retail photo printing market. eRUNNER ADVANCE series, we have introduced new In July 2012, we released the Canon MREAL System. products developed jointly with Océ, which became a Integrating the real world with the virtual world of com- consolidated Canon subsidiary in 2010. Furthermore, puter graphics, MR (mixed reality) systems employ image our sales companies around the world have strength- processing technologies to streamline various business ened their solutions business, which supports enhanced processes, including product design. We have received productivity in the office. numerous inquiries, not only from the automotive As for interchangeable-lens digital cameras, Canon and construction sectors—with whom we have collabo- further reinforced its EOS series, including the rated since the initial development stage—but also heavy launch of high-resolution models featuring compact, machinery manufacturers and educational institutions. Achieving the Overwhelming No.1 Position Expand Existing Businesses Cloud Network Compatibility Alliance Smartphone Convenience Expand Related and Peripheral Businesses Cinema EOS System DreamLabo Océ 06 STRATEGY Business Units Management System Financial Section Amid growing awareness about safety and reliabil- innovative medical imaging equipment. As part of this ity, as well as the ongoing shift from analog to digital, collaboration, we have brought two technologies to the Canon launched a full-HD network camera in 2012. In clinical evaluation stage in 2012. One relates to photo- this field, users are demanding various software func- acoustic mammography devices capable of diagnosing tions, such as detection, tracking and image retrieval. breast cancer more accurately than before and with For this reason, we will accelerate business expansion minimal bodily impact during examination. The other while pursuing M&A opportunities. relates to adaptive optics scanning laser ophthalmos- S T R A T E G Y 2 copy (AO-SLO), which contributes to the examination of the retina at the cellular level and the detection of Seeking to diversify our operations globally, Canon lifestyle-related diseases. Meanwhile, Canon U.S.A. estab- established R&D facilities in Japan, the United States lished its own R&D department in 2012 and reached and Europe. Under this strategy of developing new collaborative research agreements with two hospi- business through globalized diversification and estab- tals affiliated with Harvard Medical School to develop lishing the Three Regional Headquarters management biomedical optical imaging and medical robotics tech- system, we have identified two fields that we are nologies. This collaborative project aims to develop and strengthening as new core businesses: medical equip- commercialize unique medical devices for a variety of ment and industrial equipment. applications. In the medical device segment, we are making use of As for the industrial equipment segment, we are the imaging technologies we have amassed over many harnessing Canon’s group-wide strengths to create a years to create new levels of value in such areas as medi- new business domain with the aim of building it into cal imaging diagnostics. In Japan, we are working with a ¥1 trillion business in the future. Canon already Kyoto University toward the practical application of supplies a variety of industrial equipment, including Global Diversification Develop a Global R&D Structure New Innovation Centers in the U.S. and Europe U.S. Europe The MR System can be used not only in the design and manufacturing sectors, but also in a wide range of industries and fi elds. Satisfi ed with the functionality and quality offered by the MR System, Canon launched the system in July 2012. Establish Institutes with responsibilities spanning basic research to leading-edge technology application Promote diversification utilizing Océ as a foothold TO OUR STOCKHOLDERS 07 lithography equipment, vacuum thin-film deposi- where to base our production is the ratio of labor costs tion equipment and organic LED panel manufacturing to total manufacturing costs. Currently, we manufac- equipment. We believe, however, that we can open ture high-value-added products in Japan, while products new frontiers through the combination of individ- with lower added value and a higher labor cost ratio are ual elemental technologies. Particularly within the produced elsewhere. In addition, in the case of consum- field of factory automation, for example, expectations ables, for example, we promote localized production, are high for intelligent robots. One technology being in which the entire process—from production to sales developed for such robots is Super Machine Vision, and even the recycling of used products—is carried out which enables the positions and orientations of vari- within a single region. ous objects to be monitored three-dimensionally with Based on these policies, in 2012 we expanded our pro- micron-level precision—a capability that far exceeds duction facilities at Canon Hi-Tech (Thailand) in the human vision. northeast region of Thailand, thus reinforcing our produc- S T R A T E G Y 3 tion system for inkjet printer products. We also established new companies in Thailand, the Philippines and Brazil, With respect to manufacturing, Canon is pursuing a where we plan to start manufacturing office MFDs, laser strategy of establishing a world-leading globally opti- printers, digital cameras and other products in 2013. mized production system. We carry out comprehensive Since 2010, Canon has carried out the localized pro- evaluations to ensure the optimization of our produc- duction of toner cartridges in the United States. Thanks tion bases. We analyze trends in each country from to progress in automation, the ratio of labor costs to multiple perspectives, paying close attention to such total manufacturing costs for toner cartridges has fallen factors as wages, taxation systems, infrastructure and significantly, so we plan to replicate this business model country risk. The criterion we use when determining in Europe and other regions. Accelerate Cost Reduction by Expansion of New Production Sites Globally Optimized Production System (cid:115)(cid:0)(cid:35)(cid:65)(cid:78)(cid:79)(cid:78)(cid:0)(cid:48)(cid:82)(cid:65)(cid:67)(cid:72)(cid:73)(cid:78)(cid:66)(cid:85)(cid:82)(cid:73)(cid:0)(cid:8)(cid:52)(cid:72)(cid:65)(cid:73)(cid:76)(cid:65)(cid:78)(cid:68)(cid:9) (cid:0) (cid:8)(cid:47)(cid:70)(cid:70)(cid:73)(cid:67)(cid:69)(cid:0)(cid:45)(cid:38)(cid:36)(cid:83)(cid:9) (cid:115)(cid:0)(cid:40)(cid:73)(cid:84)(cid:65)(cid:0)(cid:35)(cid:65)(cid:78)(cid:79)(cid:78)(cid:0)(cid:45)(cid:65)(cid:84)(cid:69)(cid:82)(cid:73)(cid:65)(cid:76)(cid:0) (cid:0) (cid:8)(cid:52)(cid:79)(cid:78)(cid:69)(cid:82)(cid:0)(cid:67)(cid:65)(cid:82)(cid:84)(cid:82)(cid:73)(cid:68)(cid:71)(cid:69)(cid:0)(cid:80)(cid:65)(cid:82)(cid:84)(cid:83)(cid:9) (cid:115)(cid:0)(cid:35)(cid:65)(cid:78)(cid:79)(cid:78)(cid:0)(cid:34)(cid:85)(cid:83)(cid:73)(cid:78)(cid:69)(cid:83)(cid:83)(cid:0)(cid:45)(cid:65)(cid:67)(cid:72)(cid:73)(cid:78)(cid:69)(cid:83) (cid:0) (cid:8)(cid:48)(cid:72)(cid:73)(cid:76)(cid:73)(cid:80)(cid:80)(cid:73)(cid:78)(cid:69)(cid:83)(cid:9)(cid:0)(cid:8)(cid:44)(cid:65)(cid:83)(cid:69)(cid:82)(cid:0)(cid:80)(cid:82)(cid:73)(cid:78)(cid:84)(cid:69)(cid:82)(cid:83)(cid:9) Major Production Sites New Production Sites (cid:115)(cid:0)(cid:0)(cid:35)(cid:65)(cid:78)(cid:79)(cid:78)(cid:0)(cid:41)(cid:78)(cid:68)(cid:85)(cid:83)(cid:84)(cid:82)(cid:73)(cid:65)(cid:0)(cid:68)(cid:69)(cid:0)(cid:45)(cid:65)(cid:78)(cid:65)(cid:85)(cid:83)(cid:0) (cid:0) (cid:8)(cid:34)(cid:82)(cid:65)(cid:90)(cid:73)(cid:76)(cid:9)(cid:0)(cid:8)(cid:36)(cid:73)(cid:71)(cid:73)(cid:84)(cid:65)(cid:76)(cid:0)(cid:67)(cid:65)(cid:77)(cid:69)(cid:82)(cid:65)(cid:83)(cid:9) (cid:52)(cid:65)(cid:88) (cid:51)(cid:89)(cid:83)(cid:84)(cid:69)(cid:77)(cid:83) (cid:69)(cid:84)(cid:67)(cid:14) (cid:44)(cid:79)(cid:71)(cid:73)(cid:83)(cid:84)(cid:73)(cid:67)(cid:83) (cid:47)(cid:80)(cid:84)(cid:73)(cid:77)(cid:73)(cid:90)(cid:69)(cid:68) (cid:83)(cid:73)(cid:84)(cid:69)(cid:0)(cid:80)(cid:76)(cid:65)(cid:67)(cid:69)(cid:77)(cid:69)(cid:78)(cid:84) (cid:65)(cid:78)(cid:68)(cid:0)(cid:80)(cid:82)(cid:79)(cid:68)(cid:85)(cid:67)(cid:84)(cid:73)(cid:79)(cid:78) (cid:68)(cid:73)(cid:83)(cid:84)(cid:82)(cid:73)(cid:66)(cid:85)(cid:84)(cid:73)(cid:79)(cid:78)(cid:0)(cid:73)(cid:78) (cid:84)(cid:69)(cid:82)(cid:77)(cid:83)(cid:0)(cid:79)(cid:70)(cid:0)(cid:80)(cid:82)(cid:79)(cid:68)(cid:85)(cid:67)(cid:84) (cid:81)(cid:85)(cid:65)(cid:76)(cid:73)(cid:84)(cid:89)(cid:0)(cid:65)(cid:78)(cid:68) (cid:67)(cid:79)(cid:83)(cid:84)(cid:83) (cid:44)(cid:65)(cid:66)(cid:79)(cid:82) (cid:48)(cid:82)(cid:79)(cid:67)(cid:85)(cid:82)(cid:69)(cid:77)(cid:69)(cid:78)(cid:84) 08 STRATEGY Business Units Management System Financial Section S T R A T E G Y 4 S T R A T E G Y 5 We are also comprehensively reinforcing our global In addition to fulfilling our social responsibilities to sales capabilities in a proactive manner, particularly in the natural environment, Canon strives to become emerging nations. In China, for example, we are work- a company that simultaneously achieves progres- ing hard to tap markets in regional cities, and in 2012 sive corporate growth and protects the environment. the number of sales bases in China increased from 21 to Committed to building the foundations of an envi- 31. The importance of strengthening our sales power in ronmentally advanced corporation, we are working to emerging nations outside of China is also growing. At minimize the environmental impact of our operations the top of the list is India, where we fortified our sales and cut carbon dioxide emissions while raising the system by switching our distribution channels from an performance of our products. Initiatives here include agency-based sales approach to direct sales. We are also developing energy-saving technologies and materials focusing on the development of Canon-brand shops in with low environmental burden. In 1990, we launched India. In 2012, we opened 43 such outlets, with plans our Toner Cartridge Collection and Recycling Program to increase the number to 300 by 2014. Meanwhile, in and now carry out the localized recycling of cartridges Russia, which joined the World Trade Organization in the United States, Japan, China and France. In 1996, (WTO) in August 2012, we are also working to reinforce we also started a collection service in Japan for used ink our sales activities. cartridges, and this program has since been expanded Brazil is the world’s third-largest market for com- to include Asia, Oceania, North America and Europe. pact digital cameras, but import taxes have a major impact on competitiveness. For this reason, in July 2013 S T R A T E G Y 6 we plan to start local production in the city of Manaus, In order to ensure that Canon develops as a truly excel- which will enhance our sales appeal in the country. lent global company worthy of admiration and respect Capturing Growth in Emerging Markets Russia Middle East China India Africa (cid:115)(cid:41)(cid:78)(cid:84)(cid:82)(cid:79)(cid:68)(cid:85)(cid:67)(cid:69)(cid:0)(cid:48)(cid:82)(cid:79)(cid:68)(cid:85)(cid:67)(cid:84)(cid:83)(cid:0)(cid:65)(cid:78)(cid:68)(cid:0) (cid:45)(cid:69)(cid:82)(cid:67)(cid:72)(cid:65)(cid:78)(cid:68)(cid:73)(cid:83)(cid:69)(cid:0)(cid:84)(cid:72)(cid:65)(cid:84)(cid:0)(cid:51)(cid:85)(cid:73)(cid:84)(cid:0) (cid:37)(cid:77)(cid:69)(cid:82)(cid:71)(cid:73)(cid:78)(cid:71)(cid:0)(cid:45)(cid:65)(cid:82)(cid:75)(cid:69)(cid:84)(cid:83) (cid:115)(cid:51)(cid:84)(cid:82)(cid:69)(cid:78)(cid:71)(cid:84)(cid:72)(cid:69)(cid:78)(cid:0)(cid:51)(cid:65)(cid:76)(cid:69)(cid:83)(cid:0)(cid:35)(cid:72)(cid:65)(cid:78)(cid:78)(cid:69)(cid:76)(cid:0) (cid:65)(cid:78)(cid:68)(cid:0)(cid:51)(cid:84)(cid:82)(cid:85)(cid:67)(cid:84)(cid:85)(cid:82)(cid:69) Brazil (cid:33)(cid:67)(cid:72)(cid:73)(cid:69)(cid:86)(cid:69)(cid:0)(cid:39)(cid:82)(cid:79)(cid:87)(cid:84)(cid:72)(cid:0)(cid:84)(cid:72)(cid:65)(cid:84)(cid:0) (cid:37)(cid:88)(cid:67)(cid:69)(cid:69)(cid:68)(cid:83)(cid:0)(cid:37)(cid:67)(cid:79)(cid:78)(cid:79)(cid:77)(cid:73)(cid:67)(cid:0) (cid:37)(cid:88)(cid:80)(cid:65)(cid:78)(cid:83)(cid:73)(cid:79)(cid:78)(cid:0)(cid:73)(cid:78)(cid:0)(cid:37)(cid:65)(cid:67)(cid:72)(cid:0)(cid:35)(cid:79)(cid:85)(cid:78)(cid:84)(cid:82)(cid:89) Managers from Group companies worldwide gather at the Canon Global Management Institute in Japan to study corporate strategies and engage in cross-cultural exchanges. TO OUR STOCKHOLDERS 09 worldwide for 100, and even 200, years, it is crucial to trends. Our basic policy for 2013, which marks the third have exceptional global human resources. We believe year of Phase IV of our Excellent Global Corporation that our global workforce must be not only capa- Plan, is to decisively implement reforms and achieve ble of winning in the face of global competition but sound business growth in the face of the current turbu- also capable of delivering innovation. This is because, lent business environment. Targeting solid increases in throughout our history, we have continuously trans- both sales and profit, we will steadily implement mea- formed our company based on our enterprising spirit. sures based on the six key strategies described above. Canon is committed to imparting a corporate cul- In 2012, we celebrated Canon’s 75th anniversary, ture, and cultivating human resources befitting a having overcome numerous difficulties and achieved truly excellent global company. To this end, we already dramatic progress since the company’s foundation. have numerous local human resources in management Looking around the world, there are many examples of positions at our sales companies around the world. companies that have delivered innovation and growth For example, in Europe, our largest regional market, for 100 years or more. For companies willing to continu- the presidents of all but one of our sales companies ally transform themselves, the potential is unlimited. are from the region. At the same time, we have around Going forward, we will continue striving to reinforce 1,000 Japanese employees stationed at our sales compa- Canon’s technological capabilities. At the same time, nies around the world. We will continue endeavoring we will prevail in the face of the challenging business to acknowledge and respond flexibly to the diversified environment while relentlessly targeting productivity value perspectives of local communities, respecting improvements and cost reductions. At this early stage of their cultures and customs while striving to foster global the economic upturn, we will exploit our increasingly human resources who can excel on the world stage. robust business structure to steer Canon toward a path I N C O N C L U S I O N We look forward to your ongoing understanding The global economy in 2013 is expected to remain chal- and support. of steady growth. lenging for the foreseeable future. However, as new administrations take office in such key countries as Japan, the United States and China, there are expecta- tions that various economic stimulus measures will gradually bear fruit. As such, we believe that we will see a recovery trend in the second half that should gather momentum. Amid these circumstances, we feel that the markets in which we operate will recover in a similar fash- ion. Accordingly, we will focus on returning Canon to a growth trajectory while closely monitoring market Fujio Mitarai Chairman & CEO Canon Inc. 10 Strategy BUSINESS UNITS Management System Financial Section A T A G L A N C E Business Units Main Products O F F I C E B U S I N E S S U N I T Office Multifunction Devices (MFDs) Digital Production Printing Systems Laser Printers High Speed Continuous Feed Printers I M A G I N G S Y S T E M 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 Interchangeable-Lens Digital Cameras Digital Camcorders Inkjet Printers Broadcast Equipment Flat-Panel-Display Lithography Equipment Ophthalmic Equipment Semiconductor Lithography Equipment Document Scanners (cid:129)Office Multifunction Devices (MFDs) (cid:129)Office Copying Machines (cid:129)Personal-Use Copying Machines (cid:129)Laser MFDs (cid:129)Laser Printers (cid:129)Digital Production Printing Systems (cid:129)High Speed Continuous Feed Printers (cid:129)Wide-Format Printers (cid:129)Document Solution (cid:129)Interchangeable-Lens Digital Cameras (cid:129)Compact Digital Cameras (cid:129)Digital Camcorders (cid:129)Digital Cinema Cameras (cid:129)Interchangeable Lenses (cid:129)Inkjet Printers (cid:129)Large-Format Inkjet Printers (cid:129)Commercial Photo Printers (cid:129)Image Scanners (cid:129)Broadcast Equipment (cid:129)Calculators (cid:129)Semiconductor Lithography Equipment (cid:129)Flat-Panel-Display Lithography Equipment (cid:129)Digital Radiography Systems (cid:129)Ophthalmic Equipment (cid:129)Vacuum Thin-Film Deposition Equipment (cid:129)Organic LED Panel Manufacturing Equipment (cid:129)Micromotors (cid:129)Computers (cid:129)Handy Terminals (cid:129)Document Scanners AT A GLANCE 11 Outline Composition of Sales (%) Net Sales (Millions of yen) In this segment, Canon offers a comprehensive range of multifunction devices (MFDs), printers, and other equipment featuring high image qual- ity, high resolution, and high speed. Leveraging these products, Canon works in close collabora- tion with various Group companies and alliance partners to deliver optimal solutions 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 support in a swift and reliable manner. Canon’s offerings in this segment include digital cameras, digital camcorders, digital cinema cam- eras, interchangeable lenses, inkjet printers, and calculators. Canon’s digital cameras, digital cam- corders and digital cinema cameras, designed to deliver unparalleled image quality, have earned particularly high acclaim worldwide, thanks to in-house developed lenses, CMOS image sensors, and image processors. Also widely popular are Canon’s inkjet printers, which are easy to use and produce beautiful pictures at high speeds. Applying optical technologies and image-processing technologies amassed over many years, Canon pro- vides high-value-added products to a wide range of industries. The Company is already prominent globally as a manufacturer of flat-panel- display lithography equipment and semiconductor lithog- raphy equipment. In addition, Canon is focusing on the medical equipment field - one of its next generation core businesses. The Company is aggressively promoting sales of its cutting-edge digital radiography systems and ophthal- mic equipment, which employ Canon’s highly regarded medical imaging technologies. 50.5% 40.4% 11.7% 2,246,609 1,987,269 1,917,943 1,645,076 1,757,575 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0 2008 2009 2010 2011 2012 1,500,000 1,456,075 1,391,327 1,405,971 1,301,160 1,312,044 1,000,000 500,000 0 600,000 500,000 400,000 300,000 200,000 100,000 0 2008 2009 2010 2011 2012 522,405 432,958 420,863 407,840 357,998 2008 2009 2010 2011 2012 Note: The percentage figures for the three business units presented in the pie charts above do not add up to 100% because “Eliminations,” used in consolidated accounting, were not included in calculation considerations. 12 Strategy BUSINESS UNITS Management System Financial Section 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 offi ce multifunction devices, 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. Net Sales (Millions of yen) 1,987,269 1,917,943 1,757,575 2 0 1 2 R E V I E W The market for office network multifunction devices (MFDs) was generally firm, with solid demand on earthquake disaster restoration in Japan as well as growing demand in Asia and Oceania. In these circumstances, Canon boosted domestic sales by proactively cultivating new customers, and gener- ated particularly strong sales of its imageRUNNER ADVANCE C5000 series. We also posted increased unit sales in the Americas, and even in Europe, where the market contracted moderately. In particular in emerging European mar- kets, such as Russia, we posted healthy growth in sales of color devices. In China, the imageRUNNER ADVANCE C2000 series of low-and medium-speed color models drove expansion in unit sales. Elsewhere in Asia and also in Oceania, sales exceeded the previous year’s levels. The market for digital production printing systems benefited from growth in Asia and generally steady demand in other regions. In these circumstances, 2010 2011 2012 in Japan, we reported increased unit sales of light-production monochrome models and mid-production color models, and in other Asian markets, unit sales were also up. In the Americas and Europe, the synergistic benefits of 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0 our alliance with Océ began to appear: in addition to the mid-production monochrome Océ VarioPrint 6000 series, the monochrome Océ VarioPrint 135 series and the color imagePRESS C6010/C7010VPS series, both jointly developed by Canon and Océ, were highly praised and very well received. Furthermore, we enjoyed steadily increasing sales via the Océ channel. Moreover, sales in Europe of laser MFDs, laser printers, and personal-use MFDs for individual and SOHO use were higher than the previous year in both volume and value terms, thanks to strenuous marketing efforts in the face of difficult market conditions. In the area of OEM-brand laser MFDs and laser printers, while the market for color laser MFDs expanded, with the exception of a few regions, the rel- atively larger market for monochrome machines continued to shrink. As a result, we were not able to prevent a decline in both unit sales and sales reve- nue from sales to OEM customers. As a result, the Office Business Unit reported consolidated net sales of ¥1,757.6 billion, down 8.4% from the previous year. 2 0 1 3 I N I T I A T I V E S Going forward, Canon will promote business expansion aimed at captur- ing the top share of the market for office-use devices. At the core of this effort is the imageRUNNER ADVANCE series, featuring a now complete, extensive lineup ranging from low-speed to high-speed models, as well as monochrome and color models. We will also extensively reinforce our solu- tions and services business based on the benefits from the integration of our regional sales companies and the sales subsidiaries of Océ, with the intention of attracting more international corporate clients. To address flourishing demand in emerging nations, meanwhile, we will strengthen our strategic measures, including by launching region-specific models placing top priority on the end-user. In the production printing sector, we will seek to enter the enormous off- set printing market. Here, we will integrate the technological strengths of Canon and Océ to achieve both further advances in printing speed and cost reduction, as well as improved workflow harmony, with the aim of becoming a top player in the market. With respect to laser printers, we will strive to boost market share and profitability by launching new products, centering on the high-volume printers class. OFFICE BUSINESS UNIT 13 The imageRUNNER ADVANCE C5255 is a medium-to-high-speed MFD that offers en- hanced productivity, image print quality, and security together with much improved operability thanks to a Quick Startup Mode. The Océ VarioPrint 135, combines a new Océ-developed engine with high-perfor- mance Canon fi nishers and a scanner. The two companies jointly developed this sys- tem to meet a wide range of high-speed, high-volume monochrome printing needs. The imagePRESS C7010VPS, jointly de- veloped with Océ, delivers high-image- quality, high-precision printing that rivals offset printing, with a printing speed of up to 70 ppm for both color and mono- chrome output. 14 Strategy BUSINESS UNITS Management System Financial Section I M A G I N G S Y S T E M 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 image sensors, and image processors, lead the world with their high image quality and contribute to sales. Net Sales (Millions of yen) 1,391,327 1,405,971 1,312,044 2 0 1 2 R E V I E W The market for interchangeable-lens digital cameras showed growth across all regions. The advanced-amateur models, EOS 5D Mark III and EOS 60D, as well as the entry-level EOS Rebel series drove sales beyond the previous year’s level both in volume and value terms. Moreover, Canon retained the world’s top share in shipments of interchangeable-lens digital cameras. In addition, we released the EOS M, which was our first camera to employ a non-reflex operating system and the EOS 6D, the world’s smallest and most compact full-size digital camera. Furthermore, our EOS-1D X flagship model, released in June 2012, was used extensively by professional photographers at the London Olympics. In compact digital cameras, Canon launched attractive new products such as the PowerShot ELPH 110 HS (IXUS 125 HS in some areas) and the PowerShot A2300. The year-on-year decline in sales volume was thus slight 2010 2011 2012 despite declining demand for compact digital cameras worldwide. Digital video camcorders are also facing a downtrend in global demand. Against that backdrop, Canon pursued a profit-oriented strategy, and its HFG10, a high-end high-definition model, captured the top market share in 1,500,000 1,200,000 900,000 600,000 300,000 0 IMAGING SYSTEM BUSINESS UNIT 15 its price range. Moreover, amid a very positive reception for the Cinema EOS System in the motion picture production industry, we added products sup- porting 4K resolution, including the EOS C500 Digital Cinema Camera, to our lineup. In broadcast equipment, Canon enjoyed greater demand from domes- tic broadcasters and received numerous inquiries in Europe associated with large-scale sporting events. Accordingly, sales of broadcast equipment increased in 2012, driven by the DIGISUPER 95 field zoom lens. Demand for inkjet printers declined in 2012, impacted by economic reces- sion. Nevertheless, Canon swiftly recovered from the situation in Thailand, where flooding had caused shortages in supplies. Specifically, we focused on expanding sales centered on new products, such as the PIXMA PRO series (the lineup of which is now complete) and the PIXMA MG6300 series. As a result, we reported a year-on-year increase in sales volume despite a difficult market environment. In large format inkjet printers, we reported a steady rise in sales volume, thanks largely to new models targeting the graphic arts community. To broaden our business domain, we unveiled DreamLabo 5000, a commercial photo printer. As a result, sales at the Imaging System Business Unit increased 7.2%, to ¥1,406.0 billion. 2 0 1 3 I N I T I A T I V E S The market for interchangeable-lens digital cameras is expected to grow around 10% annually for the foreseeable future. In this context, Canon plans to maintain its strong competitiveness and become the overwhelm- ing No. 1 player. Amid dramatic market changes caused by the proliferation of smart- phones and other devices, Canon will promote a photography culture based on unique perspectives in order to always stay one step ahead and provide forms of enjoyment for users. Here, we will deploy our deep knowledge of photography culture combined with our expertise in input/output devices. In compact digital cameras, we will utilize our image processing technol- ogies amassed to date to create new levels of value. With respect to inkjet printers, we will make full use of our broad lineup, from personal-use to professional models, to achieve further growth in sales volume. In addition, Canon will focus on broadening sales of DreamLabo 5000, a commercial photo printer launched to address the growing retail photo market. As for large format inkjet printers, we will seek to further boost sales by offering a comprehensive lineup. The EOS 5D Mark III, with a newly de- veloped CMOS image sensor and image processor, boasts outstanding image quality suitable for creating professional- like still image compositions and movies. The EOS Rebel T4i (EOS 650D in some areas) is an entry-level, interchange- able-lens digital camera that delivers much enhanced autofocus performance for both still pictures and video and improved capabilities for high-speed continuous shooting and image quality. The PIXMA MG6300 Series of home-use inkjet printers offers easy operability with features like advanced wireless printing and a touch panel, together with a cutting- edge design. 16 Strategy BUSINESS UNITS Management System Financial Section 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 equipment, 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. Net Sales (Millions of yen) 432,958 420,863 407,840 2 0 1 2 R E V I E W In semiconductor lithography equipment, capital investment for memory devices was weak due to the depressed PC market. However, investment in semiconductor production equipment for image sensors and logic devices was firm, thanks to increased demand for smartphones and tablet devices. Against this backdrop, Canon worked to attract orders from semiconduc- tor devices makers, centering on i-line steppers. Notable among these was the FPA-5510iZ, suited to image sensor manufacturing, and the FPA-3030i5+, a new product suited to manufacturing green devices designed to reduce environmental stress. As a result, the decline in sales of semiconductor lithography equipment was slight, both in volume and value terms. As for flat-panel-display lithography equipment, capital investment by makers of small-to-mid-sized panels used in smartphones and other devices was solid. However, capital investment in large-sized panel manufacturing, 2010 2011 2012 where Canon excels, was weak, leading to declines in overall sales of flat- panel-display lithography equipment, both in volume and value terms. In medical equipment, Canon worked hard to bolster sales of main- stay digital radiography systems, centering on wireless-type and dynamic 500,000 400,000 300,000 200,000 100,000 0 INDUSTRY AND OTHERS BUSINESS UNIT 17 imaging equipment. In the ophthalmic equipment field, we launched the OCT–HS100, our first optical coherence tomography (OCT) device. Also con- tributing to higher sales were M&A activities conducted by subsidiaries. With respect to document scanners manufactured by Canon Electronics Inc., overall sales in volume terms increased year on year, thanks to sales recovery in North America, as well as healthy sales in China, India, and else- where in Asia. Sales of organic LED panel manufacturing equipment made by Canon Tokki Corporation rose steadily on the back of growing demand for smart- phones and tablet devices. Sales of magnetic head and hard disk thin-film deposition equipment made by Canon ANELVA Corporation declined due to a weak PC sector but sales of semiconductor thin-film deposition equipment increased sig- nificantly, boosted by brisk demand for semiconductor devices used in smartphones and the like. There was a decline in sales of die bonders made by Canon Machinery Inc., as semiconductor device manufacturers failed to bolster capital investment, but sales of rechargeable battery-related devices used in automobiles and smartphones increased. As a result, consolidated net sales of the Industry and Others Business Unit amounted to ¥407.8 billion, down 3.1% from the previous year. 2 0 1 3 I N I T I A T I V E S Going forward, Canon will focus on the medical equipment and industrial equipment fields as core areas for new business expansion. In the medical equipment field, Canon will target further business expan- sion by bolstering sales of digital radiography systems with high-value-added functions such as wireless connectivity and dynamic imaging and also by working to boost sales of OCT devices, which we added to our lineup in 2012. In addition, we will endeavor to swiftly commercialize our business in mam- mography device, which incorporates photoacoustic technologies that have minimal impact on the body and enable more precise diagnoses of breast can- cer than before. In the industrial equipment field, Canon boasts a diversity of world-leading technologies in such areas as lithography equipment, as well as in businesses handled by Canon Group companies like vacuum thin-film deposition and organic LED panel manufacturing equipment. Leveraging this advantage, we will harness our technologies to address various market needs. In this way, we will open up new domains and step up efforts to make industrial equipment into a ¥1 trillion business in the future. The FPA-3030i5+ is a category of semicon- ductor lithography equipment aimed at manufacturers of low-environmental-im- pact green devices like LEDs and MEMS devices for smartphones and other elec- tronics, and the market for such equipment is expected to grow. The CXDI-80C Wireless is a compact, lightweight, wireless, high-sensitivity digital radiography system that features an industry-fi rst* 11x14 cassette size. * As of September 2011, among medical X-ray digital imaging equipment, based on Canon research The FC7100 system enables ultrathin fi lm composition in an ultrahigh vacuum and so contributes to the rapid growth of mobile handsets as a technology that is indispensable to making devices smaller and more energy effi cient. 18 Strategy BUSINESS UNITS Management System Financial Section 2 0 1 2 T O P I C S OFFICE BUSINESS UNIT i m a g e R U N N E R A D VA N C E L I N E U P N O W C O M P L E T E ; C O R E M O D E L S U P G R A D E D Canon is working to reinforce its lineup of office multifunction devices (MFDs), and our imageRUNNER ADVANCE series is a cornerstone of this lineup. In 2012, we launched the 4000 series of low- and medium-speed monochrome MFDs to meet a diversity of needs, irrespective of office size. Now complete, the imageRUNNER ADVANCE series features a broad lineup, ranging from low- to high-speed devices, as well as both monochrome and color offerings. During the year, we also introduced second-generation versions of our mainstay monochrome and color models, with improvements in such areas as operability, productivity, and security. In addition, we raised their energy-sav- ing performance through enhanced equipment management. This is achieved through functions such as the high-speed start-up mode and automatic shut- down of devices in the same network. Thanks to such initiatives, Canon won the 2013 “Line of the Year” award for “Energy Efficiency” for its MFPs. The newly created award was announced by Buyers Laboratory LLC (BLI), a world- renowned independent analysis provider of document imaging products. imageRUNNER ADVANCE C2230 IMAGING S Y ST EM BUSINESS UNIT C A N O N W I N S 2 0 1 2 T E C H N O L O G Y A N D E N G I N E E R I N G E M M Y ® AWA R D In 2012, Canon made a full-fledged entry into the motion picture production mar- ket with its Cinema EOS System. As the first step, the Company unveiled the EOS C300 digital cinema camera, capable of reproducing beautiful images close to those of 35mm motion picture film. The camera incorporates a Canon-developed large- format CMOS image sensor that is the same size as a super 35mm motion picture frame. Since then, we added to our lineup the EOS C500 digital cinema camera, which adopts the same large-format CMOS sensor and meets the 4K standard. Canon is continually working to improve image capture technologies to meet the ever-increasing needs of the motion picture and television production markets. Our work on CMOS sensors used in the Cinema EOS System has been highly acclaimed as a breakthrough in technology that makes a significant contri- bution to broadcast technology development. As a result, Canon received a Technology and Engineering Emmy® Award in 2012 from the National Academy of Television Arts & Sciences, in the category of Improvements to Large Format CMOS Imagers for Use in High Definition Broadcast Video Cameras. This recognition came just a year after the product launch in the U.S. Emmy® and the Emmy statuette are the trademark property of the Academy of Television Arts & Sciences (ATAS) / the National Academy of Television Arts & Sciences (NATAS) The 64th Annual Technology & Engineering Emmy® Awards 2012 TOPICS 19 P I X M A P R O S E R I E S O F P R O F E S S I O N A L - U S E I N K J E T P R I N T E R S L A U N C H E D I MAGI NG S YSTEM B USI N ES S UN IT Committed to meeting strong demand among professionals for high-reso- lution photograph printing, Canon launched three new models, which completed the rollout of its PIXMA PRO series. The first is the PIXMA PRO-1, featuring a significantly broadened color gamut as well as high productiv- ity, highlighted by a new 12-color pigment ink system with large-volume ink tanks. The PIXMA PRO-10, meanwhile, boasts a new 10-color pigment ink sys- tem together with a high level of texture and depth perception. Also, there is the PIXMA PRO-100, which is equipped with a new eight-color dye ink system for superior expression of coloration and gloss. All three models utilize Canon’s Optimum Image Generating (OIG) System, which selects the optimal ink mixture and ink droplet arrangement, ensur- ing high-image-quality photograph prints best suited to the paper medium. PIXMA PRO series The two models with pigment ink systems also feature our newly developed Chroma Optimizer, which ensures uniformity of gloss perception as well as enhanced black density to suppress the amount of light reflected from the paper surface. C A N O N M A K E S F U L L - F L E D G E D E N T R Y I N T O O C T M A R K E T W I T H L A U N C H O F F I R S T C A N O N - B R A N D P R O D U C T I ND US TR Y AN D O THERS B U SI NESS U NI T Optical coherence tomography (OCT) devices are used in ophthalmology departments of hospitals and clinics to obtain tomographic images of the retina and image analysis results. The system enables observation of reti- nal structures that cannot be seen from the surface and so is essential for providing higher quality diagnosis. The OCT market is forecasted to grow at around 6%*1 annually on a volume basis. Seeking to make a full-fledged entry into the OCT market, Canon welcomed OPTOPOL Technology S.A., a Polish company, as a consolidated sub- sidiary in 2010, and since then has worked to commercialize OCT products. In September 2012, Canon unveiled its first own-brand OCT, the OCT-HS100, capable of examining the retina three-dimensionally. With the addition of the Canon-brand OCT to our product lineup, we aim to provide a comprehensive range of ophthalmology diagnostic equipment and will expand our business further. *1 Based on Canon research. OCT-HS100 20 Strategy Business Units MANAGEMENT SYSTEM Financial Section 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’ value and 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 strengthen- ing its corporate governance and further raising corporate value. Canon’s basic governance structure comprises the General Meeting of Shareholders, the Board of Directors and the Audit & Supervisory Board. 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 The San-ji (“Three Selfs”) spirit are an important guiding principle to become a truly excellent global corporation. disclosure system for management activities. composed of internal directors who have well-developed knowledge of the Company’s affairs. Also, the board B O A R D O F D I R E C T O R S Important business matters are discussed and ratified is supported by various management committees that address important management issues in their specific during meetings of the Board of Directors and Executive fields. These committees complement the Company’s Committee. As of December 31, 2012, the board con- management system by business unit, facilitate efficient sisted of 18 directors. In order to facilitate more practical decision making and realize a mutual supervisory func- and efficient decision making, the board is entirely tion for such matters as compliance and ethics. ■ Directors and Audit & Supervisory Board Members (as of December 31, 2012) Chairman & CEO Fujio Mitarai Executive Vice President & CFO Toshizo Tanaka Group Executive, Finance & Accounting Headquarters Group Executive, Facilities Management Headquarters Executive Vice President & CTO Toshiaki Ikoma Group Executive, Corporate R&D Executive Vice President Kunio Watanabe Group Executive, Corporate Planning Development Headquarters Shigeyuki Matsumoto Group Executive, Device Technology Development Headquarters Toshio Homma Group Executive, Procurement Headquarters Masaki Nakaoka Chief Executive, Office Imaging Products Operations Haruhisa Honda Group Executive, Production Engineering Headquarters Managing Directors Hideki Ozawa President & CEO, Canon (China) Co., Ltd. Masaya Maeda Chief Executive, Image Communication Products Operations Senior Managing Directors Directors Yoroku Adachi President & CEO, Canon U.S.A., Inc. Yasuo Mitsuhashi Chief Executive, Peripheral Products Operations Yasuhiro Tani Group Executive, Digital System Technology Development Headquarters Makoto Araki Group Executive, Information & Communication Systems Headquarters Hiroyuki Suematsu Group Executive, Environment and Quality Headquarters Shigeyuki Uzawa Chief Executive, Optical Products Operations Kenichi Nagasawa Group Executive, Corporate Intellectual Property & Legal Headquarters Naoji Otsuka Chief Executive, Inkjet Products Operations Audit & Supervisory Board Members Shunji Onda Kengo Uramoto Tadashi Ohe (Outside) Kazunori Watanabe (Outside) Kuniyoshi Kitamura (Outside) CORPORATE GOVERNANCE 21 (cid:81) Governance Structure (as of December 31, 2012) Canon Inc. General Meeting of Shareholders Board of Directors Executive Officers Audit & Supervisory Board Representative Directors Executive Committee Chairman & CEO 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 Imaging System 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- 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 cient management operations by maintaining an 404, which came into force during 2006, Canon contin- appropriately sized organization of directors and pro- ues to reinforce internal control systems and implement moting capable human resources with accumulated appropriate measures. The Internal Control Committee executive knowledge across specific business areas. is responsible for Groupwide internal controls, includ- Executive officers are appointed and dismissed by the ing securing credibility of financial reporting. Board of Directors and have a term of office of one year. The In order to strengthen internal controls, Canon con- number of executive officers was 17 as of December 31, 2012. ducts comprehensive evaluations of internal controls A U D I T I N G S Y S T E M Canon has five members on the Audit & Supervisory Board, across areas that include accounting, management over- sight, legal compliance, IT systems and the promotion of corporate ethics. As of December 31, 2012, internal con- including three outside corporate auditors who have no trol over financial reporting has been assessed as effective personal, capital or business affiliations with the Company. by the management and an independent registered pub- Canon has notified the stock exchanges in Tokyo, Osaka, lic accounting firm. (Please refer to pages 93 and 95.) Nagoya, Fukuoka and Sapporo of the designation of these outside members of the Audit & Supervisory Board as inde- pendent auditors, as provided under the regulations of the stock exchanges. Audit & Supervisory Board members’ duties include attending meetings of the Board of Directors and of the Executive Committee, listening to business reports from directors, carefully examining documents related to important decisions and conducting strict audits of the Group’s business and assets. Audit & Supervisory Board members also work closely with independent audi- tors and the Corporate Audit Center, which is in charge of monitoring the Company’s compliance, risk manage- ment and internal control systems in addition to providing assessments and recommendations as required. At Group companies worldwide, employees carry with them compli- ance cards. 22 Strategy Business Units MANAGEMENT SYSTEM Financial Section O T H E R C O M M I T T E E S The Corporate Ethics and Compliance Committee, in of Conduct, inspired by the above Three Selfs. The Code has been translated into 13 languages from Japanese and addition to the Disclosure Committee, is a key body of each Group company makes efforts to enforce the Code. Canon’s management committees. The Corporate Ethics Detailed policies and measures concerning the com- and Compliance Committee reviews and approves poli- pliance activities of Canon are decided at the Corporate cies and measures concerning law-abiding and corporate Ethics and Compliance Committee. With management ethics matters. The Disclosure Committee works to by the Compliance Office, these policies and measures ensure strict compliance with disclosure regulations as are mainly carried out by compliance leaders at each prescribed by stock exchanges. headquarters and Group company. C O M P L I A N C E Shortly after its founding, Canon established the San-ji D I S C L O S U R E Canon makes every effort to disclose information on its (“Three Selfs”) Sprit principles: “self-motivation,” or management and business strategies as well as its per- taking the initiative and being proactive in all things; formance results to all stakeholders in an accurate, fair “self-management,” or conducting oneself responsibly and timely manner. To this end, Canon holds regular and being accountable for all one’s actions; and “self- briefings and posts the latest information on its website awareness,” or understanding one’s situation and role together with a broad range of disclosure materials. in it. In 2001, Canon established the Canon Group Code Canon has formulated its own Disclosure Guidelines and 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 “NYSE”) Listed Company Manual (the “Manual”) 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 “Company”), 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 gov- ernance practices under Section 303A of the Manual and those required in Japan. A summary of these differences as they apply to the Company is provided below. 1. Directors Currently, the Company’s board of directors does not have any director who could be regarded as an “independent direc- tor” under the NYSE Corporate Governance Rules for U.S. listed companies. Unlike the NYSE Corporate Governance Rules, the Corporation Law of Japan (the “Corporation Law”) does not require Japanese companies with the Audit & Supervisory Board such as the Company, to appoint independent direc- tors as members of the board of directors. The NYSE Corporate Governance Rules require non-management directors of U.S. listed companies to meet at regularly scheduled executive ses- sions without the presence of management. Unlike the NYSE Corporate Governance Rules, however, the Corporation Law does not require companies to implement an internal cor- porate organ or committee comprised solely of independent directors. Thus, the Company’s board of directors currently does not include any non-management directors. 2. Committees Under the Corporation Law, the Company may choose to: (i) have an audit committee, nomination committee and com- pensation committee and abolish the post of the Audit & Supervisory Board Members; or (ii) have the Audit & Supervisory Board. The Company has elected to have the Audit & Supervisory Board, whose duties include monitoring and reviewing the management and reporting the results of these activities to the shareholders or board of directors of the Company. While the NYSE Corporate 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’s board of directors nominates candidates for directorships and submits a proposal at the general meet- ing of shareholders for shareholder approval. Pursuant to the Corporation Law, the shareholders then vote to elect directors at the meeting. The Corporation Law requires that the total amount or calculation method of compensation for directors and Audit & Supervisory Board Members be determined by a resolution of the general meeting of shareholders respectively, unless the amount or calculation method is provided under the Articles of Incorporation. As the Articles of Incorporation of the Company do not provide an amount or calculation method, the amount of compensation for the directors and the Audit & Supervisory Board Members of the Company is deter- mined by a resolution of the general meeting of shareholders. CORPORATE GOVERNANCE 23 established the Disclosure Committee, which makes deci- sions regarding information disclosure, including necessity, R I S K M A N A G E M E N T As Canon pursues business expansion in various fields content and timing. The Disclosure Committee makes such on a global scale, the business and other risks to which decisions after receiving reports on information that might it may be exposed continue to diversify. With the goal of need to be disclosed from the person in charge of the dis- eliminating such risks altogether, while honoring the closure working group at each headquarters. trust placed in it by its stakeholders, Canon works dil- 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 igently to avoid or minimize its exposure, to this end assigning specifically designated management commit- tees to address key issues. Canon Group company shall maintain relationships of any In particular, the Executive Committee and various kind with antisocial forces that represent a threat to social management committees engage in careful discussions order and security. To uphold this basic policy, Canon has regarding significant risk factors. The Corporate Audit established a department dedicated to activities aimed at Center preemptively identifies risk factors through countering such parties while reinforcing cooperative ties audit activities. Also, Canon formulates in-house rules with applicable public authorities. In addition, Canon’s to guard against those risks and, in accordance with the Employment Regulations include a clause prohibiting policies formulated by the Internal Control Committee, such relationships, and the Company continues to step up strives to identify and assess relevant risks associated efforts to ensure strict employee adherence. with individual business processes. The allotment of compensation for each director from the total amount of compensation is determined by the Company’s board of directors, and the allotment of compensation to each Audit & Supervisory Board Member is determined by consultation among the Company’s Audit & Supervisory Board Members. 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 the Audit & Supervisory Board shall be exempt from the audit committee requirements, subject to certain requirements which continue to be applica- ble under Rule 10A-3. Pursuant to the requirements of the Corporation Law, the shareholders elect the Audit & Supervisory Board Members by resolution of a general meeting of shareholders. The Company currently has five Audit & Supervisory Board Members, although the minimum number of Audit & Supervisory Board Members 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 the Audit & Supervisory Board Members to be experts in accounting or to have any other area of expertise. Under the Corporation Law, the Audit & Supervisory Board may deter- mine the auditing policies and methods for investigating the business and assets of a Company, and may resolve other mat- ters concerning the execution of the Audit & Supervisory Board Member’s duties. The Audit & Supervisory Board prepares audi- tors’ reports and may veto a proposal for the nomination of the Audit & Supervisory Board Members, accounting auditors and the determination of the amount of compensation for the accounting auditors put forward by the board of directors. Under the Corporation Law, the half or more of a company’s Audit & Supervisory Board Members must be “outside” Audit & Supervisory Board Members. These are individuals who are pro- hibited to have ever been a director, executive officer, manager, or employee of the Company or its subsidiaries. The Company’s current Audit & Supervisory Board Member system meets these requirements. In addition, pursuant to the regulations of the Japanese stock exchanges, the Company is required to have one or more “independent director(s) or independent Audit & Supervisory Board Member(s)” which terms are defined under the relevant regulations of the Japanese stock exchanges as “outside directors” or “outside Audit & Supervisory Board Members” (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 auditors, three are outside Audit & Supervisory Board Members. In addi- tion, all such three outside Audit & Supervisory Board Members are also qualified as independent Audit & Supervisory Board Members under the regulations of the Japanese stock exchanges. The qualifications for an “outside” or “independent” Audit & Supervisory Board Member under the Corporation Law or the regulations of the Japanese stock exchanges are different from the audit committee independence requirement under the NYSE Corporate 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 shareholder approval regarding the stock options to be issued to directors and Audit & Supervisory Board Members as part of remuneration of directors and Audit & Supervisory Board Members. 24 Strategy Business Units MANAGEMENT SYSTEM Financial Section R E S E A R C H & D E V E L O P M E N T Terahertz radiation, which lies between radio waves and visible light on the electromagnetic spectrum, make it possible to see the interior of opaque objects and evaluate their properties. Canon aims to contribute to a diverse array of fi elds where this technology can be applied, starting with healthcare, by forging ahead with terahertz imaging research. Seeking new possibilities, Canon is establishing an R&D structure spanning Japan, the United States and Europe under the Three Regional Headquarters management system. At the same time, Canon will develop the medical and industrial fields into new business pillars. 2012 Top Ten U.S. Patent Holders by Company 6,453 5,080 IBM* Samsung Electronics CANON Sony Panasonic Microsoft Toshiba Hon Hai Precision Industry General Electric LG Electronics 3,179 3,033 2,781 2,618 2,448 2,016 1,650 1,631 * IBM is an abbreviation for International Business Machines Corporation. Note: Number of patents for 2012 based on preliminary figures released by IFI CLAIMS Patent Services. U P G R A D I N G O U R G L O B A L R & D S T R U C T U R E Canon’s growth to date has been attributable to employing strong technolo- gies to develop competitive products, mainly in Japan, and then disseminating those offerings around the world. Going forward, the Company will expand and upgrade its R&D organizations in Europe and the; United States, laying the foundation for the Three Regional Headquarters system that Canon envisions. In the United States, Canon will set up centers to pursue activities ranging from research into fundamental technologies in healthcare and other new business fields to the application of cutting-edge technologies. In Europe, we will step up R&D in new business fields, spearheaded by existing R&D facilities. 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 inno- vative products and services. In the year under review, R&D expenses amounted to ¥296.5 billion, down 3.7%, or ¥11.3 billion, from the previous year. The ratio of R&D expenses to net sales was 8.5%. By segment, the Company allocated ¥99.5 billion (33.6% of total R&D expenses) to the Office Business Unit, ¥84.0 billion RESEARCH & DEVELOPMENT 25 The CK project, collaboration between Canon and Kyoto University, targets the practical application of innovative medical imaging equipment. (Exterior of Clinical Research Center for Medical Equipment Development (CRCMeD) where the proj- ect has been proceeding) Canon has integrated high-precision ma- chine vision technology with information technology to develop intelligent robots that think and act on their own accord, one of many areas where it has applied these technologies. (28.3%) to the Imaging System Business Unit, and ¥25.6 billion (8.6%) to the Industry and Others Business Unit. Basic R&D expenses not allocated to specific business units amounted to ¥87.4 billion (29.5%.) This focus on R&D activities has cemented Canon’s high status in the field of intellectual property. In 2012, Canon was granted 3,179 patents in the United States, ranking it third in the world and the top-ranked Japanese company for an eighth successive year. 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 continually bol- stering activities centered on key parts and key devices in order to enhance the competitiveness of its products. In CMOS image sensors, we successfully devel- oped a 120-megapixel device. Going forward, we target further advances in ultrahigh-resolution and ultrahigh-sensitivity devices while also considering applications for these technologies in various fields other than digital cameras. 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 working to establish two new business pillars: medical equipment and industrial equipment. In medical device, for some years Canon has been involved in the “CK Project” in collaboration with Kyoto University. Under the project, two of our technologies have been brought to the clinical evaluation stage. One relates to a photoacous- tic mammography device capable of diagnosing breast cancer more accurately than before, with minimal bodily impact during examination. The other relates to adaptive optics scanning laser ophthalmoscopy (AO-SLO), which contributes to the examination of the retina at the cellular level and the detection of lifestyle- related diseases. We have started clinical evaluation into AO-SLO with a number of universities and medical research institutes in Japan and abroad with the aim of commercializing this technology at an early stage. Meanwhile, Canon U.S.A., Inc. has established its R&D department to conduct joint research with Massachusetts General Hospital and Brigham and Women’s Hospital, both affiliated with Harvard Medical School. This collaborative project focuses on development and commer- cialization of unique medical devices in the area of biomedical optical imaging and medical robotic technologies, among others. Accordingly, Canon is moving forward in establishing a global R&D system for medical devices. In the industrial equipment field, Canon is working to develop intelligent robots and other systems through cutting-edge application technologies by inte- grating high-precision machine vision technology with information technology that operates as the brains of robotic systems. Canon is proceeding with R&D of these application technologies with a view to use them beyond intelligent robots in fields like risk prediction and the support and care of senior citizens. 26 Strategy Business Units MANAGEMENT SYSTEM Financial Section P R O D U C T I O N “Man-machine cell” production systems integrate processes where robots excel with processes that can only be performed by people to sharply enhance the productivity of cell production systems. (Canon Hi-Tech Thailand Ltd.) 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. Reinforcement of Production Capacity 2012: Commenced operations Mar. Canon Zhongshan Business Machines Co., Ltd.; expansion (China) Laser printers May Hita Canon Materials Inc. (Japan) Toner cartridge parts 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 identifies the most suitable locations for the production of individual products based on a comprehensive assessment of various consider- ations. These factors include cost, taxation, logistics, the ease of parts procurement, and the workforce in each country and region. An opti- Jun. Canon Inc., Taiwan; expansion (Taiwan) mized system will lead to additional improvements in productivity for Lenses, digital cameras 2013: To commence operations Apr. Canon Prachinburi (Thailand) Ltd. (Thailand) Offi ce multifunction devices, service parts Apr. Canon Business Machines (Philippines), Inc. (Philippines) Laser printers, accessories, parts Jul. Canon Indústria de Manaus Ltda. (Brazil) Digital cameras the entire Canon Group. In 2012, several manufacturing sites, including Hita Canon Materials Inc., started production. We also established new companies in Thailand, Philippines, and Brazil, where we are preparing to construct new pro- duction bases. In these ways, we are reinforcing our production system globally to meet growing demand for our products. PRODUCTION 27 The Canon Group internally manufactures functional parts, circuit boards and other major components, and even the molds and manufacturing equipment used to cre- ate parts. (Canon Precision Inc.) Belief in “Internal Production” In-House Production Automation Man-Machine Cell (cid:115)(cid:0)(cid:35)(cid:79)(cid:83)(cid:84)(cid:0)(cid:0) (cid:0) (cid:50)(cid:69)(cid:68)(cid:85)(cid:67)(cid:84)(cid:73)(cid:79)(cid:78) (cid:0) (cid:115)(cid:0)(cid:48)(cid:82)(cid:79)(cid:68)(cid:85)(cid:67)(cid:84) (cid:0) (cid:36)(cid:73)(cid:70)(cid:70)(cid:69)(cid:82)(cid:69)(cid:78)(cid:84)(cid:73)(cid:65)(cid:84)(cid:73)(cid:79)(cid:78) (cid:115)(cid:52)(cid:69)(cid:67)(cid:72)(cid:78)(cid:79)(cid:76)(cid:79)(cid:71)(cid:89) (cid:0) (cid:48)(cid:82)(cid:79)(cid:84)(cid:69)(cid:67)(cid:84)(cid:73)(cid:79)(cid:78) (cid:115)(cid:0)(cid:48)(cid:82)(cid:79)(cid:68)(cid:85)(cid:67)(cid:84)(cid:73)(cid:79)(cid:78) (cid:0) (cid:38)(cid:76)(cid:69)(cid:88)(cid:73)(cid:66)(cid:73)(cid:76)(cid:73)(cid:84)(cid:89) (cid:115)(cid:0)(cid:44)(cid:69)(cid:65)(cid:68)(cid:0)(cid:52)(cid:73)(cid:77)(cid:69) (cid:0) (cid:50)(cid:69)(cid:68)(cid:85)(cid:67)(cid:84)(cid:73)(cid:79)(cid:78) (cid:115)(cid:0)(cid:49)(cid:85)(cid:65)(cid:76)(cid:73)(cid:84)(cid:89) (cid:0) (cid:41)(cid:77)(cid:80)(cid:82)(cid:79)(cid:86)(cid:69)(cid:77)(cid:69)(cid:78)(cid:84) (cid:115)(cid:0)(cid:48)(cid:82)(cid:79)(cid:68)(cid:85)(cid:67)(cid:84)(cid:73)(cid:79)(cid:78) (cid:0) (cid:37)(cid:70)(cid:70)(cid:73)(cid:67)(cid:73)(cid:69)(cid:78)(cid:67)(cid:89) (cid:0) (cid:41)(cid:77)(cid:80)(cid:82)(cid:79)(cid:86)(cid:69)(cid:77)(cid:69)(cid:78)(cid:84) (cid:115)(cid:0)(cid:48)(cid:82)(cid:79)(cid:68)(cid:85)(cid:67)(cid:84)(cid:73)(cid:79)(cid:78) (cid:0) (cid:44)(cid:79)(cid:67)(cid:65)(cid:76)(cid:73)(cid:90)(cid:65)(cid:84)(cid:73)(cid:79)(cid:78) (cid:115)(cid:0)(cid:48)(cid:82)(cid:79)(cid:68)(cid:85)(cid:67)(cid:84)(cid:73)(cid:79)(cid:78) (cid:0) (cid:37)(cid:70)(cid:70)(cid:73)(cid:67)(cid:73)(cid:69)(cid:78)(cid:67)(cid:89) (cid:0) (cid:41)(cid:77)(cid:80)(cid:82)(cid:79)(cid:86)(cid:69)(cid:77)(cid:69)(cid:78)(cid:84) (cid:115)(cid:0)(cid:35)(cid:79)(cid:83)(cid:84) (cid:0) (cid:50)(cid:69)(cid:68)(cid:85)(cid:67)(cid:84)(cid:73)(cid:79)(cid:78) (cid:0) (cid:70)(cid:82)(cid:79)(cid:77)(cid:0)(cid:36)(cid:69)(cid:83)(cid:73)(cid:71)(cid:78) (cid:0) (cid:48)(cid:72)(cid:65)(cid:83)(cid:69) (cid:115)(cid:0)(cid:44)(cid:69)(cid:65)(cid:68)(cid:0)(cid:52)(cid:73)(cid:77)(cid:69) (cid:0) (cid:50)(cid:69)(cid:68)(cid:85)(cid:67)(cid:84)(cid:73)(cid:79)(cid:78) (cid:115)(cid:0)(cid:38)(cid:85)(cid:82)(cid:84)(cid:72)(cid:69)(cid:82) (cid:0) (cid:33)(cid:85)(cid:84)(cid:79)(cid:77)(cid:65)(cid:84)(cid:73)(cid:79)(cid:78) Internal Production I M P R O V I N G P R O D U C T I V I T Y Canon continues to expedite production in optimal locations. At the same time, by putting a priority on conducting production operations in-house, we proceed to raise quality and reduce costs through progress in manu- facturing by making full use of the expertise and insights of individual workers engaged in production. To this end, the Company has adopted a cell production system—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 roll- ing out “man-machine cell” production systems that integrate manual and automated processes. For some time, Canon has prioritized in-house manufacturing, especially of image sensors and other key parts. At present, we are broadening this strategy to include molds and production equipment, as well as automation of production itself. In the United States, for example, we have implemented a business model for toner cartridges that incorporates everything from automated production to sales, collection, and recycling in the region of consumption of our products, and we plan to apply this model in Europe as well. In Japan, moreover, we plan to automate the assembly process for inter- changeable lenses for digital SLR cameras, which requires a high degree of precision, in 2013. In addition to creating high-value-added products, Canon will expedite efforts to raise productivity in order to strengthen the cost-com- petitiveness of manufacturing products in Japan. 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. E N V I R O N M E N T A L F R I E N D L Y M A N U F A C T U R I N G ; E N H A N C E D P R O D U C T Q U A L I T Y In addition to efforts aimed at boosting productivity, Canon promotes man- ufacturing operations that are friendly to the global environment while striving to improve overall product quality. With respect to manufacturing, in 2012 we prioritized purchases of environmentally friendly products and parts and actively shifted to transportation modes that have minimal envi- ronmental impact. In addition, we have changed our quality-related slogan from “Canon Quality” to “Quality as Priority: Customers’ Safety, Smartness, and Satisfaction.” To offer customers products that are safe while also provid- ing peace of mind and satisfaction, we implement stringent quality control measures at every stage, from planning, development and production to sales and after-sales service. 28 Strategy Business Units MANAGEMENT SYSTEM Financial Section S A L E S & M A R K E T I N G At the San Francisco showroom, recently opened by Canon Solutions America, Inc., visitors can experience a wide range of Canon products through displays and demonstrations of input to output devices such as offi ce multifunction devices. In addition, workshops and classes of photography and photo printing are offered. Canon reinforces its sales and marketing capabilities by providing innovative products and advanced solutions tailored to meet the characteristics of each region. 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 capabilities by responding to actual conditions based on analyses Composition of Sales by Region of the features of each region. Asia and Oceania 23.2% ¥805.6 billion The Americas 27.0% ¥939.9 billion Net Sales ¥3,479.8 billion Japan 20.7% ¥720.3 billion Europe 29.1% ¥1,014.0 billion In 2012, Canon sought to tap markets in China’s regional cities, and also focused on upgrading its sales bases in India and other emerging nations. In the office equipment sector, we forged strongly ahead with our strategy of integrating Canon’s regional sales companies with the sales subsidiaries of Océ. This enabled us to offer a broad range of printing solutions. We also worked to bolster sales while expediting efforts to deliver advanced solutions and services that raise productivity. For consumers, we launched products tailored to the market needs of specific countries and regions while taking steps to reinforce sales in emerging nations, with the aim of achieving sales expansion in excess of economic growth. SALES & MARKETING 29 In Russia, which entered the World Trade Organization in August, 2012, we are vigorously advancing our marketing ac- tivities. (A camera sales outlet in Moscow) Canon is rapidly expanding its sales networks to meet strong demand from emerging markets. (Canon-brand shop in India) J A PA N In the year under review, sales in Japan amounted to ¥720.3 billion, equiva- lent to 20.7% of consolidated net sales. During the year, Canon opened the Nishi-Tokyo Data Center, which is one of the most advanced facilities of its type in Japan and is equipped with a multiple-level security system. In this way, we built a foundation for pro- viding highly profitable outsourced services. Utilizing the Center, we also worked to expand and upgrade our cloud computing services. T H E A M E R I C A S In the Americas sales came to ¥939.9 billion (27.0% of consolidated net sales.) Underscoring Canon’s commitment to meet the needs of the film and tele- vision production industries, Canon U.S.A. expanded in 2012 the capabilities of its recently established Hollywood Professional Technology and Support Center, in order to strengthen its sales network and bolster service and sup- port for professionals, including filmmakers utilizing the Cinema EOS System. Also, from June 2012, Canon reorganized its camera and video distri- bution strategy in Brazil to direct sales from distributor channels in an effort to expand its sales network within the country. E U R O P E ( E U R O P E , M I D D L E E A S T , A F R I C A ) In Europe sales amounted to ¥1,014.0 billion (29.1% of consolidated net sales.) In 2012, under difficult economic circumstances, Canon Europe Ltd. fur- ther strengthened its sales and marketing functions in emerging markets, such as Russia and Ukraine, by increasing its sales force and through high profile marketing activities such as signing on as an official sponsor of UEFA EURO 2012, Europe’s premier football tournament. In addition, Canon Europe has expedited expansion in the graphic arts field and business ser- vices field through the integration of Océ. This has contributed to broadened growth opportunities and its sales performance. A S I A A N D O C E A N I A In 2012, sales in Asia and Oceania amounted to ¥805.6 billion, or 23.2% of consolidated net sales. During the year, Canon (China) Co., Ltd. opened its fourth regional headquarters in Chengdu City, Sichuan Province, thus enhancing our responsiveness to growing demand in China’s interior regions. In Vietnam, which has enjoyed high growth in recent years, we established Canon Marketing Vietnam Company Limited to accelerate efforts to build a frame- work for importing and selling Canon Group products. 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. 30 Strategy Business Units MANAGEMENT SYSTEM Financial Section 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 Marketing (Thailand) Co., Ltd. has donated 29 electricity-generating wind turbines to schools across Thailand since it initiated the “Clean Energy for Green World” project in 2008. Canon is promoting CSR activities with the aim of becoming a truly excellent global corporation that is admired and respected the world over. 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 technological 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 “Action for Green,” the Canon Environmental Vision, Canon strives to support both enriched lifestyles and the global environment. In 2012, nine models among Canon’s imageRUNNER ADVANCE series were approved under the CFP (Carbon Footprint of Products) Communication Program, operated by the Japan Environmental Management Association for Industry (JEMAI.) They were the first office multifunction devices to be approved under the program. The aim of the program is to allow “visualiza- tion” of the amount of greenhouse gas emitted over the entire lifecycle of products or services, from raw materials acquisition to disposal and/or recy- cling. The program also complies with ISO 14067, a set of requirements and Canon led the industry in launching a recycling program in Japan for ink car- tridges in 1996 and has expanded the program’s coverage area in the years since then. CORPORATE SOCIAL RESPONSIBILITY 31 guidelines for carbon footprint quantification and communication that is expected to become an international standard in 2013. Canon will continue pursuing CFP initiatives in its ongoing quest to understand and minimize the environmental impact of its activities across entire product lifecycles. WWF Canon Europe is a Conservation Imaging Partner of the World Wide Fund for Nature (WWF) and supports its activities such as projects that raise aware- ness of climate change in the Arctic. In 2012, Canon Ambassador Thorsten Milse, a professional photogra- pher, accompanied and worked with a team of WWF experts and scientists in the Last Ice Area expedition. He also dedicated his time to documenting the Arctic environment to raise awareness of the need for protection. Canon Europe renewed this partnership until 2014. Canon and WWF share the hope that the power of images will expose the state of the environment in the rap- idly changing Arctic landscape. Wildlife Protection in Yellowstone National Park Canon U.S.A. supports “Eyes on Yellowstone,” an educational and research program to manage and protect endangered wildlife species and promote education at Yellowstone National Park. Canon’s imaging equipment has been used to monitor the lives of animals, create a video library, and gather information since 1995. 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 “good corporate citizen.” Third Assistance Program Decided by the Canon Foundation The Canon Foundation was established with the aim of contributing to the lasting prosperity of human society and the welfare of mankind. It has desig- nated research assistance programs in two domains: “Creation of industrial infrastructure” (contributing to industrial development) and “Pursuit of ide- als” (targeting improved human wisdom.) In 2012, the Foundation decided on its third research assistance program, covering 17 specific projects. The Tsuzuri Project Canon and the non-profit organization Kyoto Culture Association jointly pro- mote a project called the “Tsuzuri Project” (Official title: Cultural Heritage Inheritance Project.) The aim of the project is to preserve original cultural assets while maximizing the effective use of high-resolution facsimiles of cultural Canon Europe is working with World Wide Fund for Nature (WWF) as a Con- servation Imaging Partner with the aim of restoring and forestalling destruction of the earth’s natural environment and creating a future where people and na- ture can coexist in harmony. ©Thorsten Milse, Canon Ambassador The “Eyes on Yellowstone” program re- leases videos of wildlife in their natural environment online. These videos are used to educate children around the world. 32 Strategy Business Units MANAGEMENT SYSTEM Financial Section assets. These facsimiles are created by blending Canon’s latest digital technol- ogy and traditional Japanese crafts, such as gold leaf craftwork. As a result of the project, original cultural assets can be kept in the more favorable environ- ment of museums while copies can be used for educational purposes and public exhibits. Since the program began in 2007, the cumulative total of items repro- duced and donated under the project has reached 25 (as of December, 2012.) “Colorful Classroom” Project Launched at “Hope Schools” in China In 2012, Canon China teamed up with Nippon Paint Co., Ltd. and the China Youth Development Foundation (CYDF) to launch the “Colorful Classroom” project at three “Hope Schools” supported by China Canon Group. The aim of the project is to raise the observation skills, imaginative power, and aesthetic consciousness of Chinese children through images and colors. In addition to donating digital cameras, inkjet printers, and other devices, Canon sent employees to the schools to conduct photography classes for the children. 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 “conflict minerals” 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. In the United States, legis- lation was enacted requiring publicly listed companies to disclose their usage of such minerals, which went into effect in January 2013. Seeking to ensure that customers use its products with peace of mind, the Canon Group has clarified its basic stance on the issue, working together with business partners and industry entities with the aim of avoiding the use of conflict minerals. Canon has held briefing sessions for relevant domestic and overseas partners since November 2012, and launched conflict miner- als inspections of its products since the end of January 2013, beginning with major products. In terms of both legal compliance and CSR, Canon is making steady progress in preparation for disclosing conflict minerals-related infor- mation to the U.S. Securities and Exchange Commission as scheduled in 2014. 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 Canon works constantly to foster global human resources capable of per- forming on the world stage, by taking advantage of international training programs and the like. Given our priority to keep production in-house, it is important for us to cultivate personnel with world-class skills and expertise on a global scale. In 2012, we stepped up training programs aimed at acquir- ing the knowledge and skills necessary to advance our industrial equipment business, identified as a new core domain for Canon. In 2012, the Tsuzuri Project created a high-resolution facsimile of fold- ing screens with pictures of fl ocks of cranes, which belong to the Freer Gal- lery of Art, Smithsonian Institution (Washington, D.C.), and donated them to the Tokyo Metropolitan Foundation for History and Culture. Without regard to national origin, race, and other matters of background, Can- on hires, trains, and promotes personnel that can excel as a member of a global enterprise so that it can grow sustain- ability as a global company. FINANCIAL SECTION 33 F I N A N C I A L S E C T I O N T A B L E O F C O N T E N T S FINANCIAL OVERVIEW TEN-YEAR FINANCIAL SUMMARY CONSOLIDATED BALANCE SHEETS 34 50 52 CONSOLIDATED STATEMENTS OF INCOME CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME CONSOLIDATED STATEMENTS OF EQUITY 53 53 54 CONSOLIDATED STATEMENTS OF CASH FLOWS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 56 57 MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING 93 REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 94 34 Strategy Business Units Management System FINANCIAL SECTION F I N A N C I A L O V E R V I E W GENERAL The following discussion and analysis provides information that management believes to be relevant to understanding Canon’s consolidated financial condition and results of oper- ations. References in this discussion to the “Company” are to Canon Inc. and, unless otherwise indicated, references to the financial condition or operating results of “Canon” refer to Canon Inc. and its consolidated subsidiaries. OVERVIEW Canon is one of the world’s leading manufacturers of plain paper copying machines, office multifunction devices (“MFDs”), laser printers, cameras, inkjet printers, semicon- ductor lithography equipment and flat-panel -display (“FPD”) lithography equipment. Canon earns revenues primarily from the manufacture and sale of these products domesti- cally and internationally. Canon’s basic management policy is to contribute to the prosperity and well-being of the world while endeavoring to become a truly excellent global corpo- rate group targeting continued growth and development. Canon divides its businesses into three segments: the Office Business Unit, the Imaging System Business Unit, and the Industry and Others Business Unit. Economic environment Looking back at the global economy in 2012, in the United States there were signs of improvement in employment con- ditions and housing issues as the economy continued to grow moderately. In Europe, the economic downturn in Southern European countries spread to Germany and other major countries, having a serious impact on the overall European economy. Economic growth in emerging mar- kets such as China and India slowed down somewhat due to lagging exports and the effects of tight monetary policies. In Japan, despite the reconstruction demand seen at the beginning of the year from the previous year’s earthquake in Japan and flooding in Thailand, the economy entered a phase of recession during the latter half of the year due to the slowdown in the global economy and reduced domes- tic demand. As for the global economy overall, the effects of the European financial crisis were felt worldwide, leading to a widespread slowdown. Market environment As for the markets in which Canon operates amid these conditions, while demand for office color MFDs showed growth in Japan and other regions, demand for laser print- ers remained sluggish mainly in European markets. Demand for interchangeable-lens digital cameras continued to dis- play strong growth across global markets while demand for compact digital cameras shrunk not only in developed coun- tries, but also in China and some emerging nations. Overall demand for inkjet printers also waned due to the weak economy. In the industry and others segment, demand for semiconductor lithography equipment remained restrained due to weak capital investment for memory devices while lithography equipment used in the production of FPD encountered sluggish demand for large-size FPD panels despite the healthy market for mid- and small-size FPD panels used mainly in smartphones and tablet PCs. The average value of the yen during the year was ¥79.96 against the U.S. dollar, a slight depreciation compared with the previous year, and ¥102.80 against the euro, a year-on-year appreciation of approximately ¥8. Summary of operations Owing to the economic slowdown mainly in Europe and the high valuation of the yen against the euro, combined with the cooling off of demand in China during the latter half of the year, the Canon Group faced increasingly challenging conditions across all of its businesses. Amid this harsh envi- ronment, although Canon continued Group-wide efforts to expand sales, mainly for competitively priced products such as interchangeable-lens digital cameras and office equip- ment, net sales for the year declined 2.2% to ¥3,479.8 billion (U.S.$39,998 million). The gross profit ratio declined by 1.4 points year on year to 47.4% due to the significant impact of the strong yen and product mix. Thanks to Group-wide efforts to thoroughly reduce spending such as research and development (“R&D”) expenses, operating expenses decreased by 2.4% to ¥1,326.1 billion (U.S.$15,243 million). Operating profit decreased 14.3% to ¥323.9 billion (U.S.$3,722 million). Other income (deductions) achieved a turnaround of ¥22.2 billion (U.S.$256 million) owing to an improvement in for- eign currency exchange gain, resulting in income before income taxes of ¥342.6 billion (U.S.$3,937 million), a decrease of 8.5% year on year. Net income attributable to Canon Inc. decreased by 9.7% to ¥224.6 billion (U.S.$2,581 million) from the previous year. Key performance indicators The following are the key performance indicators (“KPIs”) that Canon uses in managing its business. The changes from year to year in these KPIs are set forth in the table shown on page 35. Revenues As Canon pursues the goal to become a truly excellent global company, one indicator upon which Canon’s management places strong emphasis is revenue. The following are some of the KPIs related to revenue that management considers to be important. FINANCIAL OVERVIEW 35 Net sales is one such KPI. Canon derives net sales primar- ily from the sale of products and, to a much lesser extent, provision of services associated with its products. Sales vary depending on such factors as product demand, the number and size of transactions within the reporting period, mar- ket acceptance for new products, and changes in sales prices. Other factors involved are market share and market environ- ment. In addition, management considers the evaluation of net sales by segment to be important for the purpose of assessing Canon’s sales performance in various segments, tak- ing into account recent market trends. Gross profit ratio (ratio of gross profit to net sales) is another KPI for Canon. Through its reforms of product development, Canon has been striving to shorten product development lead times in order to launch new, competi- tively priced products at a faster pace. Furthermore, Canon has further achieved cost reductions through enhancement of efficiency in its production. Canon believes that these achievements have contributed to improving Canon’s gross profit ratio, and will continue pursuing the curtailment of product development lead times and reductions in produc- tion costs. Operating profit ratio (ratio of operating profit to net sales) and R&D expense to net sales ratio are considered to be KPIs by Canon. Canon is focusing on two areas for improvement. Canon is striving to control and reduce its selling, general and administrative expenses as its first key point. Secondly, Canon’s R&D policy is designed to main- tain a certain level of spending in core technology to sustain Canon’s leading position in its current business areas and to seek possibilities in other markets. Canon believes such investments will create the basis for future success in its business and operations. Cash flow management Canon also places significant emphasis on cash flow man- agement. The following are the KPIs with regard to cash flow management that Canon’s management believes to KEY PERFORMANCE INDICATORS be important. Inventory turnover measured in days is a KPI because it measures the adequacy of supply chain management. Inventories have inherent risks of becoming obsolete, 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 to continue reducing work-in-process inventories by decreasing production lead times in order to promptly recover related product expenses, while balancing risks of supply chain dis- ruptions by optimizing finished goods inventories in order to avoid losing potential sales opportunities. Canon’s management seeks to meet its liquidity and capital requirements primarily with cash flow from oper- ations. Management also seeks debt-free operations. For a manufacturing company like Canon, it generally takes con- siderable time to realize profit from a business as the process of R&D, manufacturing and sales has to be followed for suc- cess. Therefore, management believes that it is important to have sufficient financial strength so that the Company does not have to rely on external funds. Canon has continued to reduce its dependency on external funds for capital invest- ments in favor of generating the necessary funds from its own operations. Canon Inc. stockholders’ equity to total assets ratio is another KPI for Canon. Canon believes that its stockholders’ equity to total assets ratio measures its long-term sustain- ability. Canon also believes that achieving a high or rising stockholders’ equity ratio indicates that Canon has main- tained a strong financial position or further improved its ability to fund debt obligations and other unexpected expenses. In the long-term, Canon will be able to maintain a high level of stable investments for its future operations and development. As Canon puts strong emphasis on its R&D activities, management believes that it is important to main- tain a stable financial base and, accordingly, a high level of its stockholders’ equity to total assets ratio. Net sales (Millions of yen) Gross profit to net sales ratio R&D expense to net sales ratio Operating profit to net sales ratio Inventory turnover measured in days Debt to total assets ratio Canon Inc. stockholders’ equity to total assets ratio 2012 ¥3,479,788 47.4% 8.5% 9.3% 57 days 0.1% 65.7% 2011 ¥3,557,433 48.8% 8.7% 10.6% 46 days 0.3% 64.9% 2010 ¥3,706,901 48.1% 8.5% 10.5% 35 days 0.3% 66.4% 2009 ¥3,209,201 44.5% 9.5% 6.8% 39 days 0.3% 69.9% 2008 ¥4,094,161 47.3% 9.1% 12.1% 47 days 0.4% 67.0% Note: Inventory turnover measured in days; Inventory divided by net sales for the previous six months, multiplied by 182.5. 36 Strategy Business Units Management System FINANCIAL SECTION CRITICAL ACCOUNTING POLICIES AND ESTIMATES The consolidated financial statements are prepared in accor- dance with U.S. generally accepted accounting principles (“GAAP”) and based on the selection and application of sig- nificant accounting policies which require management to make significant estimates and assumptions. These estimates and assumptions include future market conditions, net sales growth rate, gross margin and discount rate. Though Canon believes that the estimates and assumptions are reasonable, actual future results may differ from these estimates and assumptions. Canon believes that the following are the more critical judgment areas in the application of its account- ing policies that currently affect its financial condition and results of operations. Revenue recognition Canon generates revenue principally through the sale of office and imaging system products, equipment, supplies, and related services under separate contractual arrange- ments. Canon recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred and title and risk of loss have been transferred to the customer or services have been rendered, the sales price is fixed or determinable, and collectibility is probable. Revenue from sales of office products, such as office MFDs and laser printers, and imaging system products, such as digi- tal cameras and inkjet printers, is recognized upon shipment or delivery, depending upon when title and risk of loss trans- fer to the customer. Revenue from sales of optical equipment, such as semi- conductor lithography equipment and FPD lithography equipment that are sold with customer acceptance provisions related to their functionality, is recognized when the equip- ment is installed at the customer site and the specific criteria of the equipment functionality are successfully tested and dem- onstrated by Canon. Service revenue is derived primarily from separately priced product maintenance contracts on equip- ment sold to customers and is measured at the stated amount of the contract and recognized as services are provided. Canon also offers separately priced product maintenance contracts for most office products, for which the customer typi- cally pays a stated base service fee plus a variable amount based on usage. Revenue from these service maintenance contracts is measured at the stated amount of the contract and recognized as services are provided and variable amounts are earned. Revenue from the sale of equipment under sales-type leases is recognized at the inception of the lease. Income on sales-type leases and direct-financing leases is recognized over the life of each respective lease using the interest method. Leases not qualifying as sales-type leases or direct-financing leases are accounted for as operating leases and the related revenue is recognized ratably over the lease term. When equipment leases are bundled with product maintenance contracts, revenue is first allocated considering the rela- tive fair value of the lease and non-lease deliverables based upon the estimated relative fair values of each element. Lease deliverables generally include equipment, financing and executory costs, while non-lease deliverables generally consist of product maintenance contracts and supplies. For all other arrangements with multiple elements, Canon allocates revenue to each element based on its relative sell- ing price if such element meets the criteria for treatment as a separate unit of accounting. Otherwise, revenue is deferred until the undelivered elements are fulfilled and accounted for as a single unit of accounting. Canon records estimated reductions to sales at the time of sale for sales incentive programs including product dis- counts, customer promotions and volume-based rebates. Estimated reductions to sales are based upon historical trends and other known factors at the time of sale. In addi- tion, Canon provides price protection to certain resellers of its products, and records reductions to sales for the estimated impact of price protection obligations when announced. Estimated product warranty costs are recorded at the time revenue is recognized and are included in selling, general and administrative expenses. Estimates for accrued product war- ranty costs are based on historical experience, and are affected by ongoing product failure rates, specific product class failures outside of the baseline experience, material usage and service delivery costs incurred in correcting a product failure. Allowance for doubtful receivables Allowance for doubtful receivables is determined using a com- bination of factors to ensure that Canon’s trade and financing receivables are not overstated due to uncollectibility. These factors include the length of time receivables are past due, the credit quality of customers, macroeconomic conditions and historical experience. Also, Canon records specific reserves for individual accounts when Canon becomes aware of a cus- tomer’s inability to meet its financial obligations to Canon, such as in the case of bankruptcy filings or deterioration in the customer’s operating results or financial position. If cir- cumstances related to customers change, estimates of the recoverability of receivables would be further adjusted. Valuation of inventories Inventories are stated at the lower of cost or market value. Cost is determined by the average method for domestic inventories and principally the first-in, first-out method for overseas inventories. Market value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make a sale. Canon routinely reviews its inventories for their salability and for indications of obsolescence to deter- mine if inventories should be written-down to market value. Judgments and estimates must be made and used in connec- tion with establishing such allowances in any accounting period. In estimating the market value of its inventories, Canon considers the age of the inventories and the likelihood of spoilage or changes in market demand for its inventories. Impairment of long-lived assets Long-lived assets, such as property, plant and equipment, and FINANCIAL OVERVIEW 37 acquired intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the carrying amount of the asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized in the amount by which the carry- ing amount of the asset exceeds the fair value of the asset. Determining the fair value of the asset involves the use of estimates and assumptions. Property, plant and equipment Property, plant and equipment are stated at cost. Depreciation is calculated principally by the declining-bal- ance method, except for certain assets which are depreciated by the straight-line method over the estimated useful lives of the assets. Goodwill and other intangible assets Goodwill and other intangible assets with indefinite useful lives are not amortized, but are instead tested for impair- ment annually in the fourth quarter of each year, or more frequently if indicators of potential impairment exist. Canon performs its impairment test of goodwill using the two-step approach at the reporting unit level, which is one level below the operating segment level. All goodwill is assigned to the reporting unit or units that benefit from the synergies aris- ing from each business combination. If the carrying amount assigned to the reporting unit exceeds the fair value of the reporting unit, Canon performs the second step to measure an impairment charge in the amount by which the carry- ing amount of a reporting unit’s goodwill exceeds its implied fair value. Determining the fair value of the reporting unit involves the use of estimates and assumptions. Intangible assets with finite useful lives consist primarily of software, license fees, patented technologies and customer relation- ships. Software and license fees are amortized using the straight-line method over the estimated useful lives, which range from 3 years to 5 years for software and 5 years to 10 years for license fees. Patented technologies are amortized using the straight-line method principally over the estimated useful life of 3 years. Customer relationships are amortized principally using the declining-balance method over the esti- mated useful life of 5 years. Income tax uncertainties Canon considers many factors when evaluating and esti- mating income tax uncertainties. These factors include an evaluation of the technical merits of the tax positions as well as the amounts and probabilities of the outcomes that could be realized upon settlement. The actual resolutions of those uncertainties will inevitably differ from those estimates, and such differences may be material to the financial statements. Valuation of deferred tax assets Canon currently has significant deferred tax assets, which are subject to periodic recoverability assessments. Realization of Canon’s deferred tax assets is principally dependent upon its achievement of projected future taxable income. Canon’s judg- ments regarding future profitability may change due to future market conditions, its ability to continue to successfully exe- cute its operating restructuring activities and other factors. Any changes in these factors may require possible recognition of significant valuation allowances to reduce the net carry- ing value of these deferred tax asset balances. When Canon determines that certain deferred tax assets may not be recover- able, the amounts, which may not be realized, are charged to income tax expense and will adversely affect net income. Employee retirement and severance benefit plans Canon has significant employee retirement and severance benefit obligations that are recognized based on actuarial 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 these assump- tions. Other assumptions include assumed rate of increase in compensation levels, mortality rate, and withdrawal rate. Changes in these assumptions inherent in the valuation are reasonably likely to occur from period to period. Actual results that differ from the assumptions are accumulated and amortized over future periods and, therefore, generally affect future pension expenses. While management believes that the assumptions used are appropriate, the differences may affect employee retirement and severance benefit costs in the future. In preparing its financial statements for fiscal 2012, Canon estimated a weighted-average discount rate of 1.9% for Japanese plans and 4.6% for foreign plans and a weighted- average expected long-term rate of return on plan assets of 3.1% for Japanese plans and 5.4% for foreign plans. In esti- mating the discount rate, Canon uses available information about rates of return on high-quality fixed-income govern- mental and corporate bonds currently available and expected to be available during the period to the maturity of the pen- sion benefits. Canon establishes the expected long-term rate of return on plan assets based on management’s expectations of the long-term return of the various plan asset categories in which it invests. Management develops expectations with respect to each plan asset category based on actual historical returns and its current expectations for future returns. Decreases in discount rates lead to increases in actuarial pension benefit obligations which, in turn, could lead to an increase in service cost and amortization cost through amor- tization of actuarial gain or loss, a decrease in interest cost, and vice versa. For fiscal 2012, a decrease of 50 basis points in the discount rate increases the projected benefit obligation by approximately ¥83,396 million (U.S.$959 million). The net effect of changes in the discount rate, as well as the net effect of other changes in actuarial assumptions and experience, is deferred until subsequent periods. Decreases in expected returns on plan assets may increase net periodic benefit cost by decreasing the expected return amounts, while differences between expected value and actual fair value of those assets could affect pension expense in the following years, and vice versa. For fiscal 2012, a change 38 Strategy Business Units Management System FINANCIAL SECTION of 50 basis points in the expected long-term rate of return on plan assets would cause a change of approximately ¥3,725 million (U.S.$43 million) in net periodic benefit cost. Canon multiplies management’s expected long-term rate of return on plan assets by the value of its plan assets, to arrive at the expected return on plan assets that is included in pension expense. Canon defers recognition of the difference between this expected return on plan assets and the actual return on plan assets. The net deferral affects future pension expense. Canon recognizes the funded status (i.e., the difference between the fair value of plan assets and the projected bene- fit obligations) of its pension plans in its consolidated balance sheets, with a corresponding adjustment to accumulated other comprehensive income (loss), net of tax. CONSOLIDATED RESULTS OF OPERATIONS SUMMARY OF OPERATIONS Net sales Operating profit Income before income taxes Net income attributable to Canon Inc. Millions of yen 2012 ¥3,479,788 323,856 342,557 224,564 change -2.2% -14.3% -8.5% -9.7% 2011 ¥3,557,433 378,071 374,524 248,630 change -4.0% -2.4% -4.7% +0.8% 2010 ¥3,706,901 387,552 392,863 246,603 Thousands of U.S. dollars 2012 $39,997,563 3,722,483 3,937,437 2,581,195 Sales Canon’s consolidated net sales in fiscal 2012 totaled ¥3,479,788 million (U.S.$39,998 million), representing a 2.2% decrease from the previous fiscal year. This decrease of net sales was due primarily to economic slowdown mainly in Europe and the high valuation of the yen against the euro combined with the cooling off of demand in China during the latter half of the year. Canon Group faced increasingly challenging conditions across all of its businesses. Overseas operations are significant to Canon’s operat- ing results and generated 79.3% of total net sales in fiscal 2012. Such sales are denominated in the applicable local currency and are subject to fluctuations in the value of the yen to those currencies. Despite efforts to reduce the impact of currency fluctuations on operating results, includ- ing localization of manufacturing in some regions along with procuring parts and materials from overseas suppliers, Canon believes such fluctuations have had and will continue to have a significant effect on its results of operations. The average value of the yen in fiscal 2012 was ¥79.96 to the U.S. dollar, and ¥102.80 to the euro, representing a slight depreciation to the U.S. dollar, and an appreciation of approx- imately ¥8 against the euro, compared with the previous year. The effects of foreign exchange rate fluctuations nega- tively affected net sales by approximately ¥54,300 million in fiscal 2012. This impact consisted of approximately ¥69,200 million of unfavorable impact for euro denominated sales and favorable impact of ¥9,500 million for the U.S. dollar denominated sales and ¥5,400 million for other foreign cur- rency denominated sales. Cost of sales Cost of sales principally reflects the cost of raw materials, parts and labor used by Canon in the manufacture of its products. A portion of the raw materials used by Canon is imported or includes imported materials. Many of these raw materials are subject to fluctuations in world market prices accompanied by fluctuations in foreign exchange rates that may affect Canon’s cost of sales. Other components of cost of sales include depreciation expenses, maintenance expenses, light and fuel expenses, and rent expenses. The ratio of cost of sales to net sales for fiscal 2012 and 2011 was 52.6% and 51.2%, respectively. Gross profit Canon’s gross profit in fiscal 2012 decreased by 5.0% to ¥1,649,966 million (U.S.$18,965 million) from fiscal 2011. The gross profit ratio declined by 1.4 points year on year to 47.4%. The deteriorated gross profit ratio was mainly the result of such fac- tors as the sharp appreciation of the yen to the euro and falling product prices accompanied by the rise in prices of materials. Operating expenses The major components of operating expenses are payroll, R&D, advertising expenses and other marketing expenses. Owing to Group-wide efforts to thoroughly reduce spending, total operating expenses decreased by 2.4% to ¥1,326,110 mil- lion (U.S.$15,243 million) in fiscal 2012. Return on Sales (%) 7.6 6.7 7.0 6.5 4.1 9 6 3 0 2008 2009 2010 2011 2012 FINANCIAL OVERVIEW 39 Operating profit Operating profit in fiscal 2012 decreased 14.3% to a total of ¥323,856 million (U.S.$3,722 million) from fiscal 2011. The ratio of operating profit to net sales decreased 1.3% to 9.3% from fiscal 2011. Other income (deductions) Other income (deductions) for fiscal 2012 achieved a turnaround of ¥22,248 million (U.S.$256 million), owing pri- marily to an improvement in foreign currency exchange gain. Income before income taxes Income before income taxes in fiscal 2012 was ¥342,557 mil- lion (U.S.$3,937 million) a decrease of 8.5% from fiscal 2011, and constituted 9.8% of net sales. Income taxes Provision for income taxes in fiscal 2012 decreased by ¥10,303 million (U.S.$118 million) from fiscal 2011. The effective tax rate during fiscal 2012 remained consistent with fiscal 2011. The effective tax rate for fiscal 2012 was 32.1%, which was lower than the statutory tax rate in Japan. This was mainly due to the increase in tax credit for R&D expenses. Net income attributable to Canon Inc. As a result, net income attributable to Canon Inc. in fiscal 2012 decreased by 9.7% to ¥224,564 million (U.S.$2,581 mil- lion), which represents 6.5% of net sales. Segment information Canon divides its businesses into three segments: the Office Business Unit, the Imaging System Business Unit and the Industry and Others Business Unit. (cid:129)The Office Business Unit mainly includes Office MFDs / Office copying machines / Personal-use copying machines / Laser MFDs / Laser printers / Digital production printing sys- tems / High speed continuous feed printers / Wide-format printers / Document solution (cid:129)The Imaging System Business Unit* mainly includes Interchangeable-lens digital cameras / Compact digital cameras / Digital camcorders / Digital cinema cameras / Interchangeable lenses / Inkjet printers / Large-format ink- jet printers / Commercial photo printers / Image scanners / Broadcast equipment / Calculators (cid:129)The Industry and Others Business Unit mainly includes Semiconductor lithography equipment / FPD lithogra- phy equipment / Digital radiography systems / Ophthalmic equipment / Vacuum thin-film deposition equipment / Organic LED panel manufacturing equipment / Micromotors / Computers / Handy terminals / Document scanners * The “Consumer Business Unit” has been renamed the “Imaging System Business Unit” to be more consistent with its strategy to expand the busi- ness. This change in segment description has no impact on any financial information of this segment. Sales by segment Please refer to the table of sales by segment in Note 23 of the Notes to Consolidated Financial Statements. Canon’s sales by segment are summarized as follows: SALES BY SEGMENT Office Imaging System Industry and Others Eliminations Total Sales by Segment (Millions of yen) 2012 ¥ 1,757,575 1,405,971 407,840 (91,598) ¥ 3,479,788 change -8.4% +7.2% -3.1% — -2.2% Millions of yen 2011 ¥ 1,917,943 1,312,044 420,863 (93,417) ¥ 3,557,433 change -3.5% -5.7% -2.8% — -4.0% 2010 ¥ 1,987,269 1,391,327 432,958 (104,653) ¥ 3,706,901 Thousands of U.S. dollars 2012 $ 20,202,011 16,160,586 4,687,816 (1,052,850) $ 39,997,563 4,094,161 3,706,901 3,209,201 3,557,433 3,479,788 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 0 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 0 Office Business Unit Imaging System Business Unit Industry and Others Business Unit Eliminations Sales by Geographic Area (Millions of yen) 4,094,161 3,706,901 3,209,201 3,557,433 3,479,788 Japan Americas Europe Asia and Oceania 2008 2009 2010 2011 2012 2008 2009 2010 2011 2012 40 Strategy Business Units Management System FINANCIAL SECTION Sales of the Office Business Unit constituting 50.5% of consolidated net sales. Sales volume of both monochrome and color MFDs increased, favored by the continued strong demand for color MFDs, such as imageRUNNER ADVANCE C5000/C2000-series models. As for laser printers, sales vol- umes declined mainly in Europe due to deterioration in business sentiment. Consequently, combined with the appre- ciation of the yen, sales for the segment totaled ¥1,757,575 million (U.S.$20,202 million), a decline of 8.4% in fiscal 2012. Sales of the Imaging System Business Unit constituting 40.4% of consolidated net sales. Sales of interchangeable-lens digital cameras increased thanks to the competitively priced EOS Rebel series along with the EOS 5D Mark III and EOS 60D advanced-amateur models. As for compact digital cameras, despite the significant deterioration of market conditions, sales volume remained at the same level as the previous year thanks to robust sales of the PowerShot ELPH 110 HS and PowerShot A2300. With respect to inkjet printers, sales vol- ume surpassed that for the year-ago period owing to the early restoration of production following the flooding in Thailand. Furthermore, the company successfully entered new mar- kets with the launch of its CINEMA EOS SYSTEM lineup of professional cinematography products, targeting Hollywood and the broader motion picture and television production market, along with the new DreamLabo 5000, targeting the commercial photo printing market. As a result, amid the effects of the strong yen, sales for the segment increased by 7.2% year on year to ¥1,405,971 million (U.S.$16,161 million) in fiscal 2012. Sales of the Industry and Others Business Unit consti- tuted 11.7% of consolidated net sales in fiscal 2012. Among semiconductor lithography equipment, while sales of i-line steppers remained at the same level as the previous year owing to demand for image sensors and LED elements, sales volume overall decreased due to restrained capital expendi- ture for memory devices. As for FPD lithography equipment, unit sales dropped substantially in the face of shrinking demand for equipment used in the production of large- size panels, an area in which Canon is particularly strong. Consequently, combined with the appreciation of the yen, sales for the segment totaled ¥407,840 million (U.S.$4,688 million), a decrease of 3.1% year on year in fiscal 2012. Intersegment sales of ¥91,598 million (U.S.$1,053 mil- lion), representing 2.6% of total sales, are eliminated from the total sales of the three segments, and are described as “Eliminations.” Sales by geographic area Please refer to the table of sales by geographic area in Note 23 of the Notes to Consolidated Financial Statements. A geographical analysis indicates that net sales in fis- cal 2012 increased in Japan and Asia and Oceania while decreased in Americas and Europe. In Japan, sales increased by 3.7% in fiscal 2012 supported by the moderate economic recovery. In the Americas, despite the admirable sales performance of interchangeable-lens digital cameras and solid growth in MFDs, laser printer market weakness caused sales to decline by 2.3% in fiscal 2012. In Europe, although interchangeable-lens digital cam- eras showed solid growth, weak demand for laser printers along with the sharp appreciation of the yen against the euro caused sales to decrease by 8.9% in fiscal 2012. In Asia and Oceania, although the speed of economic expansion in China slowed down slightly in the latter half of the year, owing to the solid demand for interchangeable-lens digital cameras in emerging economies, net sales increased by 2.2% in fiscal 2012. A summary of net sales by geographic area is provided below. Operating profit by segment Please refer to the table of segment information in Note 23 of the Notes to Consolidated Financial Statements. Operating profit for the Office Business Unit in fiscal 2012 decreased by ¥55,687 million (U.S.$640 million) to ¥203,578 million (U.S.$2,340 million). This decrease resulted from the decrease in sales and appreciation of the yen against the euro. Operating profit for the Imaging System Business Unit in fiscal 2012 decreased by ¥976 million (U.S.$11 million) to ¥210,318 million (U.S.$2,417 million). This decrease resulted primarily from the appreciation of the yen against the euro. Operating profit for the Industry and Others Business Unit in fiscal 2012 declined by ¥18,390 million (U.S.$211 million), largely owing to the decrease in sales. SALES BY REGION Japan Americas Europe Asia and Oceania Total 2012 ¥ 720,286 939,873 1,014,038 805,591 ¥ 3,479,788 change +3.7% -2.3% -8.9% +2.2% -2.2% Millions of yen 2011 ¥ 694,450 961,955 1,113,065 787,963 ¥ 3,557,433 change -0.2% -6.0% -5.1% -3.4% -4.0% 2010 ¥ 695,749 1,023,299 1,172,474 815,379 ¥ 3,706,901 Thousands of U.S. dollars 2012 $ 8,279,149 10,803,138 11,655,609 9,259,667 $ 39,997,563 Note: This summary of net sales by geographic area is determined by the location where the product is shipped to the customers. FINANCIAL OVERVIEW 41 FOREIGN OPERATIONS AND FOREIGN CURRENCY TRANSACTIONS Canon’s marketing activities are performed by subsidiaries in various regions in local currencies, while the cost of sales is generally in yen. Given Canon’s current operating structure, appreciation of the yen has a negative impact on net sales and the gross profit ratio. To reduce the financial risks from changes in foreign exchange rates, Canon utilizes derivative financial instruments, which consist principally of forward currency exchange contracts. The operating profit on foreign operation sales is usually lower than that from domestic operations because foreign operations consist mainly of marketing activities. Marketing activities are generally less profitable than production activ- ities, which are mainly conducted by the Company and its domestic subsidiaries. Please refer to the table of geo- graphic information in Note 23 of the Notes to Consolidated Financial Statements. LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents in fiscal 2012 decreased by ¥106,549 million (U.S.$1,225 million) to ¥666,678 million (U.S.$7,663 million), compared with ¥773,227 million in fis- cal 2011 and ¥840,579 million in fiscal 2010. Canon’s cash and cash equivalents are typically denominated both in Japanese yen and in U.S. dollar, with the remainder denomi- nated in foreign currencies. Net cash provided by operating activities in fiscal 2012 decreased by ¥85,485 million (U.S.$983 million) from the pre- vious year to ¥384,077 million (U.S.$4,415 million). Cash flow from operating activities consisted of the following key com- ponents: the major component of Canon’s cash inflow is cash received from customers, and the major components of Canon’s cash outflow are payments for parts and materials, selling, general and administrative expenses, R&D expenses and income taxes. For fiscal 2012, cash inflow from cash received from cus- tomers decreased due to the decrease of sales. There were no significant changes in Canon’s collection rates. Cash outflow for payments for parts and materials increased, as a result of our efforts to optimize inventory levels in order to avoid losing potential sales opportunities while simultaneously increasing flexibility in response to unexpected risks and events. This has led to an increase in inventory turnover days. Cash outflow for payments for selling, general and adminis- trative expenses decreased owing to thorough spending cuts across the Canon Group implemented after the earthquake in fiscal 2011 to control expenses more efficiently. Cash outflow for income taxes decreased due to decrease of taxable income. Net cash used in investing activities in fiscal 2012 was ¥212,740 million (U.S.$2,445 million), decreasing by ¥43,803 million (U.S.$503 million), from ¥256,543 million in fiscal 2011, due to the net effect of increased capital investment focused on boosting production and reducing the amount of time depos- its included in short-term investments. The purchases of fixed assets, which totaled ¥316,211 million (U.S.$3,635 million) in fiscal 2012, were focused on items relevant to raising produc- tion capacity and reducing production cost. Canon defines “free cash flow” by deducting the cash flows from investing activities from the cash flows from operating activities. For fiscal 2012, free cash flow totaled ¥171,337 million (U.S.$1,970 million) as compared with ¥213,019 million for fiscal 2011. Canon’s management recog- nizes that constant and intensive investment in facilities and R&D is required to maintain and strengthen the competitive- ness of its products. Canon’s management seeks to meet its capital requirements with cash flow principally earned from its operations. Therefore, its capital resources are primarily sourced from internally generated funds. Accordingly, Canon has included the information with regard to free cash flow as its management frequently monitors this indicator, and believes that such indicator is beneficial to the understand- ing of investors. Furthermore, Canon’s management believes that this indicator is significant in understanding Canon’s current liquidity and the alternatives of use in financing activities because it takes into consideration its operating and investing activities. Canon refers to this indicator together with relevant U.S. GAAP financial measures shown in its con- solidated statements of cash flows and consolidated balance sheets for cash availability analysis. Net cash used in financing activities totaled ¥319,739 mil- lion (U.S.$3,675 million) in fiscal 2012, mainly resulting from repurchase of treasury stock of ¥149,968 million (U.S.$1,724 million), and the dividend payout of ¥142,362 million (U.S.$1,636 million). The Company paid dividends in fiscal 2012 of ¥120.00 per share. To the extent Canon relies on external funding for its liquid- ity and capital requirements, it generally has access to various funding sources, including the issuance of additional share capital, long-term debt or short-term loans. While Canon has been able to obtain funding from its traditional financ- ing sources and from the capital markets, and believes it will continue to be able to do so in the future, there can be no assurance that adverse economic or other conditions will not affect Canon’s liquidity or long-term funding in the future. Short-term loans (including the current portion of long-term debt) amounted to ¥1,866 million (U.S.$21 mil- lion) at December 31, 2012 compared with ¥8,343 million at December 31, 2011. Long-term debt (excluding the cur- rent portion) amounted to ¥2,117 million (U.S.$24 million) at December 31, 2012 compared with ¥3,368 million at December 31, 2011. Canon’s long-term debt mainly consists of lease obligations. In order to facilitate access to global capital markets, Canon obtains credit ratings from two rating agencies: Moody’s Investors Services, Inc. (“Moody’s”) and Standard and Poor’s Ratings Services (“S&P”). In addition, Canon main- tains a rating from Rating and Investment Information, Inc. (“R&I”), a rating agency in Japan, for access to the Japanese capital market. As of March 15, 2013, Canon’s debt ratings are: Moody’s: Aa1 (long-term); S&P: AA (long-term), A-1+ (short-term); 42 Strategy Business Units Management System FINANCIAL SECTION and R&I: AA+ (long-term). Canon does not have any rating downgrade triggers that would accelerate the maturity of a material amount of its debt. A downgrade in Canon’s credit ratings or outlook could, however, increase the cost of its borrowings. Return on Canon Inc. stockholders’ equity (net income attributable to Canon Inc. divided by the average of total Canon Inc. stockholders’ equity) was 8.7% in fiscal 2012 com- pared with 9.6% in fiscal 2011 and 9.2% in fiscal 2010. Increase in property, plant and equipment on an accrual basis in fiscal 2012 amounted to ¥270,457 million (U.S.$3,109 million) compared with ¥226,869 million in fiscal 2011 and ¥158,976 million in fiscal 2010. For fiscal 2013, Canon proj- ects its increase in property, plant and equipment will be approximately ¥265,000 million (U.S.$3,046 million). Employer contributions to Canon’s worldwide defined ben- efit pension plans were ¥30,421 million (U.S.$350 million) in fiscal 2012, ¥30,510 million in fiscal 2011, and ¥21,435 mil- lion in fiscal 2010. In addition, employer contributions to Canon’s worldwide defined contribution pension plans were ¥13,021 million (U.S.$150 million) in fiscal 2012, ¥12,511 mil- lion in fiscal 2011, and ¥11,780 million in fiscal 2010. Working capital in fiscal 2012 decreased by ¥21,636 million (U.S.$249 million), to ¥1,237,821 million (U.S.$14,228 mil- lion), compared with ¥1,259,457 million in fiscal 2011 and ¥1,233,488 million in fiscal 2010. Canon believes its work- ing capital will be sufficient for its requirements for the foreseeable future. Canon’s capital requirements are primar- ily dependent on management’s business plans regarding the levels and timing of purchases of fixed assets and invest- ments. The working capital ratio (ratio of current assets to current liabilities) for fiscal 2012 was 2.47 compared to 2.41 for fiscal 2011 and to 2.38 for fiscal 2010. Return on assets (net income attributable to Canon Inc. divided by the average of total assets) was 5.7% in fiscal 2012, compared to 6.3% in fiscal 2011 and 6.3% in fiscal 2010. The debt to total assets ratio was 0.1%, 0.3% and 0.3% as of December 31, 2012, 2011 and 2010, respectively. Canon had short-term loans and long-term debt of ¥3,983 million (U.S.$46 million) as of December 31, 2012, ¥11,711 million as of December 31, 2011 and ¥11,331 million as of December 31, 2010. OFF-BALANCE SHEET ARRANGEMENTS As part of its ongoing business, Canon does not participate in transactions that generate relationships with unconsol- idated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities established for the purpose of facilitating off-bal- ance sheet arrangements or other contractually narrow or limited purposes. Canon provides guarantees for bank loans of its employ- ees, affiliates and other companies. Canon would have to perform under a guarantee if the borrower defaults on a pay- ment within the contract periods of 1 year to 30 years in the case of employees with housing loans, and 1 year to 10 years in the case of affiliates and other companies. The maximum amount of undiscounted payments Canon would have had to make in the event of default by all borrowers was ¥13,333 million (U.S.$153 million) at December 31, 2012. The carrying amounts of the liabilities recognized for Canon’s obligations as a guarantor under those guarantees at December 31, 2012 were insignificant. Working Capital Ratio 2.57 2.41 2.47 2.19 2.38 Increase in Property, Plant and Equipment (Millions of yen) 361,988 270,457 216,128 226,869 158,976 400,000 300,000 200,000 100,000 0 3.0 2.5 2.0 1.5 1.0 0.5 0 Return on Canon Inc. Stockholders’ Equity (%) 12 11.1 9.6 9.2 8.7 4.9 9 6 3 0 2008 2009 2010 2011 2012 2008 2009 2010 2011 2012 2008 2009 2010 2011 2012 FINANCIAL OVERVIEW 43 CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS The following summarizes Canon’s contractual obligations at December 31, 2012. Millions of yen Contractual obiligations: Long-term debt: Capital lease obligations Other long-term debt Operating lease obligations Purchase commitments for: Property, plant and equipment Parts and raw materials Other long-term liabilities: Total Less than 1 year 1-3 years 3-5 years More than 5 years Payments due by period ¥ 3,535 129 75,807 ¥ 1,503 44 25,101 ¥ 1,775 35 27,808 ¥ 243 30 13,152 ¥ 14 20 9,746 39,520 65,311 39,520 65,311 — — — — — — Contribution to defined benefit pension plans Total 40,064 ¥ 224,366 40,064 ¥ 171,543 — ¥ 29,618 — ¥ 13,425 — ¥ 9,780 Note: The table does not include provisions for uncertain tax positions and related accrued interest and penalties, as the specific timing of future pay- ments related to these obligations cannot be projected with reasonable certainty. See Note 13, Income Taxes in the Notes to Consolidated Financial Statements for further details. Contribution to defined benefit pension plans reflects the expected amount only for the next fiscal year, since contri- butions beyond the next fiscal year are not currently determinable due to uncertainties related to changes in actuarial assumptions, returns on plan assets and changes to plan membership. Thousands of U.S. dollars Contractual obiligations: Long-term debt: Capital lease obligations Other long-term debt Operating lease obligations Purchase commitments for: Property, plant and equipment Parts and raw materials Other long-term liabilities: Total Less than 1 year 1-3 years 3-5 years More than 5 years Payments due by period $ 40,632 $ 1,483 871,345 17,276 506 288,517 $ 20,402 402 319,632 $ 2,793 345 151,172 $ 161 230 112,024 454,253 750,701 454,253 750,701 — — — — — — Contribution to defined benefit pension plans Total 460,506 460,506 $ 2,578,920 $ 1,971,759 — $ 340,436 — $ 154,310 — $ 112,415 44 Strategy Business Units Management System FINANCIAL SECTION Canon provides warranties of generally less than one year against defects in materials and workmanship on most of its consumer products. Estimated product warranty related costs are established at the time revenue are recognized and are included in selling, general and administrative expenses. Estimates for accrued product warranty costs are primarily based on historical experience, and are affected by ongoing product failure rates, specific product class failures outside of the baseline experience, material usage and service delivery costs incurred in correcting a product failure. As of December 31, 2012, accrued product warranty costs amounted to ¥12,163 million (U.S.$140 million). At December 31, 2012, commitments outstanding for the purchase of property, plant and equipment were approxi- mately ¥39,520 million (U.S.$454 million), and commitments outstanding for the purchase of parts and raw materials were approximately ¥65,311 million (U.S.$751 million), both for use in the ordinary course of its business. Canon anticipates that funds needed to fulfill these commitments will be gener- ated internally through operations. During fiscal 2013, Canon expects to contribute ¥18,610 million (U.S.$214 million) to its Japanese defined benefit pension plans and ¥21,454 million (U.S.$247 million) to its foreign defined benefit pension plans. Canon’s management believes that current financial resources, cash generated from operations and Canon’s poten- tial capacity for additional debt and/or equity financing will be sufficient to fund current and future capital requirements. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES Year 2012 marks the second year of the Excellent Global Corporation Plan, its 5-year (2011–2015) management plan. The slogan of the fourth phase (“Phase IV”) is “Aiming for the Summit - Speed & Sound Growth” and there are three core strategies related to R&D: (cid:129)Achieve the overwhelming No.1 position in all core busi- nesses and expand related and peripheral businesses; (cid:129)Develop new business through globalized diversification and establish the Three Regional Headquarters manage- ment system; and (cid:129)Build the foundations of an environmentally advanced corporation. Canon has been striving to implement the three R&D related strategies as follows: (cid:129)Achieve the overwhelming No.1 position in all core busi- nesses and expand related and peripheral businesses: Continue to introduce competitive products through innovation and aim at gaining profit through solutions and services. (cid:129)Develop new business through globalized diversification and establish the Three Regional Headquarters manage- ment system: Reinforce the businesses of commercial printing sector, medical imaging sector, industrial equip- ment sector and security and safety sector to develop into Canon’s new pillars. Seek talents in Japan, US, and Europe to foster promising technologies and enhance R&D capabilities in global-scale dimensions by enabling product development in specialized area of each region, with actively utilizing M&A. (cid:129)Build the foundations of an environmentally advanced corporation: Focus on energy- and resource-conserving technologies to create products with the highest environ- mental performance. Canon has developed and strengthened relationships with universities and other research institutes, such as Kyoto University, Tokyo Institute of Technology, Osaka University, Stanford University, the University of Arizona, the New Energy and Industrial Technology Development Organization and the National Institute of Advanced Industrial Science and Technology to assist with fundamental research and to develop cutting-edge technologies. Additionally, Canon has entered into respective collaborative research agreements with Massachusetts General Hospital (MGH) and Brigham and Women’s Hospital (BWH) to develop and commercialize unique medical devices. Canon has fully introduced 3D-CAD systems across the Canon Group, boosting R&D efficiency to curtail product development times and costs. Moreover, Canon enhanced and evolved its simulation, measurement, and analysis technol- ogies by establishing leading-edge facilities, including one of Japan’s highest-performance cluster computers. As such, Canon has succeeded in further reducing the need for pro- totypes, dramatically lowering costs and shortening product development lead times. Canon’s consolidated R&D expenses were ¥296,464 mil- lion (U.S.$3,408 million) in fiscal 2012, ¥307,800 million in fiscal 2011 and ¥315,817 million in fiscal 2010. The ratios of R&D expenses to the consolidated total net sales for fiscal 2012, 2011 and 2010 were 8.5%, 8.7% and 8.5%, respectively. Canon believes that new products protected by patents will not easily allow competitors to compete with them, and will give them an advantage in establishing standards in the market and industry. According to the United States patent annual list, released by IFI CLAIMS® Patent Services, Canon obtained the third greatest number of private sector patents in fiscal 2012. R&D Expenses (Millions of yen) 400,000 374,025 300,000 200,000 100,000 0 315,817 304,600 307,800 296,464 2008 2009 2010 2011 2012 FINANCIAL OVERVIEW 45 MARKET RISK EXPOSURES Canon is exposed to market risks, including changes in for- eign currency exchange rates, interest rates and prices of marketable securities and investments. In order to hedge the risks of changes in foreign currency exchange rates, Canon uses derivative financial instruments. Equity price risk Canon holds marketable securities included in current assets, which consist generally of highly-liquid and low-risk instru- ments. Investments included in noncurrent assets are held as long-term investments. Canon does not hold marketable secu- rities and investments for trading purposes. Maturities and fair values of such marketable securities and investments with original maturities of more than three months, all of which were classified as available-for-sale securities, were as follows at December 31, 2012. Available-for-sale securities Due within one year Due after one year through five years Due after five years through ten years Equity securities Millions of yen Thousands of U.S. dollars Cost ¥ 30 953 1,010 14,866 ¥ 16,859 Fair value 30 ¥ 990 985 21,335 ¥ 23,340 Cost $ 345 10,954 11,609 170,874 $ 193,782 Fair value $ 345 11,379 11,322 245,230 $ 268,276 Foreign currency exchange rate and interest rate risk Canon operates internationally, exposing it to the risk of changes in foreign currency exchange rates. Derivative financial instruments are comprised principally of foreign currency exchange contracts utilized by the Company and certain of its subsidiaries to reduce the risk. Canon assesses foreign currency exchange rate risk by continually moni- toring changes in the exposures and by evaluating hedging opportunities. Canon does not hold or issue derivative finan- cial instruments for trading purposes. Canon is also exposed to credit-related losses in the event of non-performance by counterparties to derivative financial instruments, but it is not expected that any counterparties will fail to meet their obligations. Most of the counterparties are internationally recognized financial institutions and selected by Canon tak- ing into account their financial condition, and contracts are diversified across a number of major financial institutions. Canon’s international operations expose Canon to the risk of changes in foreign currency exchange rates. Canon uses foreign exchange contracts to manage certain foreign cur- rency exchange exposures principally from the exchange of U.S. dollars and euros into Japanese yen. These contracts are primarily used to hedge the foreign currency exposure of forecasted intercompany sales and intercompany trade receivables which are denominated in foreign currencies. In accordance with Canon’s policy, a specific portion of foreign currency exposure resulting from forecasted intercompany sales are hedged using foreign exchange contracts which principally mature within three months. The following table provides information about Canon’s major derivative financial instruments related to foreign currency exchange transactions existing at December 31, 2012. All of the foreign exchange contracts described in the following table have a contractual maturity date in 2013. Millions of yen Forwards to sell foreign currencies: Contract amounts Estimated fair value Forwards to buy foreign currencies: Contract amounts Estimated fair value Thousands of U.S. dollars Forwards to sell foreign currencies: Contract amounts Estimated fair value Forwards to buy foreign currencies: Contract amounts Estimated fair value U.S.$ Euro Others Total ¥ 220,742 (12,365) ¥ 172,641 (11,444) ¥ 26,889 (1,600) ¥ 420,272 (25,409) ¥ 38,826 136 ¥ 27,737 611 ¥ — — ¥ 66,563 747 U.S.$ Euro Others Total $ 2,537,264 $ 1,984,379 (131,540) (142,126) $ 309,070 (18,391) $ 4,830,713 (292,057) $ 446,276 $ 318,816 7,023 1,563 $ — $ 765,092 8,586 — 46 Strategy Business Units Management System FINANCIAL SECTION All of Canon’s long-term debt is fixed rate debt. Canon expects that fair value changes and cash flows resulting from reasonable near-term changes in interest rates will be immaterial. Accordingly, Canon believes interest rate risk is insignificant. See also Note 10 of the Notes to Consolidated Financial Statements. Changes in the fair value of derivative financial instru- ments designated as cash flow hedges, including foreign exchange contracts associated with forecasted intercompany sales, are reported in accumulated other comprehensive income (loss). These amounts are subsequently reclassified into earnings through other income (deductions) in the same period as the hedged items affect earnings. Substantially all such amounts recorded in accumulated other comprehen- sive income (loss) at year-end are expected to be recognized in earnings over the next twelve months. Canon excludes the time value component from the assessment of hedge effec- tiveness. Changes in the fair value of a foreign exchange contract for the period between the date that the forecasted intercompany sales occur and its maturity date are 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, 2012, 2011 and 2010. The amounts of net losses excluded from the assessment of hedge effectiveness (time value component) which was recorded in other income (deductions) was ¥221 million (U.S.$3 million), ¥457 million and ¥302 million for the years ended December 31, 2012, 2011 and 2010, respectively. Canon has entered into certain foreign currency exchange contracts to manage its foreign currency exposures. These for- eign currency exchange contracts have not been designated as hedges. Accordingly, the changes in fair values of these contracts are recorded in earnings immediately. LOOKING FORWARD Looking at prospects for the global economy, Canon expects the U.S. economy to realize an accelerated recovery and emerging economies such as China to maintain solid growth. Canon believes, however, that European economies are likely to remain sluggish due to the debt crisis. The global economy as a whole is likely, Canon thinks, to show moderate growth, while the Japanese economy will likely head into solid recovery driven by the economic reconstruction policy and weakening of the yen against other currencies. Fiscal 2013 represents the third year of Phase IV (2011– 2015) of the Excellent Global Corporation Plan, a year in which Canon will implement various measures and in line with a basic policy Canon has established to implement sharp reforms and achieve sound business growth in the face of the current turbulent business environment. In order to achieve its targets, Canon has set and will actively pursue the following five priority goals. (cid:129) Reinforcing Business by Creating Outstanding Hit Products Canon aims to develop next-generation products and cre- ate business models that take into account the dramatic changes taking place in the market such as the popular- ization of smartphones and cloud computing. Canon will further reinforce business profitability, realizing timely launches of new products that are of sound development quality leveraging the technology of prototype-less devel- opment, and filtering down the selection of products through a process of selection and concentration. (cid:129) Securely Launching New Businesses and Achieving Sound Expansion Canon plans to work to fundamentally strengthen its business, targeting the rapidly growing market for network camera systems. Canon plans to also work to further strengthen its “CINEMA EOS SYSTEM” and boost the profitability of its MR System “MREAL.” Additionally, Canon will take full advantage of M&A opportunities to further broaden the range of its business. (cid:129) Thoroughly Strengthening Sales in Accordance with Respective Market Characteristics In the office products domain, Canon plans to lever- age its integration with sales subsidiaries of Océ N.V. to thoroughly strengthen direct sales and the solution and service business, while in the consumer products domain, Canon plans to strengthen sales in emerging markets and launch products suited to the country’s or region’s market characteristics in order to achieve sales expansion that is higher than economic growth. (cid:129) Relentlessly Pursuing Cost Reductions and Accelerating Optimization of Global Production Canon plans to accelerate the application of automated and robot-based production. Canon plans to also expand its application of in-house production, which has focused FINANCIAL OVERVIEW 47 mainly on key components, to include general parts and molds, and production equipment. Additionally, Canon plans to promote a globally optimized production struc- ture through agile production strategies always suited to the characteristics of each global base. (cid:129) Concentrating on Cultivation of Technological Themes that Lead the Way to the Future Canon plans to accelerate innovation by further filtering down key themes and concentrating resources to obtain a steady stream of basic patents. Office Business Unit In 2012, Canon was able to maintain its revenue from sales of MFDs, services and solutions despite a strong yen and the deceleration of the global economy. The consolidation of Océ N.V. has brought many strategic assets to Canon, including expertise, resources and innovation. The importance of connectivity, systems integration, busi- ness-workflow and web services continues to grow in the office imaging space and such added value is increasingly offered together with MFDs, printers and other hardware products as customer solutions. Canon seeks to maintain its leading position in these core markets. In 2012, Canon expanded its offering with the launch of the imageRUNNER ADVANCE 4000, 6200, 8200 and imageRUNNER ADVANCE C5200 series and Océ VarioPrint 110/120/135, which are monochrome digital presses jointly developed with Océ N.V. As for Production Printing Product (PPP), Canon strength- ened its innovation capabilities in business services to accelerate the development of higher added value services as well as continued to invest in new products in order to expand its business in existing and new markets. To enter the Poster print market, Canon launched a new wide for- mat printer, the ColorWave 650. Canon also introduced InfiniStream, which enables the vision of high-volume just- in-time production of customized folding cartons, with the industry’s fastest liquid toner technology. As for solutions Canon introduced imageWARE Desktop Version 3, a software program that enhances the imageRUNNER ADVANCE ecosys- tem by enabling seamless document management. Canon also launched new service offerings for the Canon Business Imaging Online, Canon’s unique cloud-based platform, while joining forces with major players in the technology industry. To maintain and enhance its competitive edge and to meet increasingly sophisticated customer demands, Canon plans to continue reinforcing its hardware and software product line- ups and solutions capability. Although there is heightened uncertainty about the future of the laser printer market with the ongoing eco- nomic downturn in Europe and the deceleration of growth in emerging markets, Canon’s laser printer business continues to occupy a large share and strong position in the market. In the monochrome laser printer market, the transition to a low price segment is expected to expand sales in the micro office/ home office market and in emerging markets. Canon expects an expansion in the color laser printer market to be driven by increasing demand for color printing. Moreover, Canon plans to aggressively launch new products in the MFDs market and to drive Canon’s business growth. However, Canon is experiencing fierce competition with competitors focused on the laser printer market and an eventual decline in sales prices is becoming a major threat. Growth of the tablet PC and smartphone market, which affects users’ printing behavior and may also lead to a decrease in demand for printing, is becoming a new threat. In response, Canon aims to promote technological developments in order to introduce in a timely manner com- petitive products across the office business unit, and to pursue business efficiency through continuous cost reduc- tion and optimization of its supply chain. Imaging System Business unit The demand for high-resolution digital photos remained high, and as a result the interchangeable lens digital cam- era market continued to show robust growth in 2012. By market category, growth remained strong in developed coun- tries, and was particularly robust in Asia outside Japan and other emerging markets, which contributed to overall global growth in the imaging system business unit. By product cat- egory, the digital single-lens-reflex (“SLR”) camera market showed steady growth, while mirrorless cameras represented a new category stimulating consumer demand. In terms of interchangeable lens digital cameras, on top of the need for higher resolution and more compact and lightweight sizes, there is also consumer demand for video recording functions which manufacturers are meeting with a full high definition (HD) format, which is becoming a stan- dard feature. Canon believes there remains considerable room for future growth in this category through develop- ment of new products based on state-of-the-art technology. In emerging markets, sales volumes of interchangeable lens dig- ital cameras are still increasing rapidly. As for the interchangeable lens market, interchangeable lens digital cameras have made dramatic advances in popu- larity, and further growth is expected in the future. Canon will continue to endeavor to market products that meet customer needs, such as lenses equipped with an image stabi- lization function, so as to expand sales and market share. Overall, the compact digital camera market shrank year- on-year due to ongoing economic stagnation and the rapid growth of tablet PCs and smartphones. However, Canon’s position in the compact market improved such that Canon now maintains a higher market share compared to the previ- ous fiscal year. In the digital camera market, Canon faced intense price competition. This combined with the value of the yen remaining at historical highs throughout most of 2012, 48 Strategy Business Units Management System FINANCIAL SECTION placed serious constraints on Canon’s profit margins. Throughout the industry, there has been a strong tendency toward reliance on EMS (electronic manufacturing services), and intense price competition is expected to continue for the foreseeable future. Canon’s strategies to address these chal- lenges include boosting the added value of products, pressing forward with 100% internal production leveraging the econ- omies of scale that come with being the industry leader, and building an optimum cost structure to combat the pressures that might return should the yen strengthen again. The main recording media for digital camcorders has become flash memory and the shift from SD to HD is ongo- ing. The market for conventional camcorders has been shrinking primarily because many popular devices include a movie function. On the other hand, new categories like web cameras and action cameras are emerging and expand- ing. Canon aims to expand sales in this market with a robust product lineup including higher added value based around Canon’s distinctive high-definition, high-resolution technol- ogies also found in Canon’s professional line. Canon plans to expand lineup of “CINEMA EOS SYSTEM” in the business-use digital video camcorder field. CINEMA EOS SYSTEM consists of new interchangeable lens digital cinema camcorders, EF Lenses and new EF Cinema Lenses. Canon is widely aiming to solidify its top position in the motion picture production market by introducing a new series of interchangeable lens cinema camcorders and cinema lenses to the market not only cinema but also broadcast, sports, documentary, etc. as the CINEMA EOS SYSTEM. In 2012, Canon experienced robust growth in the field of projectors for business applications, and in particular brighter, installation type projectors. In this installation mar- ket, Canon launched the new install-type WUX5000, WX6000 and SX6000 with great success in 2012. Moving forward, Canon expects to extend its competitive product lineup based around the optical technology on which the company prides itself, and push for expanded sales. In the field of network cameras for industrial surveillance and management applications, the fiscal year 2012 achieved double-digit growth. The four HD-compatible products Canon launched in the second half of 2011 have increased the importance of mega-pixels and image analysis and also achieved significant growth in terms of both units sold and monetary amount. In the broadcast TV lens market, gradual market expan- sion has continued due to market growth in emerging economies although demand arising from the switchover to high-definition broadcast formats in developed countries dropped off. Despite the economic slump in Europe, the slow- down of exports to China and the progressive lowering of equipment prices, Canon still has a large share of the TV lens market with high value-added products. Canon’s success- ful introduction in 2012 of a new field lens for international level sporting events contributed to increased revenue. In 2012, the consumer inkjet printer market declined com- pared to 2011, due to a worldwide economic downturn and competitor’s withdrawal from the business. Vendors intro- duced new product functions which make it easy to print from smartphone, tablet PC and the cloud computing environment, as well as functions which improve operability for users. Such vendors also expanded their lineup of products from conventional home use to emerging market and business area use. The large-format inkjet printer market decreased slightly in 2012 from the previous year, amid the situation of drop- ping in capital spending caused by the downturn in the European economy and the slowdown of the growth rate in the Asian economy. In this environment, Canon was able to increase sales of large-format inkjet printer units in 2012 compared to 2011. In the first quarter of 2012, Canon was unable to supply enough units to the market primarily as a result of supply delays caused by the floods in Thailand. However, owing to a keen focus on recovering production quickly, Canon has been able to exceed unit sales levels for each quarter from the second quarter of 2012 compared to the same quarter in the prior year. Because the overall market declined in 2012, Canon was accordingly able to increase its share of the market. Canon increased the unit sales of large-format inkjet printers in part by launching new products for the graphic art market and expanding sales channels. Industry and Others Business Unit In fiscal 2012, the market for semiconductor lithography equipment decreased approximately 30% from the previous year. In the memory segment, equipment investment by chip makers remained low primarily because supply continued to outweigh demand. However, image sensor, logic device and automotive device makers steadily increased their equipment investments, drawn by the growing market for smartphones, tablet PCs and hybrid cars. At the same time, some manufac- turers started to invest in i-line steppers for small diameter wafers used in power devices and LEDs, as well as for new markets such as 3D mountings for silicon Via (TSV). As a result, Canon’s shipments of semiconductor lithogra- phy equipment in 2012 slightly decreased from the previous year. Shipments for memory makers remained low while i-line steppers for image sensor production enjoyed brisk sales. In addition, Canon released new i-line stepper FPA- 3030i5+ suitable for the production of the green devices such as LEDs and power devices, which currently occupies a high share of automotive device and LEDs markets. Canon also released new KrF stepper FPA-6300ES6a with greatly improved productivity compared to conventional equipment. In 2012, the market for FPD lithography equipment gen- erally slowed because of a deterioration of panel makers’ earnings. Overall the market for 8th generation large-sized panel production declined 60% from the previous year while FINANCIAL OVERVIEW 49 Sales of film deposition equipment, made by Canon ANELVA Corporation, for magnetic heads and hard discs fell due to the weak PC market, while sales of semiconductor film deposition equipment significantly increased as demand for semiconductor devices used in smartphones was robust. Although sales of die bonders manufactured by Canon Machinery Inc. decreased due to slow capital investment by semiconductor manufacturers, sales of equipment related to secondary batteries used in automobiles and smartphones increased. Forward looking statements The foregoing discussion and other disclosure in this report contains forward-looking statements that reflect manage- ment’s current views with respect to certain future events and financial performance. Actual results may differ materi- ally from those projected or implied in the forward-looking statements. Further, certain forward-looking statements are based upon assumptions of future events that may not prove to be accurate. The following important factors could cause actual results to differ materially from those projected or implied in any forward-looking statements: foreign cur- rency exchange rate fluctuations; the uncertainty of Canon’s ability to implement its plans to localize production and other measures to reduce the impact of foreign currency exchange rate fluctuations; uncertainty as to economic con- ditions in Canon’s major markets; uncertainty of continued demand for Canon’s high-value-added products; Canon’s ability to continue to develop products and to market prod- ucts that incorporate new technology on a timely basis, are competitively priced, and achieve market acceptance; the pos- sibility of losses resulting from foreign currency transactions designed to reduce financial risks from changes in foreign currency exchange rates; and inventory risk due to shifts in market demand. the market for 5.5-6th generation small-to-mid-sized panel production maintained high growth due to the brisk market of smartphones and tablet PCs. As a result, Canon’s shipments of FPD lithography equip- ment decreased from the previous year primarily due to decline in the market for large-sized panels, where Canon is particularly competitive, and the delay in the development of new products for small-to-mid-sized panels, for which the market has maintained a healthy growth. Canon expects FPD lithography equipment investments by panel makers to recover in 2013 mainly led by Chinese makers. Canon aims to turn around the market share by revamping its product lineup including products for small-to- mid-sized panels. In the medical equipment business, the digital radiogra- phy (DR) market continued to expand in 2012, mainly in the emerging markets such as Asia. Moreover, the digital systems market of developed countries continued to experience a rapid transition from the digitalization format of computed radiography (CR) to the newest DR format. While competition increased with a growing number of new players, the target market of Canon DR products showed steady growth. As a result, Canon accelerated sales of Canon’s static DR products; CXDI-401C/G, CXDI-401C/G COMPACT, CXDI-501C/G, and CXDI-80C Wireless, all launched in fiscal year 2011, led the revenue increase for fiscal year 2012. Canon’s dynamic DR product, CXDI-50RF, also recorded consistent sales growth, contributing to the overall sales expansion in DR business. Regarding the ophthalmic products, the optical coher- ence tomography (“OCT”) market continued to expand in 2012, and Canon expects a further increase in both vol- ume and competition in the market. In the OCT market, Canon launched the first Canon-brand OCT, OCT HS-100, in September 2012. This product was the result of collaboration with Optopol Technology, S.A. (Poland), a Canon Group con- solidated subsidiary since 2010. Canon’s fiscal year 2012 ophthalmic product sales were supported by increased sales of TX-20/TX-20P a full auto tonometer and CR-2 Plus high-end non-mydriatic retinal camera, both released in 2011, and RK-F2, a full auto refkera- tometer released in 2012. With the addition of OCT to Canon’s product portfolio, Canon strives to further increase sales in the ophthalmic equipment market. Sales of document scanners manufactured by Canon Electronics Inc. recovered in North America in addition to brisk sales in China, India and other Asian countries. As a result, overall unit sales increased. Sales of organic LED panel manufacturing equipment made by Canon Tokki Corporation recorded steady sales from aggressive capital investment by organic LED panel manu- facturers on the back of increasing demand for smartphones and tablet PCs. 50 Strategy Business Units Management System FINANCIAL SECTION T E N - Y E A R F I N A N C I A L S U M M A R Y Net sales: Domestic Overseas Total Percentage of previous year Net income attributable to Canon Inc. Percentage of sales Advertising Research and development expenses Depreciation of property, plant and equipment Increase in property, plant and equipment Long-term debt, excluding current installments Canon Inc. stockholders' equity Total assets Per share data: Net income attributable to Canon Inc. stockholders per share: Basic Diluted Dividend per share Stock price: High Low Millions of yen (except per share amounts) 2012 2011 2010 2009 ¥ 720,286 2,759,502 3,479,788 97.8% ¥ 694,450 2,862,983 3,557,433 96.0% ¥ 695,749 3,011,152 3,706,901 115.5% ¥ 702,344 2,506,857 3,209,201 78.4% 224,564 6.5% 83,134 296,464 211,973 270,457 248,630 7.0% 81,232 307,800 210,179 226,869 246,603 6.7% 94,794 315,817 232,327 158,976 131,647 4.1% 78,009 304,600 277,399 216,128 ¥ 2,117 2,598,026 3,955,503 ¥ 3,368 2,551,132 3,930,727 ¥ 4,131 2,645,782 3,983,820 ¥ 4,912 2,688,109 3,847,557 ¥ ¥ 191.34 191.34 130.00 4,015 2,308 204.49 204.48 120.00 4,280 3,220 ¥ 199.71 199.70 120.00 4,520 3,205 ¥ 106.64 106.64 110.00 4,070 2,115 Average number of common shares in thousands Number of employees 1,173,648 196,968 1,215,832 198,307 1,234,817 197,386 1,234,482 168,879 Common Stock Price Range (Tokyo Stock Exchange) (Yen) 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 TEN-YEAR FINANCIAL SUMMARY 51 Thousands of U.S. dollars (except per share amounts) 2008 2007 2006 2005 2004 2003 2012 ¥ 868,280 3,225,881 4,094,161 91.4% ¥ 947,587 3,533,759 4,481,346 107.8% ¥ 932,290 3,224,469 4,156,759 110.7% 309,148 7.6% 112,810 374,025 304,622 361,988 488,332 10.9% 132,429 368,261 309,815 428,549 455,325 11.0% 116,809 308,307 235,804 379,657 ¥ 8,423 2,659,792 3,969,934 ¥ 8,680 2,922,336 4,512,625 ¥ 15,789 2,986,606 4,521,915 ¥ 856,205 2,897,986 3,754,191 108.3% 384,096 10.2% 106,250 286,476 205,727 383,784 ¥ 27,082 2,604,682 4,043,553 ¥ 849,734 2,618,119 3,467,853 108.4% 343,344 9.9% 111,770 275,300 174,397 318,730 ¥ 801,400 2,396,672 3,198,072 108.8% $ 8,279,149 31,718,414 39,997,563 97.8% 275,730 8.6% 100,278 259,140 168,636 210,038 2,581,195 6.5% 955,563 3,407,632 2,436,471 3,108,701 ¥ 28,651 2,209,896 3,587,021 ¥ 59,260 1,865,545 3,182,148 $ 24,333 29,862,368 45,465,552 ¥ 246.21 246.20 110.00 5,820 2,215 ¥ 377.59 377.53 110.00 7,450 5,190 ¥ 341.95 341.84 83.33 6,780 4,567 ¥ 288.63 288.36 66.67 ¥ ¥ 258.53 257.85 43.33 4,780 3,460 3,880 3,273 209.21 207.17 33.33 4,140 2,607 $ 2.20 2.20 1.49 46.15 26.53 1,255,626 166,980 1,293,296 131,352 1,331,542 118,499 1,330,761 115,583 1,328,048 108,257 1,317,974 102,567 Notes: 1. U.S. dollar amounts are translated from yen at the rate of U.S.$1 = JPY87, the approximate exchange rate on the Tokyo Foreign Exchange Market as of December 28, 2012. 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 the stock split have been adjusted to reflect the stock split. 52 Strategy Business Units Management System FINANCIAL SECTION C O N S O L I D A T E D B A L A N C E S H E E T S Canon Inc. and Subsidiaries December 31, 2012 and 2011 ASSETS Current assets: Cash and cash equivalents (Note 1) Short-term investments (Note 3) Trade receivables, net (Note 4) Inventories (Note 5) Prepaid expenses and other current assets (Notes 7, 13 and 18) Total current assets Noncurrent receivables (Note 19) Investments (Note 3) Property, plant and equipment, net (Notes 6 and 7) Intangible assets, net (Note 9) Other assets (Notes 7, 9, 12 and 13) Total assets LIABILITIES AND EQUITY Current 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 liabilities Long-term debt, excluding current installments (Note 10) Accrued pension and severance cost (Note 12) Other noncurrent liabilities (Note 13) Total liabilities Commitments and contingent liabilities (Note 19) Equity: Canon Inc. stockholders’ equity: Common stock Authorized 3,000,000,000 shares; issued 1,333,763,464 shares in 2012 and 2011 Additional paid-in capital Legal reserve (Note 14) Retained earnings (Note 14) Accumulated other comprehensive income (loss) (Note 15) Treasury stock, at cost; 180,972,173 shares in 2012 and 132,231,296 shares in 2011 Total Canon Inc. stockholders’ equity Noncontrolling interests Total equity Total liabilities and equity See accompanying Notes to Consolidated Financial Statements. Millions of yen Thousands of U.S. dollars (Note 2) 2012 2011 2012 ¥ 666,678 28,322 573,375 551,623 262,258 2,082,256 19,702 56,617 1,260,364 135,736 400,828 ¥ 3,955,503 1,866 ¥ 325,235 60,057 291,348 165,929 844,435 2,117 272,131 82,518 1,201,201 ¥ 773,227 125,517 533,208 476,704 244,649 2,153,305 16,772 51,790 1,190,836 138,030 379,994 ¥ 3,930,727 8,343 ¥ 380,532 45,900 299,422 159,651 893,848 3,368 249,604 70,240 1,217,060 174,762 401,547 61,663 3,138,976 (367,249) (811,673) 2,598,026 156,276 2,754,302 ¥ 3,955,503 174,762 401,572 59,004 3,059,298 (481,773) (661,731) 2,551,132 162,535 2,713,667 ¥ 3,930,727 $ 7,662,966 325,540 6,590,517 6,340,494 3,014,460 23,933,977 226,460 650,770 14,486,943 1,560,184 4,607,218 $ 45,465,552 21,448 $ 3,738,333 690,310 3,348,828 1,907,230 9,706,149 24,333 3,127,943 948,483 13,806,908 2,008,759 4,615,483 708,770 36,080,184 (4,221,253) (9,329,575) 29,862,368 1,796,276 31,658,644 $ 45,465,552 CONSOLIDATED BALANCE SHEETS / CONSOLIDATED STATEMENTS OF INCOME / CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 53 C O N S O L I D A T E D S T A T E M E N T S O F I N C O M E Canon Inc. and Subsidiaries Years ended December 31, 2012, 2011 and 2010 Net sales Cost of sales (Notes 6, 9, 12 and 19) Gross profit Operating expenses (Notes 1, 6, 9, 12, 16 and 19): Selling, general and administrative expenses Research and development expenses Operating profit Other income (deductions): Interest and dividend income Interest expense Other, net (Notes 1, 3, 18 and 21) Income before income taxes Income taxes (Note 13) Consolidated net income Millions of yen Thousands of U.S. dollars (Note 2) 2012 ¥ 3,479,788 1,829,822 1,649,966 2011 ¥ 3,557,433 1,820,670 1,736,763 2010 ¥ 3,706,901 1,923,813 1,783,088 2012 $ 39,997,563 21,032,437 18,965,126 1,029,646 296,464 1,326,110 323,856 1,050,892 307,800 1,358,692 378,071 1,079,719 315,817 1,395,536 387,552 6,792 (1,022) 12,931 18,701 342,557 8,432 (988) (10,991) (3,547) 374,524 6,022 (1,931) 1,220 5,311 392,863 11,835,011 3,407,632 15,242,643 3,722,483 78,069 (11,747) 148,632 214,954 3,937,437 110,112 232,445 120,415 254,109 140,160 252,703 1,265,655 2,671,782 Less: Net income attributable to noncontrolling interests Net income attributable to Canon Inc. 7,881 ¥ 224,564 5,479 ¥ 248,630 6,100 ¥ 246,603 90,587 $ 2,581,195 Net income attributable to Canon Inc. stockholders per share (Note 17): Basic Diluted Cash dividends per share See accompanying Notes to Consolidated Financial Statements. Yen U.S. dollars (Note 2) ¥ ¥ 191.34 191.34 130.00 204.49 204.48 120.00 ¥ 199.71 199.70 120.00 $ 2.20 2.20 1.49 C O N S O L I D A T E D S T A T E M E N T S O F C O M P R E H E N S I V E I N C O M E Canon Inc. and Subsidiaries Years ended December 31, 2012, 2011 and 2010 Consolidated net income Other comprehensive income (loss), net of tax: Foreign currency translation adjustments Net unrealized gains and losses on securities Net gains and losses on derivative instruments Pension liability adjustments Comprehensive income (Note 15) Less: Comprehensive income (loss) attributable to noncontrolling interests Comprehensive income attributable to Canon Inc. See accompanying Notes to Consolidated Financial Statements. Millions of yen Thousands of U.S. dollars (Note 2) 2012 2011 2010 2012 ¥ 232,445 ¥ 254,109 ¥ 252,703 $ 2,671,782 133,735 3,265 (4,880) (12,787) 119,333 351,778 (54,086) (2,116) (449) (38,377) (95,028) 159,081 (126,918) (146) 767 (9,327) (135,624) 117,079 1,537,184 37,529 (56,092) (146,978) 1,371,643 4,043,425 10,824 ¥ 340,954 1,765 ¥ 157,316 (563) ¥ 117,642 124,414 $ 3,919,011 54 Strategy Business Units Management System FINANCIAL SECTION C O N S O L I D A T E D S T A T E M E N T S O F E Q U I T Y Canon Inc. and Subsidiaries Balance at December 31, 2009 Acquisition of subsidiaries Equity transactions with noncontrolling interests and other Dividends paid to Canon Inc. stockholders Dividends paid to noncontrolling interests Transfer to legal reserve Comprehensive income (loss): Net income Other comprehensive income (loss), net of tax (Note 15): Foreign currency translation adjustments Net unrealized gains and losses on securities Net gains and losses on derivative instruments Pension liability adjustments Total comprehensive income (loss) Repurchase of treasury stock, net Balance at December 31, 2010 Equity transactions with noncontrolling interests and other Dividends paid to Canon Inc. stockholders Dividends paid to noncontrolling interests Transfer to legal reserve Comprehensive income : Net income Other comprehensive income (loss), net of tax (Note 15): Foreign currency translation adjustments Net unrealized gains and losses on securities Net gains and losses on derivative instruments Pension liability adjustments Total comprehensive income Repurchase of treasury stock, net Balance at December 31, 2011 Equity transactions with noncontrolling interests and other Dividends paid to Canon Inc. stockholders Dividends paid to noncontrolling interests Transfer to legal reserve Comprehensive income: Net income Other comprehensive income (loss), net of tax (Note 15): Foreign currency translation adjustments Net unrealized gains and losses on securities Net gains and losses on derivative instruments Pension liability adjustments Total comprehensive income Repurchase of treasury stock, net Balance at December 31, 2012 Common stock Additional paid-in capital Legal reserve Retained earnings Millions of yen Accumulated other comprehensive income (loss) Total Canon Inc. stockholders’ equity Treasury stock ¥ 174,762 ¥ 404,293 ¥ 54,687 ¥ 2,871,437 ¥ (260,818) ¥ (556,252) ¥ 2,688,109 Noncontrolling interests Total equity ¥ 191,291 19,168 ¥ 2,879,400 19,168 (3,787) (13,453) (136,103) (680) 55,250 3,243 (3,243) 37,330 (136,103) — (43,214) (2,827) (5,884) (136,103) (2,827) — 246,603 246,603 6,100 252,703 (122,667) (122,667) (4,251) (126,918) (222) 833 (6,905) 174,762 (81) 400,425 57,930 (4) 2,965,237 (390,459) (61,111) (562,113) 1,193 (609) (152,784) 1,074 (1,074) (222) 76 (146) 833 (6,905) 117,642 (61,196) 2,645,782 (66) (2,422) (563) 163,855 767 (9,327) 117,079 (61,196) 2,809,637 584 (152,784) — (247) (2,838) 337 (152,784) (2,838) — 248,630 248,630 5,479 254,109 (53,251) (2,017) (462) (35,584) ¥ 174,762 (46) ¥ 401,572 ¥ 59,004 (102) ¥ 3,059,298 ¥ (481,773) (99,618) ¥ (661,731) (16) 152 (142,362) (1,866) 2,659 (2,659) (53,251) (835) (54,086) (2,017) (99) (2,116) (462) (35,584) 157,316 (99,766) ¥ 2,551,132 13 (2,793) 1,765 ¥ 162,535 (449) (38,377) 159,081 (99,766) ¥ 2,713,667 (1,730) (142,362) — (13,591) (3,492) (15,321) (142,362) (3,492) — 224,564 224,564 7,881 232,445 132,704 132,704 1,031 133,735 3,148 (4,882) (14,580) ¥ 174,762 (9) ¥ 401,547 ¥ 61,663 (17) ¥ 3,138,976 ¥ (367,249) (149,942) ¥ (811,673) 3,148 117 3,265 (4,882) (14,580) 340,954 (149,968) ¥ 2,598,026 2 1,793 10,824 ¥ 156,276 (4,880) (12,787) 351,778 (149,968) ¥ 2,754,302 CONSOLIDATED STATEMENTS OF EQUITY 55 Common stock Additional paid-in capital Legal reserve Thousands of U.S. dollars (Note 2) Accumulated other comprehensive income (loss) Retained earnings Treasury stock Total Canon Inc. stockholders’ equity Noncontrolling interests Total equity Balance at December 31, 2011 Equity transactions with noncontrolling interests and other Dividends paid to Canon Inc. stockholders Dividends paid to noncontrolling interests Transfer to legal reserve Comprehensive income: Net income Other comprehensive income (loss), net of tax (Note 15): Foreign currency translation adjustments Net unrealized gains and losses on securities Net gains and losses on derivative instruments Pension liability adjustments Total comprehensive income Repurchase of treasury stock, net Balance at December 31, 2012 $ 2,008,759 $ 4,615,770 $ 678,207 $ 35,164,345 $ (5,537,621) $ (7,606,104) $29,323,356 $ 1,868,219 $ 31,191,575 (184) 1,748 (1,636,345) (21,448) 30,563 (30,563) (19,884) (1,636,345) — (156,219) (40,138) (176,103) (1,636,345) (40,138) — 2,581,195 2,581,195 90,587 2,671,782 1,525,333 1,525,333 11,851 1,537,184 36,184 (56,115) (167,586) $ 2,008,759 (103) $ 4,615,483 $ 708,770 (196) $ 36,080,184 $ (4,221,253) (1,723,471) $ (9,329,575) 36,184 1,345 37,529 (56,115) (167,586) 3,919,011 (1,723,770) $ 29,862,368 23 20,608 124,414 $ 1,796,276 (56,092) (146,978) 4,043,425 (1,723,770) $ 31,658,644 See accompanying Notes to Consolidated Financial Statements. 56 Strategy Business Units Management System FINANCIAL SECTION C O N S O L I D A T E D S T A T E M E N T S O F C A S H F L O W S Canon Inc. and Subsidiaries Years ended December 31, 2012, 2011 and 2010 Cash flows from operating activities: Consolidated net income Adjustments to reconcile consolidated net income to net cash provided by operating activities: Depreciation and amortization Loss on disposal of fixed assets Impairment loss of fixed assets Impairment loss of investments Equity in (earnings) losses of affiliated companies Deferred income taxes (Increase) decrease in trade receivables Increase in inventories Increase (decrease) in trade payables Increase (decrease) in accrued income taxes Increase (decrease) in accrued expenses Increase (decrease) in accrued (prepaid) pension and severance cost Other, net Net cash provided by operating activities Cash flows from investing activities: Purchases of fixed assets (Note 6) Proceeds from sale of fixed assets (Note 6) Purchases of available-for-sale securities Proceeds from sale and maturity of available-for-sale securities (Increase) decrease in time deposits, net Acquisitions of subsidiaries, net of cash acquired Purchases of other investments Other, net Net cash used in investing activities Cash flows from financing activities: Proceeds from issuance of long-term debt Repayments of long-term debt Increase (decrease) in short-term loans, net Dividends paid Repurchases of treasury stock, net Other, net Net cash used in financing activities Effect of exchange rate changes on cash and cash equivalents Net change in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Supplemental disclosure for cash flow information (Note 22): Cash paid during the year for: Interest Income taxes See accompanying Notes to Consolidated Financial Statements. Millions of yen Thousands of U.S. dollars (Note 2) 2012 2011 2010 2012 ¥ 232,445 ¥ 254,109 ¥ 252,703 $ 2,671,782 258,133 11,242 7 1,527 (610) 7,487 5,030 (24,805) (102,293) 12,427 (30,089) 5,515 8,061 384,077 (316,211) 4,861 (417) 344 103,137 (704) (796) (2,954) (212,740) 614 (3,732) (5,055) (142,362) (149,968) (19,236) (319,739) 41,853 (106,549) 773,227 ¥ 666,678 261,343 8,937 598 8,130 7,368 29,129 9,991 (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 ¥ 773,227 276,193 21,120 1,288 23,330 (10,471) 29,381 (6,671) (17,532) 115,726 25,228 77 4,147 29,894 744,413 (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) 45,545 795,034 ¥ 840,579 2,967,046 129,218 80 17,552 (7,011) 86,057 57,816 (285,115) (1,175,782) 142,839 (345,851) 63,391 92,656 4,414,678 (3,634,609) 55,874 (4,793) 3,954 1,185,483 (8,092) (9,149) (33,955) (2,445,287) 7,057 (42,897) (58,103) (1,636,345) (1,723,770) (221,103) (3,675,161) 481,069 (1,224,701) 8,887,667 $ 7,662,966 ¥ 1,084 98,096 ¥ 914 120,696 ¥ 1,924 80,212 $ 12,460 1,127,540 CONSOLIDATED STATEMENTS OF CASH FLOWS / NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 57 N O T E S T O C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S Canon Inc. and Subsidiaries 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES (a) Description of Business Canon Inc. (the “Company”) and subsidiaries (collectively “Canon”) is one of the world’s leading manufacturers in such fields as office products, imaging system products and industry and other products. Office products consist mainly of office multifunction devices (“MFDs”), office copy- ing machines, laser printers and digital production printing systems. Imaging system products consist mainly of inter- changeable-lens digital cameras, compact digital cameras, interchangeable lenses, digital camcorders, digital cin- ema cameras, inkjet printers, large-format inkjet printers, commercial photo printers, image scanners and broadcast equipment. Industry and other products consist mainly of semiconductor lithography equipment, flat-panel-display (“FPD”) lithography equipment, digital radiography systems, vacuum thin-film deposition equipment and organic LED panel manufacturing equipment. Canon’s consolidated net sales for the years ended December 31, 2012, 2011 and 2010 were distributed as follows: the Office Business Unit 50.5%, 53.9% and 53.6%, the Imaging System Business Unit 40.4%, 36.9% and 37.5%, the Industry and Others Business Unit 11.7%, 11.8% and 11.7%, and elimination between segments 2.6%, 2.6% and 2.8%, respectively. These percentages were computed by dividing segment net sales, including interseg- ment sales, by consolidated net sales, based on the segment operating results described in Note 23. Sales are made principally under the Canon brand name, almost entirely through sales subsidiaries. These subsidiaries are responsible for marketing and distribution, and pri- marily sell to retail dealers in their geographic area. 79.3%, 80.5% and 81.2% of consolidated net sales for the years ended December 31, 2012, 2011 and 2010 were generated outside Japan, with 27.0%, 27.0% and 27.6% in the Americas, 29.1%, 31.3% and 31.6% in Europe, and 23.2%, 22.2% and 22.0% in Asia and Oceania, respectively. Canon sells laser printers on an OEM basis to Hewlett- Packard Company; such sales constituted 17.0%, 19.3% and 20.1% of consolidated net sales for the years ended December 31, 2012, 2011 and 2010, respectively, and are included in the Office Business Unit. Canon’s manufacturing operations are conducted pri- marily at 28 plants in Japan and 17 overseas plants which are located in countries or regions such as the United States, Germany, France, the Netherlands, Taiwan, China, Malaysia, Thailand and Vietnam. (b) Basis of Presentation The Company and its domestic subsidiaries maintain their books of account in conformity with financial accounting standards of Japan. Foreign subsidiaries maintain their books of account in conformity with financial accounting stan- dards of the countries of their domicile. Certain adjustments and reclassifications have been incorporated in the accompanying consolidated financial statements to conform with U.S. generally accepted account- ing principles (“GAAP”). These adjustments were not recorded in the statutory books of account. (c) Principles of Consolidation The consolidated financial statements include the accounts of the Company, its majority owned subsidiaries and those variable interest entities where the Company or its con- solidated subsidiaries are the primary beneficiaries. All significant intercompany balances and transactions have been eliminated. (d) Use of Estimates The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial state- ments and the reported amounts of revenues and expenses during the period. Significant estimates and assumptions are reflected in valuation and disclosure of revenue recognition, allowance for doubtful receivables, valuation of inventories, impairment of long-lived assets, environmental liabilities, valuation of deferred tax assets, uncertain tax positions and employee retirement and severance benefit obligations. Actual results could differ materially from those estimates. (e) Translation of Foreign Currencies Assets and liabilities of the Company’s subsidiaries located outside Japan with functional currencies other than Japanese yen are translated into Japanese yen at the rates of exchange in effect at the balance sheet date. Income and expense items are translated at the average exchange rates prevailing during the year. Gains and losses resulting from translation of finan- cial statements are excluded from earnings and are reported in other comprehensive income (loss). Gains and losses resulting from foreign currency transac- tions, including foreign exchange contracts, and translation of assets and liabilities denominated in foreign currencies are included in other income (deductions) in the consolidated statements of income. Foreign currency exchange gains and losses was a net gain of ¥9,130 million ($104,943 thousand) for the year ended December 31, 2012, a net loss of ¥3,287 million for the year ended December 31, 2011 and a net gain of ¥3,089 million for the year ended December 31, 2010, respectively. 58 Strategy Business Units Management System FINANCIAL SECTION (f) Cash Equivalents All highly liquid investments acquired with original maturities of three months or less are considered to be cash equiva- lents. Certain debt securities with original maturities of less than three months, classified as available-for-sale securities of ¥141,729 million ($1,629,069 thousand) and ¥204,307 million at December 31, 2012 and 2011, respectively, are included in cash and cash equivalents in the consolidated balance sheets. (g) Investments Investments consist primarily of time deposits with original maturities of more than three months, debt and marketable equity securities, investments in affiliated companies and non- marketable equity securities. Canon reports investments with maturities of less than one year as short-term investments. Canon classifies investments in debt and marketable equity securities as available-for-sale or held-to-maturity securities. Canon does not hold any trading securities, which are bought and held primarily for the purpose of sale in the near term. Available-for-sale securities are recorded at fair value. Fair value is determined based on quoted market prices, pro- jected discounted cash flows or other valuation techniques as appropriate. Unrealized holding gains and losses, net of the related tax effect, are reported as a separate component of other comprehensive income (loss) until realized. Held-to- maturity securities are recorded at amortized cost, adjusted for amortization of premiums and accretion of discounts. Available-for-sale and held-to-maturity securities are reg- ularly reviewed for other-than-temporary declines in the carrying amount based on criteria that include the length of time and the extent to which the market value has been less than cost, the financial condition and near-term pros- pects of the issuer and Canon’s intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in market value. For debt securities for which the declines are deemed to be other-than-temporary and there is no intent to sell, impairments are separated into the amount related to credit loss, which is recognized in earnings, and the amount related to all other factors, which is recog- nized in other comprehensive income (loss). For debt securities for which the declines are deemed to be other-than-temporary and there is an intent to sell, impairments in their entirety are recognized in earnings. For equity securities for which the declines are deemed to be other-than-temporary, impairments in their entirety are recognized in earnings. Canon recognizes an impairment loss to the extent by which the cost basis of the investment exceeds the fair value of the investment. Realized gains and losses are determined by the average cost method and reflected in earnings. Investments in affiliated companies over which Canon has the ability to exercise significant influence, but does not hold a controlling financial interest, are accounted for by the equity method. Non-marketable equity securities in companies over which Canon does not have the ability to exercise signifi- cant influence are stated at cost and reviewed periodically for impairment. (h) Allowance for Doubtful Receivables Allowance for doubtful trade and finance receivables is main- tained for all customers based on a combination of factors, including aging analysis, macroeconomic conditions and historical experience. An additional reserve for individual accounts is recorded when Canon becomes aware of a cus- tomer’s inability to meet its financial obligations, such as in the case of bankruptcy filings. If circumstances related to cus- tomers change, estimates of the recoverability of receivables would be further adjusted. When all collection options are exhausted including legal recourse, the accounts or portions thereof are deemed to be uncollectable and charged against the allowance. (i) Inventories Inventories are stated at the lower of cost or market value. Cost is determined by the average method for domestic inven- tories and principally by the first-in, first-out method for overseas inventories. (j) Impairment of Long-Lived Assets Long-lived assets, such as property, plant and equipment, and acquired intangibles subject to amortization, are reviewed for impairment whenever events or changes in circum- stances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset and the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of the asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of by sale are reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. (k) Property, Plant and Equipment Property, plant and equipment are stated at cost. Depreciation is calculated principally by the declining-bal- ance method, except for certain assets which are depreciated by the straight-line method over the estimated useful lives of the assets. The depreciation period ranges from 3 years to 60 years for buildings and 1 year to 20 years for machinery and equipment. Assets leased to others under operating leases are stated at cost and depreciated to the estimated residual value of the assets by the straight-line method over the lease term, gener- ally from 2 years to 5 years. (l) Goodwill and Other Intangible Assets Goodwill and other intangible assets with indefinite useful lives are not amortized, but are instead tested for impair- ment annually in the fourth quarter of each year, or more frequently if indicators of potential impairment exist. Canon performs its impairment test of goodwill using the two-step approach at the reporting unit level, which is one level below the operating segment level. All goodwill is assigned to the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 59 reporting unit or units that benefit from the synergies aris- ing from each business combination. If the carrying amount assigned to the reporting unit exceeds the fair value of the reporting unit, Canon performs the second step to measure an impairment charge in the amount by which the carry- ing amount of a reporting unit’s goodwill exceeds its implied fair value. Intangible assets with finite useful lives consist pri- marily of software, license fees, patented technologies and customer relationships. Software and license fees are amor- tized using the straight-line method over the estimated useful lives, which range from 3 years to 5 years for software and 5 years to 10 years for license fees. Patented technologies are amortized using the straight-line method principally over the estimated useful life of 3 years. Customer relationships are amortized principally using the declining-balance method over the estimated useful life of 5 years. Certain costs incurred in connection with developing or obtaining internal-use soft- ware are capitalized. These costs consist primarily of payments made to third parties and the salaries of employees working on such software development. Costs incurred in connection with developing internal-use software are capitalized at the applica- tion development stage. In addition, Canon develops or obtains certain software to be sold where related costs are capitalized after establishment of technological feasibility. (m) Environmental Liabilities Liabilities for environmental remediation and other environ- mental costs are accrued when environmental assessments or remedial efforts are probable and the costs can be reasonably estimated. Such liabilities are adjusted as further infor- mation develops or circumstances change. Costs of future obligations are not discounted to their present values. (n) Income Taxes Deferred tax assets and liabilities are recognized for the esti- mated future tax consequences attributable to differences between the financial statement carrying amounts of exist- ing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Canon records a valuation allowance to reduce the deferred tax assets to the amount that is more likely than not realizable. Canon recognizes the financial statement effects of tax positions when it is more likely than not, based on the technical merits, that the tax positions will be sustained upon examination by the tax authorities. Benefits from tax positions that meet the more-likely-than-not recognition threshold are measured at the largest amount of benefit that is greater than 50% likely of being realized upon settlement. Interest and penalties accrued related to unrecognized tax benefits are included in income taxes in the consolidated statements of income. (o) Stock-Based Compensation Canon measures stock-based compensation cost at the grant date, based on the fair value of the award, and recognizes the cost on a straight-line basis over the requisite service period, which is the vesting period. (p) Net Income Attributable to Canon Inc. Stockholders per Share Basic net income attributable to Canon Inc. stockholders per share is computed by dividing net income attributable to Canon Inc. by the weighted-average number of common shares outstanding during each year. Diluted net income attributable to Canon Inc. stockholders per share includes the effect from potential issuances of common stock based on the assumptions that all stock options were exercised. (q) Revenue Recognition Canon generates revenue principally through the sale of office and imaging system products, equipment, supplies, and related services under separate contractual arrange- ments. Canon recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred and title and risk of loss have been transferred to the customer or services have been rendered, the sales price is fixed or determinable, and collectibility is probable. Revenue from sales of office products, such as office MFDs and laser printers, and imaging system products, such as digi- tal cameras and inkjet printers, is recognized upon shipment or delivery, depending upon when title and risk of loss trans- fer to the customer. Revenue from sales of optical equipment, such as semicon- ductor lithography equipment and FPD lithography equipment that are sold with customer acceptance provisions related to their functionality, is recognized when the equipment is installed at the customer site and the specific criteria of the equipment functionality are successfully tested and demon- strated by Canon. Service revenue is derived primarily from separately priced product maintenance contracts on equipment sold to customers and is measured at the stated amount of the contract and recognized as services are provided. Canon also offers separately priced product maintenance contracts for most office products, for which the customer typi- cally pays a stated base service fee plus a variable amount based on usage. Revenue from these service maintenance contracts is measured at the stated amount of the contract and recognized as services are provided and variable amounts are earned. Revenue from the sale of equipment under sales-type leases is recognized at the inception of the lease. Income on sales-type leases and direct-financing leases is recognized over the life of each respective lease using the interest method. Leases not qualifying as sales-type leases or direct-financ- ing leases are accounted for as operating leases and related revenue is recognized ratably over the lease term. When equipment leases are bundled with product maintenance contracts, revenue is first allocated considering the rela- tive fair value of the lease and non-lease deliverables based upon the estimated relative fair values of each element. Lease 60 Strategy Business Units Management System FINANCIAL SECTION deliverables generally include equipment, financing and executory costs, while non-lease deliverables generally consist of product maintenance contracts and supplies. For all other arrangements with multiple elements, Canon allocates revenue to each element based on its relative sell- ing price if such element meets the criteria for treatment as a separate unit of accounting. Otherwise, revenue is deferred until the undelivered elements are fulfilled and accounted for as a single unit of accounting. Canon records estimated reductions to sales at the time of sale for sales incentive programs including product dis- counts, customer promotions and volume-based rebates. Estimated reductions to sales are based upon historical trends and other known factors at the time of sale. During the year ended December 31, 2012, Canon revised its estimates for sales incentive programs accrual. This change in estimate caused an increase in net income attributable to Canon Inc. by ¥10,785 million ($123,966 thousand), and an increase in basic and diluted net income attributable to Canon Inc. stock- holders per share by ¥9.19 ($0.11) each. In addition, Canon provides price protection to certain resellers of its products, and records reductions to sales for the estimated impact of price protection obligations when announced. Estimated product warranty costs are recorded at the time revenue is recognized and are included in selling, general and administrative expenses in the consolidated statements of income. Estimates for accrued product warranty costs are based on historical experience, and are affected by ongoing product failure rates, specific product class failures outside of the baseline experience, material usage and service delivery costs incurred in correcting a product failure. Taxes collected from customers and remitted to gov- ernmental authorities are excluded from revenues in the consolidated statements of income. (r) Research and Development Costs Research and development costs are expensed as incurred. (s) Advertising Costs Advertising costs are expensed as incurred. Advertising expenses were ¥83,134 million ($955,563 thousand), ¥81,232 million and ¥94,794 million for the years ended December 31, 2012, 2011 and 2010, respectively. (t) Shipping and Handling Costs Shipping and handling costs totaled ¥38,499 million ($442,517 thousand), ¥43,308 million and ¥56,306 million for the years ended December 31, 2012, 2011 and 2010, respec- tively, and are included in selling, general and administrative expenses in the consolidated statements of income. (u) Derivative Financial Instruments All derivatives are recognized at fair value and are included in prepaid expenses and other current assets, or other cur- rent liabilities in the consolidated balance sheets. Canon uses and designates certain derivatives as a hedge of a forecasted transaction or the variability of cash flows to be 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, as well as its risk-management objective and strategy for under- taking various hedge transactions. Canon also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging trans- actions are highly effective in offsetting changes in cash flows of hedged items. When it is determined that a deriv- ative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, Canon discontinues hedge accounting prospectively. Changes in the fair value of a deriv- ative that is designated and qualifies as a cash flow hedge are recorded in other comprehensive income (loss), until earnings are affected by the variability in cash flows of the hedged item. Gains and losses from hedging ineffectiveness are included in other income (deductions). Gains and losses related to the components of hedging instruments excluded from the assessment of hedge effectiveness are included in other income (deductions). Canon also uses certain derivative financial instruments which are not designated as hedges. The changes in fair val- ues of these derivative financial instruments are immediately recorded in earnings. Canon classifies cash flows from derivatives as cash flows from operating activities in the consolidated statements of cash flows. (v) Guarantees Canon recognizes, at the inception of a guarantee, a liability for the fair value of the obligation it has undertaken in issu- ing guarantees. (w) Recently Issued Accounting Guidance In June 2011, the Financial Accounting Standards Board (“FASB”) issued an amendment which requires presenta- tion of net income and other comprehensive income in one continuous statement or in two separate but consecutive statements, which is applied retrospectively for all periods presented. Canon adopted this amended guidance from the quarter beginning January 1, 2012. This adoption did not have a material impact on Canon’s consolidated results of operations and financial condition. In February 2013, the FASB issued an amendment which requires entities to provide information about the amounts reclassified out of accumulated other comprehen- sive income by component, and to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumu- lated other comprehensive income by the respective line items of net income. Canon will adopt this amended guid- ance from the quarter beginning January 1, 2013, and does not expect the adoption of this guidance to have a mate- rial impact on Canon’s consolidated results of operations and financial condition. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 61 2. BASIS OF FINANCIAL STATEMENT TRANSLATION The consolidated financial statements presented herein are expressed in Japanese yen and, solely for the convenience of the reader, have been translated into United States dollars at the rate of ¥87 = U.S.$1, the approximate exchange rate pre- vailing on the Tokyo Foreign Exchange Market on December 28, 2012. This translation should not be construed as a repre- sentation that the amounts shown could be converted into United States dollars at such rate. 3. INVESTMENTS The cost, gross unrealized holding gains, gross unrealized holding losses and fair value for available-for-sale securities included in short-term investments and investments by major security type at December 31, 2012 and 2011 were as follows: December 31 Millions of yen 2012: Current: Corporate bonds Noncurrent: Government bonds Corporate bonds Fund trusts Equity securities Millions of yen 2011: Current: Corporate bonds Noncurrent: Government bonds Corporate bonds Fund trusts Equity securities Thousands of U.S. dollars 2012: Current: Corporate bonds Noncurrent: Government bonds Corporate bonds Fund trusts Equity securities Cost Gross unrealized holding gains Gross unrealized holding losses ¥ 30 ¥ — ¥ 181 590 1,192 14,866 ¥ 16,829 ¥ — — 43 7,033 ¥ 7,076 ¥ — ¥ — 30 1 564 ¥ 595 Fair value ¥ 30 ¥ 181 560 1,234 21,335 ¥ 23,310 Cost Gross unrealized holding gains Gross unrealized holding losses Fair value ¥ 20 ¥ — ¥ — ¥ 20 ¥ 172 569 1,867 15,911 ¥ 18,519 ¥ — 73 2 3,200 ¥ 3,275 ¥ 22 84 43 1,387 ¥ 1,536 ¥ 150 558 1,826 17,724 ¥ 20,258 Cost Gross unrealized holding gains Gross unrealized holding losses Fair value $ 345 $ — $ — $ 345 $ 2,080 6,782 13,701 170,874 $ 193,437 $ — — 494 80,839 $ 81,333 $ — 345 11 6,483 $ 6,839 $ 2,080 6,437 14,184 245,230 $ 267,931 62 Strategy Business Units Management System FINANCIAL SECTION Maturities of available-for-sale debt securities and fund trusts included in short-term investments and investments in the accompanying consolidated balance sheets were as follows at December 31, 2012: December 31 Millions of yen Thousands of U.S. dollars Due within one year Due after one year through five years Due after five years through ten years Cost ¥ 30 953 1,010 ¥ 1,993 Fair value ¥ 30 990 985 ¥ 2,005 Cost $ 345 10,954 11,609 $ 22,908 Fair value $ 345 11,379 11,322 $ 23,046 Gross realized gains were ¥238 million ($2,736 thousand), ¥204 million and ¥641 million for the years ended December 31, 2012, 2011 and 2010, respectively. Gross realized losses, including write-downs for impairments that were other-than- temporary, were ¥1,545 million ($17,759 thousand), ¥4,281 million and ¥1,961 million for the years ended December 31, 2012, 2011 and 2010, respectively. At December 31, 2012, substantially all of the available-for- sale securities with unrealized losses had been in a continuous unrealized loss position for less than twelve months. Time deposits with original maturities of more than three months are ¥28,292 million ($325,195 thousand) and ¥125,497 million at December 31, 2012 and 2011, respectively, and are included in short-term investments in the accompa- nying consolidated balance sheets. Aggregate cost of non-marketable equity securities accounted for under the cost method totaled ¥14,808 mil- lion ($170,207 thousand) and ¥14,583 million at December 31, 2012 and 2011, respectively. These investments were not evaluated for impairment at December 31, 2012 and 2011, respectively, because (a) Canon did not estimate the fair value of those investments as it was not practicable to esti- mate the fair value of the investments and (b) Canon did not identify any events or changes in circumstances that might have had significant adverse effects on the fair value of those investments. Investments in affiliated companies accounted for by the equity method amounted to ¥17,345 million ($199,368 thou- sand) and ¥15,776 million at December 31, 2012 and 2011, respectively. Canon’s share of the net earnings (losses) in affiliated companies accounted for by the equity method, included in other income (deductions), were earnings of ¥610 million ($7,011 thousand), losses of ¥7,368 million and earn- ings of ¥10,471 million for the years ended December 31, 2012, 2011 and 2010, respectively. 4. TRADE RECEIVABLES Trade receivables are summarized as follows: December 31 Notes Accounts Less allowance for doubtful receivables 5. INVENTORIES Inventories are summarized as follows: December 31 Finished goods Work in process Raw materials Millions of yen 2012 ¥ 17,207 569,138 586,345 (12,970) ¥ 573,375 2011 ¥ 16,739 528,032 544,771 (11,563) ¥ 533,208 Millions of yen 2012 ¥ 391,194 139,923 20,506 ¥ 551,623 2011 ¥ 291,023 166,076 19,605 ¥ 476,704 Thousands of U.S. dollars 2012 $ 197,782 6,541,816 6,739,598 (149,081) $ 6,590,517 Thousands of U.S. dollars 2012 $ 4,496,483 1,608,310 235,701 $ 6,340,494 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 63 6. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost less accumulated depreciation and are summarized as follows: December 31 Land Buildings Machinery and equipment Construction in progress Less accumulated depreciation Millions of yen 2012 2011 ¥ 272,233 1,447,838 1,586,827 112,919 3,419,817 (2,159,453) ¥ 1,260,364 ¥ 268,493 1,367,187 1,499,331 94,507 3,229,518 (2,038,682) ¥ 1,190,836 Thousands of U.S. dollars 2012 $ 3,129,115 16,641,816 18,239,391 1,297,919 39,308,241 (24,821,298) $ 14,486,943 Depreciation expense for the years ended December 31, 2012, 2011 and 2010 was ¥211,973 million ($2,436,471 thou- sand), ¥210,179 million and ¥232,327 million, respectively. Amounts due for purchases of property, plant and equipment were ¥38,893 million ($447,046 thousand) and ¥47,690 million at December 31, 2012 and 2011, respectively, and are included in other current liabilities in the accompa- nying consolidated balance sheets. Fixed assets presented in the consolidated statements of cash flows include property, plant and equipment and intangible assets. 7. FINANCE RECEIVABLES AND OPERATING LEASES Finance receivables represent financing leases which consist of sales-type leases and direct-financing leases resulting from the sales of Canon’s and complementary third-party products primarily in foreign countries. These receivables typically have terms ranging from 1 year to 8 years. The components of the finance receivables, which are included in prepaid expenses and other current assets, and other assets in the accompanying consolidated balance sheets, are as follows: December 31 Total minimum lease payments receivable Unguaranteed residual values Executory costs Unearned income Less allowance for credit losses Less current portion The activity in the allowance for credit losses is as follows: Years ended December 31 Balance at beginning of year Charge-offs Provision Other Balance at end of year Millions of yen 2012 ¥ 231,221 8,863 (2,598) (27,521) 209,965 (6,908) 203,057 (74,168) ¥ 128,889 2011 ¥ 204,326 8,195 (2,275) (24,955) 185,291 (7,039) 178,252 (66,337) ¥ 111,915 Millions of yen 2012 ¥ 7,039 (1,304) 1,922 (749) ¥ 6,908 2011 ¥ 7,983 (1,937) 2,052 (1,059) ¥ 7,039 Thousands of U.S. dollars 2012 $ 2,657,713 101,873 (29,862) (316,333) 2,413,391 (79,402) 2,333,989 (852,506) $ 1,481,483 Thousands of U.S. dollars 2012 $ 80,908 (14,989) 22,092 (8,609) $ 79,402 64 Strategy Business Units Management System FINANCIAL SECTION Canon has policies in place to ensure that its products are sold to customers with an appropriate credit history, and continuously monitors its customers’ credit quality based on information including length of period in arrears, macroeconomic conditions, initiation of legal proceedings against customers and bankruptcy filings. The allowance for credit losses of finance receivables are evaluated collectively based on historical experience of credit losses. An additional reserve for individual accounts is recorded when Canon becomes 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, 2012 and 2011 are not significant. The cost of equipment leased to customers under operat- ing leases included in property, plant and equipment, net at December 31, 2012 and 2011 was ¥80,186 million ($921,678 thousand) and ¥75,391 million, respectively. Accumulated depreciation on equipment under operating leases at December 31, 2012 and 2011 was ¥58,433 million ($671,644 thousand) and ¥54,791 million, respectively. The following is a schedule by year of the future minimum lease payments to be received under financing leases and non- cancelable operating leases at December 31, 2012. Year ending December 31: Millions of yen Thousands of U.S. dollars 2013 2014 2015 2016 2017 Thereafter 8. ACQUISITIONS Financing leases Operating leases Financing leases Operating leases ¥ 89,794 63,348 38,983 19,221 19,472 403 ¥ 231,221 ¥ 7,073 4,359 3,038 2,195 1,671 4,084 ¥ 22,420 $ 1,032,115 728,138 448,080 220,931 223,816 4,633 $ 2,657,713 $ 81,299 50,103 34,920 25,230 19,207 46,942 $ 257,701 In March 2010, Canon acquired 45.2% of the total outstanding shares of Océ N.V. (“Océ”), which was listed on NYSE Euronext Amsterdam, principally through a fully self-funded public cash tender offer for consideration of ¥50,374 million, in addition to the 22.9% interest Canon held before the public cash tender offer. In addition, Canon acquired Océ’s convertible cumula- tive financing preference shares representing 19.1% of the total outstanding shares of Océ for consideration of ¥8,027 million. As a result, Canon’s aggregate interest represented 87.2% of the total outstanding shares of Océ at that time. The fair value of the 12.8% noncontrolling interest in Océ of ¥18,245 mil- lion was measured based on the quoted price of Océ’s common stock on the acquisition date. Canon holds 99.4% of Océ’s out- standing shares at December 31, 2012. The acquisition was accounted for using the acquisition method. Prior to the March 2010 acquisition date, Canon accounted for its 22.9% interest in Océ using the equity method. The acquisition-date fair value of the previous equity interest of ¥25,508 million was remeasured using the quoted price of Océ’s common stock on the acquisition date and included in the measurement of the total acquisition con- sideration. In connection with the acquisition, Canon repaid ¥55,378 million of Océ’s existing bank debt and ¥22,936 mil- lion of Océ’s existing United States Private Placement notes, which are included in decrease in short-term loans in the con- solidated statement of cash flows. Océ is engaged in research and development, manufacture and sale of document management systems, printing systems for professionals and high-speed, wide format digital print- ing systems. Canon and Océ have complementary technologies and products and would benefit from this strong business rela- tionship. Amid the increasingly competitive printing industry, Canon is further strengthening its business foundation in order to solidify its position as one of the global leaders. Canon aims to provide diversified solutions to its customers in the printing industry by making Océ a consolidated subsidiary. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 65 The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at acquisition date. Current assets Property, plant and equipment Intangible assets Goodwill Other noncurrent assets Non-current assets Total acquired assets Total assumed liabilities Net assets acquired Millions of yen ¥ 122,248 51,156 56,297 77,253 42,658 227,364 349,612 247,458 ¥ 102,154 Intangible assets acquired, which are subject to amorti- zation, consist of customer relationships of ¥32,747 million, patented technologies of ¥11,316 million, and other intan- gible assets of ¥12,234 million. Canon has estimated the amortization period for the customer relationships and pat- ented technologies to be 5 years and 3 years, respectively. The weighted average amortization period for all intangible assets is approximately 4.4 years. Goodwill recognized, which is assigned to the Office Business Unit for impairment testing, is attributable primar- ily to expected synergies from combining operations of Océ and Canon. None of the goodwill is expected to be deduct- ible for income tax purposes. The amount of net sales of Océ included in Canon’s con- solidated statement of income from the acquisition date for the year ended December 31, 2010 was ¥246,518 million. The unaudited pro forma net sales as if Océ had been included in Canon’s consolidated statements of income from the beginning of the year ended December 31, 2010 was ¥3,772,425 million. Pro forma net income was not disclosed because the impact on Canon’s consolidated state- ments of income was not material. Canon acquired businesses other than this described above during the years ended December 31, 2012, 2011, and 2010. Such acquisitions were accounted for using the acqui- sition method but were not material to its consolidated financial statements. 9. GOODWILL AND OTHER INTANGIBLE ASSETS Intangible assets subject to amortization acquired during the years ended December 31, 2012 and 2011 totaled ¥34,196 million ($393,057 thousand) and ¥35,994 million, which primarily consist of software of ¥33,985 million ($390,632 thousand) and ¥33,217 million, respectively. The weighted average amortization periods for intangible assets in total acquired during the years ended December 31, 2012 and 2011 are approximately 4 years and 5 years, respectively. The weighted average amortization periods for software acquired during the years ended December 31, 2012 and 2011 are approximately 4 years. The components of intangible assets subject to amortization at December 31, 2012 and 2011 were as follows: December 31 Millions of yen Software Customer relationships Patented technologies License fees Other 2012 2011 Gross carrying amount ¥ 225,894 39,615 25,900 20,142 22,776 ¥ 334,327 Accumulated amortization ¥ 131,875 26,938 19,028 14,573 9,382 ¥ 201,796 Gross carrying amount ¥ 205,235 34,957 24,342 20,425 19,235 ¥ 304,194 Accumulated amortization ¥ 115,131 18,724 13,317 12,867 6,857 ¥ 166,896 66 Strategy Business Units Management System FINANCIAL SECTION December 31 Thousands of U.S. dollars Software Customer relationships Patented technologies License fees Other Gross carrying amount $ 2,596,483 455,345 297,701 231,517 261,793 $ 3,842,839 2012 Accumulated amortization $ 1,515,805 309,632 218,713 167,506 107,838 $ 2,319,494 Aggregate amortization expense for the years ended December 31, 2012, 2011 and 2010 was ¥46,160 million ($530,575 thousand), ¥51,164 million and ¥43,866 million, respectively. Estimated amortization expense for intan- gible assets currently held for the next five years ending December 31 is ¥44,409 million ($510,448 thousand) in 2013, ¥34,219 million ($393,322 thousand) in 2014, ¥20,576 million ($236,506 thousand) in 2015, ¥11,822 million ($135,885 thou- sand) in 2016, and ¥6,605 million ($75,920 thousand) in 2017. Intangible assets not subject to amortization other than goodwill at December 31, 2012 and 2011 were not significant. For management reporting purposes, goodwill is not allo- cated to the segments. Goodwill has been allocated to its respective segment for impairment testing. The changes in the carrying amount of goodwill by segment, which is included in other assets in the consolidated balance sheets, for the years ended December 31, 2012 and 2011 were as follows: Years ended December 31 Millions of yen 2012: Balance at beginning of year Goodwill acquired during the year Translation adjustments and other Balance at end of year Millions of yen 2011: Balance at beginning of year Translation adjustments and other Balance at end of year Thousands of U.S. dollars 2012: Balance at beginning of year Goodwill acquired during the year Translation adjustments and other Balance at end of year Office ¥ 102,060 — 9,288 ¥ 111,348 Office ¥ 107,301 (5,241) ¥ 102,060 Office $ 1,173,103 — 106,759 $ 1,279,862 Imaging System ¥ 12,088 — 586 ¥ 12,674 Imaging System ¥ 12,386 (298) ¥ 12,088 Imaging System $ 138,943 — 6,735 $ 145,678 Industry and Others ¥ 4,873 961 987 ¥ 6,821 Industry and Others ¥ 5,502 (629) ¥ 4,873 Industry and Others $ 56,012 11,046 11,345 $ 78,403 Total ¥ 119,021 961 10,861 ¥ 130,843 Total ¥ 125,189 (6,168) ¥ 119,021 Total $ 1,368,058 11,046 124,839 $ 1,503,943 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 67 10. SHORT-TERM LOANS AND LONG-TERM DEBT Short-term loans consisting of bank borrowings at December 31, 2012 and 2011 were ¥319 million ($3,666 thousand) and ¥4,641 million, respectively. The weighted average interest rates on short-term loans outstanding at December 31, 2012 and 2011 were 4.00% and 2.72%, respectively. Long-term debt consisted of the following: December 31 Loans, principally from banks, maturing in installments through 2020; bearing weighted average interest of 1.94% and 1.68% at December 31, 2012 and 2011, respectively 0.75% Japanese yen notes, due 2012 0.84% Japanese yen notes, due 2013 Capital lease obligations Less current portion Millions of yen 2012 2011 ¥ 132 — — 3,532 3,664 (1,547) ¥ 2,117 ¥ 1,297 1,020 156 4,597 7,070 (3,702) ¥ 3,368 The aggregate annual maturities of long-term debt outstanding at December 31, 2012 were as follows: Year ending December 31: 2013 2014 2015 2016 2017 Thereafter Millions of yen ¥ 1,547 1,199 611 182 91 34 ¥ 3,664 Thousands of U.S. dollars 2012 $ 1,517 — — 40,598 42,115 (17,782) $ 24,333 Thousands of U.S. dollars $ 17,782 13,781 7,023 2,092 1,046 391 $ 42,115 Both short-term and long-term bank loans are made under general agreements which provide that security and guarantees for present and future indebtedness will be given upon request of the bank, and that the bank shall have the right to offset cash deposits against obligations that have become due or, in the event of default, against all obligations due to the bank. 11. TRADE PAYABLES Trade payables are summarized as follows: December 31 Notes Accounts Millions of yen 2012 ¥ 11,971 313,264 ¥ 325,235 2011 ¥ 16,519 364,013 ¥ 380,532 Thousands of U.S. dollars 2012 $ 137,598 3,600,735 $ 3,738,333 68 Strategy Business Units Management System FINANCIAL SECTION 12. EMPLOYEE RETIREMENT AND SEVERANCE BENEFITS The Company and certain of its subsidiaries have contrib- utory and noncontributory defined benefit pension plans covering substantially all of their employees. Benefits pay- able under the plans are based on employee earnings and years of service. The Company and certain of its subsidiaries also have defined contribution pension plans covering sub- stantially all of their employees. The amounts of cost recognized for the defined contri- bution pension plans of the Company and certain of its subsidiaries for the years ended December 31, 2012, 2011 and 2010 were ¥13,021 million ($149,667 thousand), ¥12,511 million and ¥11,780 million, respectively. Obligations and funded status Reconciliations of beginning and ending balances of the benefit obligations and the fair value of the plan assets are as follows: Years ended December 31 Japanese plans Foreign plans Millions of yen Thousands of U.S. dollars Millions of yen Thousands of U.S. dollars 2012 2011 2012 2012 2011 2012 Change in benefit obligations: Benefit obligations at beginning of year Service cost Interest cost Plan participants’ contributions Amendments Actuarial loss Benefits paid Foreign currency exchange rate changes Benefit obligations at end of year ¥ 626,924 25,738 11,788 — — 6,049 (18,979) — 651,520 Change in plan assets: Fair value of plan assets at beginning of year Actual return on plan assets Employer contributions Plan participants’ contributions Benefits paid Foreign currency exchange rate changes Fair value of plan assets at end of year Funded status at end of year 448,736 41,593 22,589 — (17,466) — 495,452 ¥ (156,068) ¥ 593,274 25,875 12,354 — (1,913) 14,845 (17,511) — 626,924 $ 7,206,023 295,839 135,494 — — 69,529 (218,149) — 7,488,736 ¥ 262,130 5,884 13,176 2,315 — 45,145 (10,407) 46,366 364,609 ¥ 261,130 5,756 12,748 2,680 — 3,872 (8,234) (15,822) 262,130 $ 3,012,989 67,632 151,448 26,609 — 518,908 (119,621) 532,943 4,190,908 460,090 (17,285) 22,282 — (16,351) — 448,736 ¥ (178,188) 5,157,885 478,080 259,644 — (200,758) — 5,694,851 $ (1,793,885) 192,033 25,290 7,832 2,315 (9,825) 31,889 249,534 ¥ (115,075) 197,835 2,335 8,228 2,680 (8,201) (10,844) 192,033 ¥ (70,097) 2,207,276 290,690 90,023 26,609 (112,931) 366,540 2,868,207 $ (1,322,701) Amounts recognized in the consolidated balance sheets at December 31, 2012 and 2011 are as follows: December 31 Japanese plans Foreign plans Other assets Accrued expenses Accrued pension and severance cost Millions of yen Thousands of U.S. dollars Millions of yen Thousands of U.S. dollars 2012 2011 2012 2012 2011 2012 ¥ — — (156,068) ¥ (156,068) ¥ 54 — (178,242) ¥ (178,188) $ — — (1,793,885) $ (1,793,885) ¥ 1,371 (383) (116,063) ¥ (115,075) ¥ 1,397 (132) (71,362) ¥ (70,097) $ 15,759 (4,402) (1,334,058) $ (1,322,701) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 69 Amounts recognized in accumulated other comprehensive income (loss) at December 31, 2012 and 2011 before the effect of income taxes are as follows: December 31 Japanese plans Foreign plans Actuarial loss Prior service credit Millions of yen Thousands of U.S. dollars Millions of yen Thousands of U.S. dollars 2012 2011 2012 2012 2011 2012 ¥ 253,748 (117,633) ¥ 136,115 ¥ 291,778 (130,712) ¥ 161,066 $ 2,916,643 (1,352,103) $ 1,564,540 ¥ 50,417 (261) ¥ 50,156 ¥ 16,095 (345) ¥ 15,750 $ 579,506 (3,000) $ 576,506 The accumulated benefit obligation for all defined benefit plans was as follows: December 31 Japanese plans Foreign plans Millions of yen Thousands of U.S. dollars Millions of yen Thousands of U.S. dollars 2012 2011 2012 2012 2011 2012 Accumulated benefit obligation ¥620,589 ¥595,689 $ 7,133,207 ¥ 328,736 ¥ 238,675 $ 3,778,575 The projected benefit obligations and the fair value of plan assets for the pension plans with projected benefit obligations in excess of plan assets, and the accumulated benefit obligations and the fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets are as follows: December 31 Japanese plans Foreign plans Millions of yen Thousands of U.S. dollars Millions of yen Thousands of U.S. dollars 2012 2011 2012 2012 2011 2012 Plans with projected benefit obligations in excess of plan assets: Projected benefit obligations Fair value of plan assets Plans with accumulated benefit obligations in excess of plan assets: Accumulated benefit obligations Fair value of plan assets ¥ 651,520 495,452 ¥ 622,645 444,403 $ 7,488,736 5,694,851 ¥ 360,742 244,296 ¥ 259,517 188,023 $ 4,146,460 2,808,000 ¥ 615,551 489,929 ¥ 591,830 444,403 $ 7,075,299 5,631,368 ¥ 324,869 244,296 ¥ 160,941 111,527 $ 3,734,126 2,808,000 Components 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 December 31, 2012, 2011 and 2010 consisted of the following components: Years ended December 31 Japanese plans Foreign plans Service cost Interest cost Expected return on plan assets Amortization of net transition obligation Amortization of prior service credit Amortization of actuarial loss Millions of yen Thousands of U.S. dollars Millions of yen Thousands of U.S. dollars 2012 2011 2010 2012 2012 2011 2010 2012 ¥ 25,738 11,788 (13,791) ¥ 25,875 12,354 (16,485) ¥ 23,331 12,636 (16,591) $ 295,839 135,494 (158,516) ¥ 5,884 13,176 (11,806) ¥ 5,756 12,748 (12,112) ¥ 5,660 11,792 (10,540) $ 67,632 151,448 (135,702) — 722 722 — — — — — (13,079) 16,277 ¥ 26,933 (13,674) 14,462 ¥ 23,254 (13,878) 14,545 ¥ 20,765 (150,334) 187,092 $ 309,575 (116) 1,351 ¥ 8,489 (93) 621 ¥ 6,920 (116) 1,050 ¥ 7,846 (1,333) 15,529 $ 97,574 70 Strategy Business Units Management System FINANCIAL SECTION Other changes in plan assets and benefit obligations recognized in other comprehensive income (loss) for the years ended December 31, 2012, 2011 and 2010 are summarized as follows: Years ended December 31 Japanese plans Foreign plans Current year actuarial (gain) loss Amortization of actuarial loss Prior service credit due to amendments Amortization of prior service credit Amortization of net transition obligation Millions of yen Thousands of U.S. dollars Millions of yen Thousands of U.S. dollars 2012 2011 2010 2012 2012 2011 2010 2012 ¥ (21,753) (16,277) ¥ 48,615 (14,462) ¥ 34,348 (14,545) $ (250,035) (187,092) ¥ 31,661 (1,351) ¥ 13,649 (621) ¥ (14,713) (1,050) $ 363,920 (15,529) — (1,913) (423) — 13,079 13,674 13,878 150,334 — 116 — 93 (149) — 116 1,333 — ¥ (24,951) (722) ¥ 45,192 (722) ¥ 32,536 — $ (286,793) — ¥ 30,426 — ¥ 13,121 — ¥ (15,796) — $ 349,724 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: Prior service credit Actuarial loss Japanese plans Foreign plans Millions of yen Thousands of U.S. dollars Millions of yen Thousands of U.S. dollars ¥ (13,070) 14,414 $ (150,230) 165,678 ¥ (124) 1,413 $ (1,425) 16,241 Assumptions Weighted-average assumptions used to determine benefit obligations are as follows: December 31 Discount rate Assumed rate of increase in future compensation levels Japanese plans Foreign plans 2012 1.8% 3.0% 2011 1.9% 3.0% 2012 3.6% 2.2% 2011 4.6% 2.4% Weighted-average assumptions used to determine net periodic benefit cost are as follows: Years ended December 31 Discount rate Assumed rate of increase in future compensation levels Expected long-term rate of return on plan assets Japanese plans Foreign plans 2012 1.9% 3.0% 3.1% 2011 2.1% 3.0% 3.6% 2010 2.3% 3.0% 3.6% 2012 4.6% 2.4% 5.4% 2011 4.9% 2.9% 5.7% 2010 4.9% 2.8% 6.1% Canon determines the expected long-term rate of return based on the expected long-term return of the various asset categories in which it invests. Canon considers the current expectations for future returns and the actual historical returns of each plan asset category. Plan assets Canon’s investment policies are designed to ensure ade- quate plan assets are available to provide future payments of pension benefits to eligible participants. Taking into account the expected long-term rate of return on plan assets, Canon formulates a “model” portfolio comprised of the optimal combination of equity securities and debt secu- rities. Plan assets are invested in individual equity and debt securities using the guidelines of the “model” portfolio in order to produce a total return that will match the expected return on a mid-term to long-term basis. Canon evalu- ates the gap between expected return and actual return of invested plan assets on an annual basis to determine if such differences necessitate a revision in the formulation of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 71 the “model” portfolio. Canon revises the “model” portfolio when and to the extent considered necessary to achieve the expected long-term rate of return on plan assets. Canon’s model portfolio for Japanese plans consists of three major components: approximately 30% is invested in equity securities, approximately 50% is invested in debt securities, and approximately 20% is invested in other investment vehicles, primarily consisting of investments in life insurance company general accounts. Outside Japan, investment policies vary by country, but the long-term investment objectives and strategies remain consistent. Canon’s model portfolio for foreign plans has been developed as follows: approximately 40% is invested in equity securities, approximately 55% is invested in debt securities, and approximately 5% is invested in other invest- ment vehicles, primarily consisting of investments in real estate assets. The equity securities are selected primarily from stocks that are listed on the securities exchanges. Prior to invest- ing, Canon has investigated the business condition of the investee companies, and appropriately diversified invest- ments by type of industry and other relevant factors. The debt securities are selected primarily from government bonds, public debt instruments, and corporate bonds. Prior to investing, Canon has investigated the quality of the issue, including rating, interest rate, and repayment dates, and has appropriately diversified the investments. Pooled funds are selected using strategies consistent with the equity and debt securities described above. As for investments in life insurance company general accounts, the contracts with the insurance companies include a guaranteed interest rate and return of capital. With respect to investments in foreign investment vehicles, Canon has investigated the stability of the underlying governments and economies, the market characteristics such as settlement systems and the taxation systems. For each such investment, Canon has selected the appropriate investment country and currency. The three levels of input used to measure fair value are more fully described in Note 21. The fair values of Canon’s pension plan assets at December 31, 2012 and 2011, by asset category, are as follows: December 31, 2012 Millions of yen Japanese plans Foreign plans Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Equity securities: Japanese companies (a) Foreign companies Pooled funds (b) Debt securities: Government bonds (c) Municipal bonds Corporate bonds Pooled funds (d) Mortgage backed securities (and other asset backed securities) Life insurance company general accounts Other assets ¥ 34,387 6,560 — ¥ — — 99,631 ¥ — — — ¥ 34,387 6,560 99,631 ¥ — 13,149 — ¥ — — 60,142 20,301 — — — — 1,064 8,425 192,386 — 8,400 — — — — — 20,301 1,064 8,425 192,386 4,345 — — — — 21 — 128,647 8,400 — 236 — — ¥ 61,248 113,179 9,813 ¥ 432,898 — 1,306 ¥ 1,306 113,179 11,119 ¥ 495,452 — — ¥ 17,494 1,857 41,137 ¥ 232,040 ¥ — — — — — — — — — — ¥ — ¥ — 13,149 60,142 4,345 21 — 128,647 236 1,857 41,137 ¥ 249,534 72 Strategy Business Units Management System FINANCIAL SECTION December 31, 2011 Millions of yen Japanese plans Foreign plans Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Equity securities: Japanese companies (e) Foreign companies Pooled funds (f) Debt securities: Government bonds (g) Municipal bonds Corporate bonds Pooled funds (h) Mortgage backed securities (and other asset backed securities) Life insurance company general accounts Other assets ¥ 37,875 4,804 — ¥ — — 82,380 ¥ 17,951 — — — — 864 8,170 190,832 — 4,842 — — — — — — — — ¥ 37,875 4,804 82,380 ¥ — 3,779 — ¥ — — 47,779 17,951 864 8,170 190,832 2,326 — — — — 19 — 92,653 ¥ — — — — — — — ¥ — 3,779 47,779 2,326 19 — 92,653 4,842 — 2,726 — 2,726 — — ¥ 60,630 92,700 7,171 ¥ 386,959 — 1,147 ¥ 1,147 92,700 8,318 ¥ 448,736 — — ¥ 6,105 — 42,751 ¥ 185,928 — — ¥ — — 42,751 ¥ 192,033 December 31, 2012 Thousands of U.S. dollars Japanese plans Foreign plans Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Equity securities: Japanese companies (a) Foreign companies Pooled funds (b) Debt securities: Government bonds (c) Municipal bonds Corporate bonds Pooled funds (d) Mortgage backed securities (and other asset backed securities) Life insurance company general accounts Other assets $ 395,253 75,402 — $ — — 1,145,184 $ 233,345 — — — — 12,230 96,839 2,211,333 — — — — — — — $ 395,253 75,402 1,145,184 $ — 151,138 — $ — — 691,287 233,345 12,230 96,839 2,211,333 49,943 — — — — 241 — 1,478,701 $ — — — — — — — $ — 151,138 691,287 49,943 241 — 1,478,701 — 96,552 — 96,552 — 2,713 — 2,713 — — $ 704,000 1,300,908 112,793 $ 4,975,839 — 15,012 $ 15,012 1,300,908 127,805 $ 5,694,851 — — $ 201,081 21,345 472,839 $ 2,667,126 — — $ — 21,345 472,839 $ 2,868,207 (a) The plan’s equity securities include common stock of the Company and certain of its subsidiaries in the amounts of ¥565 million ($6,494 thousand). (b) These funds invest in listed equity securities consisting of approximately 20% Japanese companies and 80% foreign companies for Japanese plans, and mainly foreign com- panies for foreign plans. (c) This class includes approximately 30% Japanese gov- ernment bonds and 70% foreign government bonds for Japanese plans, and mainly foreign government bonds for foreign plans. (d) These funds invest in approximately 65% Japanese gov- ernment bonds, 25% foreign government bonds, 5% Japanese municipal bonds, and 5% corporate bonds for Japanese plans. These funds invest in approximately 30% foreign government bonds and 70% corporate bonds for foreign plans. (e) The plan’s equity securities include common stock of the Company and certain of its subsidiaries in the amounts of ¥1,129 million. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 73 (f) These funds invest in listed equity securities consisting of approximately 50% Japanese companies and 50% foreign companies for Japanese plans, and mainly foreign com- panies for foreign plans. (g) This class includes approximately 30% Japanese gov- ernment bonds and 70% foreign government bonds for Japanese plans, and mainly foreign government bonds for foreign plans. (h) These funds invest in approximately 75% Japanese gov- ernment bonds, 15% foreign government bonds, 5% Japanese municipal bonds, and 5% corporate bonds for Japanese plans. These funds invest in approximately 40% foreign government bonds and 60% corporate bonds for foreign plans. Each level into which assets are categorized is based on inputs used to measure the fair value of the assets, and does not necessarily indicate the risks or ratings of the assets. Level 1 assets are comprised principally of equity secu- rities and government bonds, which are valued using unadjusted quoted market prices in active markets with suf- ficient volume and frequency of transactions. Level 2 assets are comprised principally of pooled funds that invest in equity and debt securities, corporate bonds and investments in life insurance company general accounts. Pooled funds are valued at their net asset values that are calculated by the sponsor of the fund and have daily liquidity. Corporate bonds are valued using quoted prices for identical assets in markets that are not active. Investments in life insurance company general accounts are valued at conversion value. The fair value of Level 3 assets, consisting of hedge funds, was ¥1,306 million ($15,012 thousand) and ¥1,147 million at December 31, 2012 and 2011, respectively. Amounts of actual returns on, and purchases and sales of, these assets during the years ended December 31, 2012 and 2011 were not significant. Contributions Canon expects to contribute ¥18,610 million ($213,908 thousand) to its Japanese defined benefit pension plans and ¥21,454 million ($246,598 thousand) to its foreign defined benefit pension plans for the year ending December 31, 2013. Estimated future benefit payments The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid: Year ending December 31: Japanese plans Foreign plans 2013 2014 2015 2016 2017 2018-2022 Millions of yen ¥ 15,961 16,947 18,765 20,524 21,970 141,232 Thousands of U.S. dollars $ 183,460 194,793 215,690 235,908 252,529 1,623,356 Millions of yen ¥ 8,954 8,876 9,094 9,792 10,467 61,438 Thousands of U.S. dollars $ 102,920 102,023 104,529 112,552 120,310 706,184 74 Strategy Business Units Management System FINANCIAL SECTION 13. INCOME TAXES Domestic and foreign components of income before income taxes and the current and deferred income tax expense (benefit) attributable to such income are summarized as follows: Years ended December 31 2012: Income before income taxes Income taxes: Current Deferred Millions of yen Japanese Foreign Total ¥ 257,640 ¥ 84,917 ¥ 342,557 ¥ 73,573 13,900 ¥ 87,473 ¥ 29,052 (6,413) ¥ 22,639 ¥ 102,625 7,487 ¥ 110,112 2011: Income before income taxes ¥ 287,592 ¥ 86,932 ¥ 374,524 Income taxes: Current Deferred ¥ 67,671 21,047 ¥ 88,718 ¥ 23,615 8,082 ¥ 31,697 ¥ 91,286 29,129 ¥ 120,415 2010: Income before income taxes ¥ 302,965 ¥ 89,898 ¥ 392,863 Income taxes: Current Deferred ¥ 78,359 35,496 ¥ 113,855 ¥ 32,420 (6,115) ¥ 26,305 ¥ 110,779 29,381 ¥ 140,160 Thousands of U.S. dollars Japanese Foreign Total 2012: Income before income taxes $ 2,961,379 $ 976,058 $ 3,937,437 Income taxes: Current Deferred $ 845,667 159,770 $ 1,005,437 $ 333,931 (73,713) $ 260,218 $ 1,179,598 86,057 $ 1,265,655 The Company and its domestic subsidiaries are subject to a number of income taxes, which, in the aggregate, rep- resent a statutory income tax rate of approximately 40% for the years ended December 31, 2012, 2011 and 2010. Amendments to the Japanese tax regulations were enacted into law on November 30, 2011. As a result of these amendments, the statutory income tax rate will be reduced from approximately 40% to 38% effective from the year beginning January 1, 2013, and to approximately 35% effec- tive from the year beginning January 1, 2016 thereafter. Consequently, the statutory income tax rate utilized for deferred tax assets and liabilities expected to be settled or realized in the period from January 1, 2013 to December 31, 2015 is approximately 38% and for periods subsequent to December 31, 2015 the rate is approximately 35%. The adjustments of deferred tax assets and liabilities for this change in the tax rate amounted to ¥6,599 million and have been reflected in income taxes in the consolidated state- ment of income for the year ended December 31, 2011. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 75 A reconciliation of the Japanese statutory income tax rate and the effective income tax rate as a percentage of income before income taxes is as follows: Years ended December 31 Japanese statutory income tax rate Increase (reduction) in income taxes resulting from: Expenses not deductible for tax purposes Income of foreign subsidiaries taxed at lower than Japanese statutory tax rate Tax credit for research and development expenses Change in valuation allowance Effect of enacted changes in tax laws and rates on Japanese tax Other Effective income tax rate 2012 40.0% 2011 40.0% 2010 40.0% 0.8 0.6 0.8 (4.3) (5.7) (1.7) — 3.0 32.1% (4.3) (3.9) (0.5) 1.8 (1.5) 32.2% (3.5) (5.1) 2.8 — 0.7 35.7% Net deferred income tax assets and liabilities are included in the accompanying consolidated balance sheets under the following captions: December 31 Prepaid expenses and other current assets Other assets Other current liabilities Other noncurrent liabilities Millions of yen 2012 ¥ 62,358 121,934 (2,662) (44,712) ¥ 136,918 2011 ¥ 61,961 130,582 (1,735) (43,542) ¥ 147,266 Thousands of U.S. dollars 2012 $ 716,759 1,401,540 (30,598) (513,931) $ 1,573,770 76 Strategy Business Units Management System FINANCIAL SECTION The tax effects of temporary differences that give rise to the deferred tax assets and deferred tax liabilities at December 31, 2012 and 2011 are presented below: December 31 Deferred tax assets: Inventories Accrued business tax Accrued pension and severance cost Research and development – costs capitalized for tax purposes Property, plant and equipment Accrued expenses Net operating losses carried forward Other Less valuation allowance Total deferred tax assets Deferred tax liabilities: Undistributed earnings of foreign subsidiaries Net unrealized gains on securities Tax deductible reserve Financing lease revenue Prepaid pension and severance cost Other Total deferred tax liabilities Net deferred tax assets Millions of yen 2012 2011 ¥ 13,040 4,754 86,442 12,658 28,780 36,528 32,494 41,366 256,062 (32,167) 223,895 (8,235) (2,437) (6,417) (41,417) (1,073) (27,398) (86,977) ¥ 136,918 ¥ 18,885 3,227 90,025 12,898 31,624 37,992 31,967 38,220 264,838 (33,788) 231,050 (6,783) (1,180) (6,385) (40,878) (2,224) (26,334) (83,784) ¥ 147,266 Thousands of U.S. dollars 2012 $ 149,885 54,644 993,586 145,494 330,805 419,862 373,494 475,471 2,943,241 (369,735) 2,573,506 (94,655) (28,011) (73,759) (476,057) (12,333) (314,921) (999,736) $ 1,573,770 The net changes in the total valuation allowance were a decrease of ¥1,621 million ($18,632 thousand) for the year ended December 31, 2012, a decrease of ¥1,519 million and an increase of ¥13,119 million for the years ended December 31, 2011 and 2010, respectively. Based upon the level of historical taxable income and projections for future taxable income over the peri- ods which the net deductible temporary differences are expected to reverse, management believes it is more likely than not that Canon will realize the benefits of these deferred tax assets, net of the existing valuation allowance, at December 31, 2012. At December 31, 2012, Canon had net operating losses which can be carried forward for income tax purposes of ¥122,850 million ($1,412,069 thousand) to reduce future taxable income. Periods available to reduce future taxable income vary in each tax jurisdiction and generally range from one year to twenty years as follows: Within one year After one year through five years After five years through ten years After ten years through twenty years Indefinite period Total Millions of yen ¥ 2,583 28,470 15,803 44,533 31,461 ¥ 122,850 Thousands of U.S. dollars $ 29,690 327,241 181,644 511,874 361,620 $ 1,412,069 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 77 Income taxes have not been accrued on undistributed earnings of domestic subsidiaries as the tax law provides a means by which the dividends from a domestic subsidiary can be received tax free. Canon has not recognized deferred tax liabilities of ¥22,604 million ($259,816 thousand) for a portion of undis- tributed earnings of foreign subsidiaries that arose for the year ended December 31, 2012 and prior years because Canon currently does not expect to have such amounts distributed or paid as dividends to the Company in the fore- seeable future. Deferred tax liabilities will be recognized when Canon expects that it will realize those undistrib- uted earnings in a taxable manner, such as through receipt of dividends or sale of the investments. At December 31, 2012, such undistributed earnings of these subsidiaries were ¥894,850 million ($10,285,632 thousand). A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: Years ended December 31 Balance at beginning of year Additions for tax positions of the current year Additions for tax positions of prior years Reductions for tax positions of prior years Settlements with tax authorities Additions from acquisitions Other Balance at end of year 2012 ¥ 2,933 869 4,903 (1,546) (41) — 593 ¥ 7,711 Millions of yen 2011 ¥ 6,035 149 431 (2,139) (1,264) — (279) ¥ 2,933 2010 ¥ 13,235 73 805 (8,354) (2,471) 4,066 (1,319) ¥ 6,035 Thousands of U.S. dollars 2012 $ 33,713 9,989 56,356 (17,770) (471) — 6,815 $ 88,632 The total amounts of unrecognized tax benefits that would reduce the effective tax rate, if recognized, are ¥7,711 million ($88,632 thousand) and ¥2,809 million at December 31, 2012 and 2011, respectively. Although Canon believes its estimates and assumptions of unrecognized tax benefits are reasonable, uncertainty regarding the final determination of tax audit settle- ments and any related litigation could affect the effective tax rate in the future period. Based on each of the items of which Canon is aware at December 31, 2012, no signifi- cant changes to the unrecognized tax benefits are expected within the next twelve months. Canon recognizes interest and penalties accrued related to unrecognized tax benefits in income taxes. Both interest and penalties accrued at December 31, 2012 and 2011, and interest and penalties included in income taxes for the years ended December 31, 2012, 2011 and 2010 are not material. Canon files income tax returns in Japan and various foreign tax jurisdictions. In Japan, Canon is no longer subject to regular income tax examinations by the tax authority for years before 2012. While there has been no specific indication by the tax authority that Canon will be subject to a transfer pricing exam- ination in the near future, the tax authority could conduct a transfer pricing examination for years after 2003. In other major foreign tax jurisdictions, including the United States and the Netherlands, Canon is no longer subject to income tax examinations by tax authorities for years before 2006 with few exceptions. The tax authorities are currently conducting income tax examinations of Canon’s income tax returns for years after 2005 in major foreign tax jurisdictions. 14. LEGAL RESERVE AND RETAINED EARNINGS The Corporation Law of Japan provides that an amount equal to 10% of distributions from retained earnings paid by the Company and its Japanese subsidiaries be appropriated as a legal reserve. No further appropriations are required when the total amount of the additional paid-in capital and the legal reserve equals 25% of their respective stated capital. The Corporation Law of Japan also provides that additional paid- in capital and legal reserve are available for appropriations by the resolution of the stockholders. Certain foreign subsid- iaries are also required to appropriate their earnings to legal reserves under the laws of the respective countries. Cash dividends and appropriations to the legal reserve charged to retained earnings for the years ended December 31, 2012, 2011 and 2010 represent dividends paid out dur- ing those years and the related appropriations to the legal reserve. Retained earnings at December 31, 2012 did not reflect current year-end dividends in the amount of ¥80,695 million ($927,529 thousand) which were approved by the stockholders in March 2013. The amount available for dividends under the Corporation Law of Japan is based on the amount recorded in the Company’s nonconsolidated books of account in accordance with generally accepted accounting standards of Japan. Such amount was ¥1,090,834 million ($12,538,322 thousand) at December 31, 2012. Retained earnings at December 31, 2012 included Canon’s equity in undistributed earnings of affiliated companies accounted for by the equity method in the amount of ¥17,094 million ($196,483 thousand). 78 Strategy Business Units Management System FINANCIAL SECTION 15. OTHER COMPREHENSIVE INCOME (LOSS) Changes in accumulated other comprehensive income (loss) are as follows: Years ended December 31 Foreign currency translation adjustments: Balance at beginning of year Adjustments for the year Balance at end of year Net unrealized gains and losses on securities: Balance at beginning of year Adjustments for the year Balance at end of year Net gains and losses on derivative instruments: Balance at beginning of year Adjustments for the year Balance at end of year Pension liability adjustments: Balance at beginning of year Adjustments for the year Balance at end of year Total accumulated other comprehensive income (loss): Balance at beginning of year Adjustments for the year Balance at end of year Millions of yen 2012 2011 2010 Thousands of U.S. dollars 2012 ¥ (378,863) 131,129 (247,734) ¥ (325,612) (53,251) (378,863) ¥ (202,628) (122,984) (325,612) $ (4,354,747) 1,507,230 (2,847,517) 1,003 3,143 4,146 455 (4,917) (4,462) 3,020 (2,017) 1,003 917 (462) 455 (104,368) (14,831) (119,199) (68,784) (35,584) (104,368) 3,285 (265) 3,020 71 846 917 (61,546) (7,238) (68,784) 11,529 36,126 47,655 5,230 (56,517) (51,287) (1,199,633) (170,471) (1,370,104) (481,773) 114,524 ¥ (367,249) (390,459) (91,314) ¥ (481,773) (260,818) (129,641) ¥ (390,459) (5,537,621) 1,316,368 $ (4,221,253) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 79 Tax effects allocated to each component of other comprehensive income (loss) and reclassification adjustments, includ- ing amounts attributable to noncontrolling interests, are as follows: Years ended December 31 2012: Foreign currency translation adjustments Net unrealized gains and losses on securities: Amount arising during the year Reclassification adjustments for gains and losses realized in net income Net change during the year Net gains and losses on derivative instruments: Amount arising during the year Reclassification adjustments for gains and losses realized in net income Net change during the year Pension liability adjustments: Amount arising during the year Reclassification adjustments for gains and losses realized in net income Net change during the year Other comprehensive income (loss) 2011: Foreign currency translation adjustments Net unrealized gains and losses on securities: Amount arising during the year Reclassification adjustments for gains and losses realized in net income Net change during the year Net gains and losses on derivative instruments: Amount arising during the year Reclassification adjustments for gains and losses realized in net income Net change during the year Pension liability adjustments: Amount arising during the year Reclassification adjustments for gains and losses realized in net income Net change during the year Other comprehensive income (loss) 2010: Foreign currency translation adjustments Net unrealized gains and losses on securities: Amount arising during the year Reclassification adjustments for gains and losses realized in net income Net change during the year Net gains and losses on derivative instruments: Amount arising during the year Reclassification adjustments for gains and losses realized in net income Net change during the year Pension liability adjustments: Amount arising during the year Reclassification adjustments for gains and losses realized in net income Net change during the year Other comprehensive income (loss) Before-tax amount Millions of yen Tax (expense) or benefit Net-of-tax amount ¥ 134,930 ¥ (1,195) ¥ 133,735 3,418 1,307 4,725 (10,647) 2,440 (8,207) (13,888) 4,433 (9,455) ¥ 121,993 (1,004) (456) (1,460) 4,041 (714) 3,327 (1,738) (1,594) (3,332) ¥ (2,660) 2,414 851 3,265 (6,606) 1,726 (4,880) (15,626) 2,839 (12,787) ¥ 119,333 ¥ (53,839) ¥ (247) ¥ (54,086) (7,571) 4,077 (3,494) 4,221 (5,006) (785) (59,928) 2,038 (57,890) ¥ (116,008) 3,010 (1,632) 1,378 (1,708) 2,044 336 20,252 (739) 19,513 ¥ 20,980 (4,561) 2,445 (2,116) 2,513 (2,962) (449) (39,676) 1,299 (38,377) ¥ (95,028) ¥ (128,271) ¥ 1,353 ¥ (126,918) (2,179) 1,320 (859) 8,409 (6,990) 1,419 (19,170) 2,323 (16,847) ¥ (144,558) 671 42 713 (3,573) 2,921 (652) 8,314 (794) 7,520 ¥ 8,934 (1,508) 1,362 (146) 4,836 (4,069) 767 (10,856) 1,529 (9,327) ¥ (135,624) Strategy Business Units Management System FINANCIAL SECTION 80 Years ended December 31 2012: Foreign currency translation adjustments Net unrealized gains and losses on securities: Amount arising during the year Reclassification adjustments for gains and losses realized in net income Net change during the year Net gains and losses on derivative instruments: Amount arising during the year Reclassification adjustments for gains and losses realized in net income Net change during the year Pension liability adjustments: Amount arising during the year Reclassification adjustments for gains and losses realized in net income Net change during the year Other comprehensive income (loss) Thousands of U.S. dollars Before-tax amount Tax (expense) or benefit Net-of-tax amount $ 1,550,920 $ (13,736) $ 1,537,184 39,287 15,023 54,310 (122,379) 28,046 (94,333) (159,633) 50,954 (108,679) $ 1,402,218 (11,540) (5,241) (16,781) 46,448 (8,207) 38,241 (19,977) (18,322) (38,299) $ (30,575) 27,747 9,782 37,529 (75,931) 19,839 (56,092) (179,610) 32,632 (146,978) $ 1,371,643 16. STOCK-BASED COMPENSATION On May 1, 2011, based on the approval of the stockholders, the Company granted stock options to its directors, execu- tive officers and certain employees to acquire 912,000 shares of common stock. These option awards vest after two years of continued service beginning on the grant date and have a four year contractual term. The grant-date fair value per share of the stock options granted during the year ended December 31, 2011 was ¥772. On May 1, 2010, based on the approval of the stockholders, the Company granted stock options to its directors, execu- tive officers and certain employees to acquire 890,000 shares of common stock. These option awards vest after two years of continued service beginning on the grant date and have a four year contractual term. The grant-date fair value per share of the stock options granted during the year ended December 31, 2010 was ¥988. On May 1, 2009, based on the approval of the stockholders, the Company granted stock options to its directors, execu- tive officers and certain employees to acquire 954,000 shares of common stock. These option awards vest after two years of continued service beginning on the grant date and have a four year contractual term. The grant-date fair value per share of the stock options granted during the year ended December 31, 2009 was ¥699. On May 1, 2008, based on the approval of the stockholders, the Company granted stock options to its directors, execu- tive officers and certain employees to acquire 592,000 shares of common stock. These option awards vest after two years of continued service beginning on the grant date and have a four year contractual term. The grant-date fair value per share of the stock options granted during the year ended December 31, 2008 was ¥1,247. The compensation cost recognized for these stock options for the years ended December 31, 2012, 2011 and 2010 was ¥364 million ($4,184 thousand), ¥748 million and ¥643 million, respectively, and is included in selling, general and administra- tive expenses in the consolidated statements of income. The fair value of each option award was estimated on the date of grant using the Black-Scholes option pricing model that incorporates the assumptions presented below: Years ended December 31 Expected term of option (in years) Expected volatility Dividend yield Risk-free interest rate 2011 4.0 36.44% 3.16% 0.44% 2010 4.0 38.00% 2.53% 0.45% NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 81 A summary of option activity under the stock option plans as of and for the years ended December 31, 2012, 2011 and 2010 is presented below: Shares Weighted-average exercise price Yen U.S. dollars Weighted-average remaining contractual term Aggregate intrinsic value Year 3.0 Millions of yen ¥ 588 Thousands of U.S. dollars Outstanding at January 1, 2010 Granted Forfeited Outstanding at December 31, 2010 Granted Exercised Forfeited Outstanding at December 31, 2011 Exercised Forfeited Outstanding at December 31, 2012 Exercisable at December 31, 2012 1,512,000 890,000 (182,000) 2,220,000 912,000 (65,800) (24,000) 3,042,200 (10,800) (305,000) 2,726,400 1,988,400 ¥ 4,119 4,573 3,479 4,354 3,990 3,287 4,282 4,268 3,287 4,493 ¥ 4,247 ¥ 4,342 2.5 722 2.0 88 $ 42.14 54.90 $54.72 $ 54.58 1.6 1.1 ¥ 37 ¥ 37 $ 425 $ 425 At December 31, 2012, 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, 2012, and changes during the year ended December 31, 2012, is presented below: Year ended December 31, 2012 Shares Weighted-average grant-date fair value Nonvested at January 1, 2012 Vested Forfeited Nonvested at December 31, 2012 1,768,000 (848,000) (182,000) 738,000 Yen ¥ 878 988 796 772 U.S. dollars $ 10.09 11.36 9.15 8.87 At December 31, 2012, there was ¥95 million ($1,092 thousand) of total unrecognized compensation cost related to nonvested stock options. That cost is expected to be rec- ognized over a period of 0.33 year. The total fair value of shares vested during the years ended December 31, 2012, 2011 and 2010 was ¥848 million ($9,747 thousand), ¥547 million and ¥696 million, respectively. Cash received from the exercise of stock options for the year ended December 31, 2012 and 2011 was ¥35 million ($402 thousand) and ¥216 million, respectively. 82 Strategy Business Units Management System FINANCIAL SECTION 17. NET INCOME ATTRIBUTABLE TO CANON INC. STOCKHOLDERS PER SHARE A reconciliation of the numerators and denominators of basic and diluted net income attributable to Canon Inc. stockhold- ers per share computations is as follows: Years ended December 31 Millions of yen 2012 2011 2010 Thousands of U.S. dollars 2012 Net income attributable to Canon Inc. ¥ 224,564 ¥ 248,630 ¥ 246,603 $ 2,581,195 Average common shares outstanding Effect of dilutive securities: Stock options Diluted common shares outstanding Net income attributable to Canon Inc. stockholders per share: Basic Diluted Number of shares 1,173,647,835 1,215,832,419 1,234,817,434 20,574 1,173,668,409 60,552 1,215,892,971 50,603 1,234,868,037 Yen U.S. dollars ¥ 191.34 191.34 ¥ 204.49 204.48 ¥ 199.71 199.70 $ 2.20 2.20 The computation of diluted net income attributable to Canon Inc. stockholders per share for the years ended December 31, 2012, 2011 and 2010 excludes certain outstanding stock options because the effect would be anti-dilutive. 18. DERIVATIVES AND HEDGING ACTIVITIES Risk management policy Canon operates internationally, exposing it to the risk of changes in foreign currency exchange rates. Derivative financial instruments are comprised principally of foreign exchange contracts utilized by the Company and certain of its subsidiaries to reduce the risk. Canon assesses foreign cur- rency exchange rate risk by continually monitoring changes in the exposures and by evaluating hedging opportunities. Canon does not hold or issue derivative financial instruments for trading purposes. Canon is also exposed to credit-related losses in the event of non-performance by counterparties to derivative financial instruments, but it is not expected that any counterparties will fail to meet their obligations. Most of the counterparties are internationally recognized financial institutions and selected by Canon taking into account their financial condition, and contracts are diversified across a number of major financial institutions. Foreign currency exchange rate risk management Canon’s international operations expose Canon to the risk of changes in foreign currency exchange rates. Canon uses foreign exchange contracts to manage certain foreign cur- rency exchange exposures principally from the exchange of U.S. dollars and euros into Japanese yen. These contracts are primarily used to hedge the foreign currency exposure of forecasted intercompany sales and intercompany trade receivables that are denominated in foreign currencies. In accordance with Canon’s policy, a specific portion of foreign currency exposure resulting from forecasted intercompany sales are hedged using foreign exchange contracts which principally mature within three months. Cash flow hedge Changes in the fair value of derivative financial instruments designated as cash flow hedges, including foreign exchange contracts associated with forecasted intercompany sales, are reported in accumulated other comprehensive income (loss). These amounts are subsequently reclassified into earnings through other income (deductions) in the same period as the hedged items affect earnings. Substantially all amounts recorded in accumulated other comprehensive income (loss) at year-end are expected to be recognized in earnings over the next twelve months. Canon excludes the time value compo- nent from the assessment of hedge effectiveness. Changes in the fair value of a foreign exchange contract for the period between the date that the forecasted intercompany sales occur and its maturity date are recognized in earnings and not considered hedge ineffectiveness. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 83 Derivatives not designated as hedges Canon has entered into certain foreign exchange contracts to primarily offset the earnings impact related to fluctua- tions in foreign currency exchange rates associated with certain assets denominated in foreign currencies. Although these foreign exchange contracts have not been designated as hedges as required in order to apply hedge accounting, the contracts are effective from an economic perspective. The changes in the fair value of these contracts are recorded in earnings immediately. Contract amounts of foreign exchange contracts at December 31, 2012 and 2011 are set forth below: December 31 To sell foreign currencies To buy foreign currencies Millions of yen 2012 ¥ 420,272 66,563 2011 ¥ 391,455 75,016 Thousands of U.S. dollars 2012 $ 4,830,713 765,092 Fair value of derivative instruments in the consolidated balance sheets The following tables present Canon’s derivative instruments measured at gross fair value as reflected in the consolidated balance sheets at December 31, 2012 and 2011. Derivatives designated as hedging instruments December 31 Fair value Millions of yen Balance sheet location 2012 2011 Thousands of U.S. dollars 2012 Assets: Foreign exchange contracts Liabilities: Foreign exchange contracts Prepaid expenses and other current assets ¥ 443 ¥ 1,325 $ 5,092 Other current liabilities 4,472 1,270 51,402 Derivatives not designated as hedging instruments December 31 Fair value Millions of yen Balance sheet location 2012 2011 Thousands of U.S. dollars 2012 Assets: Foreign exchange contracts Liabilities: Foreign exchange contracts Prepaid expenses and other current assets ¥ 388 ¥ 3,393 $ 4,460 Other current liabilities 21,021 1,340 241,621 84 Strategy Business Units Management System FINANCIAL SECTION Effect of derivative instruments in the consolidated statements of income The following tables present the effect of Canon’s derivative instruments in the consolidated statements of income for the years ended December 31, 2012, 2011 and 2010. Derivatives in cash flow hedging relationships Years ended December 31 Gain (loss) recognized in OCI (effective portion) Gain (loss) reclassified from accumulated OCI into income (effective portion) Gain (loss) recognized in income (ineffective portion and amount excluded from effectiveness testing) Millions of yen Amount Location Amount Location Amount 2012: Foreign exchange contracts 2011: Foreign exchange contracts 2010: Foreign exchange contracts Thousands of U.S. dollars 2012: Foreign exchange contracts ¥(8,207) Other, net ¥(2,440) Other, net ¥(221) (785) Other, net 5,006 Other, net 1,419 Other, net 6,990 Other, net (457) (302) $(94,333) Other, net $(28,046) Other, net $(2,540) Derivatives not designated as hedging instruments Years ended December 31 Gain (loss) recognized in income on derivative Foreign exchange contracts Other, net ¥(30,602) Location 2012 Millions of yen 2011 ¥11,168 2010 ¥50,794 Thousands of U.S. dollars 2012 $(351,747) 19. COMMITMENTS AND CONTINGENT LIABILITIES Commitments At December 31, 2012, commitments outstanding for the purchase of property, plant and equipment approximated ¥39,520 million ($454,253 thousand), and commitments outstanding for the purchase of parts and raw materials approximated ¥65,311 million ($750,701 thousand). Canon occupies sales offices and other facilities under lease arrangements accounted for as operating leases. Deposits made under such arrangements aggregated ¥13,313 million ($153,023 thousand) and ¥14,171 million at December 31, 2012 and 2011, respectively, and are included in noncurrent receivables in the accompanying consoli- dated balance sheets. Rental expenses under such operating lease arrangements amounted to ¥40,273 million ($462,908 thousand), ¥38,167 million and ¥40,396 million for the years ended December 31, 2012, 2011 and 2010, respectively. Future minimum lease payments required under noncancelable operating leases that have initial or remaining lease terms in excess of one year at December 31, 2012 are as follows: Year ending December 31: 2013 2014 2015 2016 2017 Thereafter Total future minimum lease payments Millions of yen ¥ 25,101 16,512 11,296 7,529 5,623 9,746 ¥ 75,807 Thousands of U.S. dollars $ 288,517 189,793 129,839 86,540 64,632 112,024 $ 871,345 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 85 Guarantees Canon provides guarantees for bank loans of its employ- ees, affiliates and other companies. The guarantees for the employees are principally made for their housing loans. The guarantees of loans of its affiliates and other companies are made to ensure that those companies operate with less financial risk. For each guarantee provided, Canon would have to per- form under a guarantee if the borrower defaults on a payment within the contract periods of 1 year to 30 years, in the case of employees with housing loans, and of 1 year to 10 years, in the case of affiliates and other companies. The maximum amount of undiscounted payments Canon would have had to make in the event of default is ¥13,333 million ($153,253 thousand) at December 31, 2012. The carrying amounts of the liabilities recognized for Canon’s obligations as a guarantor under those guarantees at December 31, 2012 were not significant. Canon also issues contractual product warranties under which it generally guarantees the performance of products delivered and services rendered for a certain period or term. Changes in accrued product warranty cost for the years ended December 31, 2012 and 2011 are summarized as follows: Years ended December 31 Balance at beginning of year Addition Utilization Other Balance at end of year Millions of yen 2012 ¥ 11,691 13,553 (12,503) (578) ¥ 12,163 2011 ¥ 13,343 14,296 (14,649) (1,299) ¥ 11,691 Thousands of U.S. dollars 2012 $ 134,379 155,782 (143,713) (6,643) $ 139,805 Legal proceedings Canon is involved in various claims and legal actions arising in the ordinary course of business. Canon has recorded pro- visions for liabilities when it is probable that liabilities have been incurred and the amount of loss can be reasonably estimated. Canon reviews these provisions at least quarterly and adjusts these provisions to reflect the impact of the negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a partic- ular case. Based on its experience, although litigation is inherently unpredictable, Canon believes that any damage amounts claimed in outstanding matters are not a meaning- ful indicator of Canon’s potential liability. In the opinion of management, any reasonably possible range of losses from outstanding matters would not have a material adverse effect on Canon’s consolidated financial position, results of operations, or cash flows. 86 Strategy Business Units Management System FINANCIAL SECTION 20. DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF CREDIT RISK Fair value of financial instruments The estimated fair values of Canon’s financial instruments at December 31, 2012 and 2011 are set forth below. The follow- ing summary excludes cash and cash equivalents, trade receivables, finance receivables, noncurrent receivables, short-term loans, trade payables and accrued expenses for which fair values approximate their carrying amounts. The summary also excludes investments which are disclosed in Note 3. December 31 Millions of yen Thousands of U.S. dollars Long-term debt, including current installments Foreign exchange contracts: Assets Liabilities 2012 2011 2012 Carrying amount Estimated fair value Carrying amount Estimated fair value Carrying amount Estimated fair value ¥ (3,664) ¥ (3,654) ¥ (7,070) ¥ (7,053) $ (42,115) $ (42,000) 831 (25,493) 831 (25,493) 4,718 (2,610) 4,718 (2,610) 9,552 (293,023) 9,552 (293,023) The following methods and assumptions are used to esti- mate the fair value in the above table. Long-term debt Canon’s long-term debt instruments are classified as Level 2 instruments and valued based on the present value of future cash flows associated with each instrument dis- counted using current market borrowing rates for similar debt instruments of comparable maturity. The levels are more fully described in Note 21. Foreign exchange contracts The fair values of foreign exchange contracts are measured based on the market price obtained from financial institutions. Limitations of fair value estimates Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instruments. These estimates are sub- jective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Concentrations of credit risk At December 31, 2012 and 2011, one customer accounted for approximately 18% and 17% of consolidated trade receiv- ables, respectively. Although Canon does not expect that the customer will fail to meet its obligations, Canon is poten- tially exposed to concentrations of credit risk if the customer failed to perform according to the terms of the contracts. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 87 21. FAIR VALUE MEASUREMENTS Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the princi- pal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. A three-level fair value hierarchy that pri- oritizes the inputs used to measure fair value is as follows: Level 1— Inputs are quoted prices in active markets for iden- tical assets or liabilities. Level 2— Inputs are quoted prices for similar assets or liabil- ities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable, and inputs that are derived princi- pally from or corroborated by observable market data by correlation or other means. Level 3— Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable, which reflect the reporting entity’s own assumptions about the assumptions that market participants would use in establishing a price. Assets and liabilities measured at fair value on a recurring basis The following tables present Canon’s assets and liabilities that are measured at fair value on a recurring basis consistent with the fair value hierarchy at December 31, 2012 and 2011. December 31 Millions of yen 2012: Assets: Cash and cash equivalents Available-for-sale (current): Corporate bonds Available-for-sale (noncurrent): Government bonds Corporate bonds Fund trusts Equity securities Derivatives Total assets Liabilities: Derivatives Total liabilities Millions of yen 2011: Assets: Cash and cash equivalents Available-for-sale (current): Corporate bonds Available-for-sale (noncurrent): Government bonds Corporate bonds Fund trusts Equity securities Derivatives Total assets Liabilities: Derivatives Total liabilities Level 1 Level 2 Level 3 Total ¥ — ¥ 141,729 30 — 181 — 159 21,335 — ¥ 21,705 ¥ ¥ — — — 116 1,075 — 831 ¥ 143,751 ¥ 25,493 ¥ 25,493 Level 1 Level 2 ¥ — ¥ 204,307 20 — 150 — 151 17,724 — ¥ 18,045 ¥ ¥ — — — 104 1,675 — 4,718 ¥ 210,804 ¥ 2,610 ¥ 2,610 ¥ — — — 444 — — — ¥ 444 ¥ — ¥ — Level 3 ¥ — — — 454 — — — ¥ 454 ¥ — ¥ — ¥ 141,729 30 181 560 1,234 21,335 831 ¥ 165,900 ¥ 25,493 ¥ 25,493 Total ¥ 204,307 20 150 558 1,826 17,724 4,718 ¥ 229,303 ¥ 2,610 ¥ 2,610 Strategy Business Units Management System FINANCIAL SECTION 88 December 31 Thousands of U.S. dollars 2012: Assets: Cash and cash equivalents Available-for-sale (current): Corporate bonds Available-for-sale (noncurrent): Government bonds Corporate bonds Fund trusts Equity securities Derivatives Total assets Liabilities: Derivatives Total liabilities Level 1 Level 2 Level 3 Total $ — $ 1,629,069 $ — $ 1,629,069 345 — — 345 2,080 — 1,828 245,230 — $ 249,483 $ $ — — — 1,334 12,356 — 9,552 $ 1,652,311 $ 293,023 $ 293,023 — 5,103 — — — $ 5,103 $ — $ — 2,080 6,437 14,184 245,230 9,552 $ 1,906,897 $ 293,023 $ 293,023 Level 1 investments are comprised principally of Japanese equity securities, which are valued using an unadjusted quoted market price in active markets with sufficient volume and frequency of transactions. Level 2 cash and cash equiv- alents are valued based on market approach, using quoted prices for identical assets in markets that are not active. Level 3 investments are mainly comprised of corporate bonds, which are valued based on cost approach, using unobservable inputs as the market for the assets was not active at the mea- surement date. Derivative financial instruments are comprised of for- eign exchange contracts. Level 2 derivatives are valued using quotes obtained from counterparties or third parties, which are periodically validated by pricing models using observable market inputs, such as foreign currency exchange rates and interest rates, based on market approach. The following table presents the changes in Level 3 assets measured on a recurring basis, consisting primarily of corporate bonds, for the years ended December 31, 2012 and 2011. Years ended December 31 Balance at beginning of year Total gains or losses (realized or unrealized): Included in earnings Included in other comprehensive income (loss) Purchases, issuances, and settlements Balance at end of year Millions of yen 2012 ¥ 454 3 2 (15) ¥ 444 2011 ¥ 1,950 (2) (12) (1,482) ¥ 454 Thousands of U.S. dollars 2012 $ 5,218 34 23 (172) $ 5,103 Gains and losses included in earnings are mainly related to corporate bonds still held at December 31, 2012 and 2011, and are reported in “Other, net” in the consolidated state- ments of income. Assets and liabilities measured at fair value on a nonrecurring basis During the year ended December 31, 2012, there were no circumstances that required any significant assets or liabili- ties to be measured at fair value on a nonrecurring basis. During the year ended December 31, 2011, equity secu- rities accounted for by the equity method with a carrying amount of ¥3,577 million were written down to their fair value of zero, resulting in an other-than-temporary impair- ment charge of ¥3,577 million, which was included in earnings. Equity securities accounted for by the equity method were classified as Level 3 instruments and valued based on an income approach using unobservable inputs such as projected income of the investment. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 89 22. SUPPLEMENTAL CASH FLOW INFORMATION During the year ended December 31, 2010, the Company executed three separate share exchanges under which the Company made its three listed subsidiaries, Canon Finetech Inc., Canon Machinery Inc. and Tokki Corporation, its wholly owned subsidiaries. The Company issued no new shares, as it issued 10,000,853 shares of treasury stock for 23. SEGMENT INFORMATION these transactions in total. As a result of the share exchanges, the carrying amount of the Company’s noncontrolling interest in Canon Finetech Inc., Canon Machinery Inc. and Tokki Corporation was decreased from ¥38,644 million to zero. Canon operates its business in three segments: the Office Business Unit, the Imaging System Business Unit, and the Industry and Others Business Unit, which are based on the organizational structure and information reviewed by Canon’s management to evaluate results and allocate resources. Industry and Others Business Unit: Semiconductor lithography equipment / FPD lithogra- phy equipment / Digital radiography systems / Ophthalmic equipment / Vacuum thin-film deposition equipment / Organic LED panel manufacturing equipment / Micromotors / Computers / Handy terminals / Document scanners The primary products included in each segment are as follows: Office Business Unit: Office MFDs / Office copying machines/ Personal-use copying machines / Laser MFDs / Laser printers / Digital production printing systems / High speed continuous feed printers / Wide-format printers / Document solution Imaging System Business Unit*: Interchangeable-lens digital cameras / Compact digital cameras / Digital camcorders / Digital cinema cameras / Interchangeable lenses / Inkjet printers / Large-format ink- jet printers / Commercial photo printers / Image scanners / Broadcast equipment / Calculators * The “Consumer Business Unit” has been renamed the “Imaging System Business Unit” to be more consistent with its strategy to expand the business. This change in segment description has no impact on any financial information of this segment. The accounting policies of the segments are substantially the same as those described in the significant accounting policies in Note 1. Canon evaluates performance of, and allo- cates resources to, each segment based on operating profit. 90 Strategy Business Units Management System FINANCIAL SECTION Information about operating results and assets for each segment as of and for the years ended December 31, 2012, 2011 and 2010 is as follows: Millions of yen 2012: Net sales: External customers Intersegment Total Operating cost and expenses Operating profit Total assets Depreciation and amortization Capital expenditures 2011: Net sales: External customers Intersegment Total Operating cost and expenses Operating profit (loss) Total assets Depreciation and amortization Capital expenditures 2010: Net sales: External customers Intersegment Total Operating cost and expenses Operating profit (loss) Total assets Depreciation and amortization Capital expenditures Thousands of U.S. dollars 2012: Net sales: Office Imaging System Industry and Others Corporate and eliminations Consolidated ¥ 1,751,960 5,615 1,757,575 1,553,997 ¥ 203,578 ¥ 828,222 77,660 58,402 ¥ 1,912,112 5,831 1,917,943 1,658,678 ¥ 259,265 ¥ 821,782 93,196 53,888 ¥ 1,978,945 8,324 1,987,269 1,693,947 ¥ 293,322 ¥ 855,893 103,548 53,115 ¥ 1,404,394 1,577 1,405,971 1,195,653 ¥ 210,318 ¥ 614,328 53,664 58,142 ¥ 1,311,023 1,021 1,312,044 1,100,750 ¥ 211,294 ¥ 452,809 45,609 48,192 ¥ 1,389,622 1,705 1,391,327 1,153,262 ¥ 238,065 ¥ 414,022 41,665 36,266 ¥ 323,434 84,406 407,840 401,930 ¥ 5,910 ¥ 337,899 34,264 44,086 ¥ 334,298 86,565 420,863 396,563 ¥ 24,300 ¥ 362,638 29,685 37,648 ¥ 338,334 94,624 432,958 442,789 ¥ (9,831) ¥ 307,029 37,387 27,105 ¥ — (91,598) (91,598) 4,352 ¥ (95,950) ¥ 2,175,054 92,545 146,031 ¥ 3,479,788 — 3,479,788 3,155,932 ¥ 323,856 ¥ 3,955,503 258,133 306,661 ¥ — (93,417) (93,417) 23,371 ¥ (116,788) ¥ 2,293,498 92,853 122,753 ¥ 3,557,433 — 3,557,433 3,179,362 ¥ 378,071 ¥ 3,930,727 261,343 262,481 ¥ — (104,653) (104,653) 29,351 ¥ (134,004) ¥ 2,406,876 93,593 77,061 ¥ 3,706,901 — 3,706,901 3,319,349 ¥ 387,552 ¥ 3,983,820 276,193 193,547 Office Imaging System Industry and Others Corporate and eliminations Consolidated External customers Intersegment Total Operating cost and expenses Operating profit Total assets Depreciation and amortization Capital expenditures $ 20,137,471 64,540 20,202,011 17,862,034 $ 2,339,977 $ 9,519,793 892,644 671,287 $ 16,142,460 18,126 16,160,586 13,743,138 $ 2,417,448 $ 7,061,241 616,828 668,299 $ 3,717,632 970,184 4,687,816 4,619,885 $ 67,931 $ 3,883,897 393,839 506,736 $ — (1,052,850) (1,052,850) 50,023 $ (1,102,873) $ 25,000,621 1,063,735 1,678,517 $ 39,997,563 — 39,997,563 36,275,080 $ 3,722,483 $ 45,465,552 2,967,046 3,524,839 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 91 Intersegment sales are recorded at the same prices used in transactions with third parties. Expenses not directly associated with specific segments are allocated based on the most reasonable measures applicable. Corporate expenses include certain corporate research and develop- ment expenses. Segment assets are based on those directly associated with each segment. Corporate assets primarily consist of cash and cash equivalents, finance receivables, investments, deferred tax assets, goodwill and corporate properties. Capital expenditures represent the additions to property, plant and equipment and intangible assets mea- sured on an accrual basis. Information by major geographic area as of and for the years ended December 31, 2012, 2011 and 2010 is as follows: Net sales: Japan Americas Europe Asia and Oceania Total Long-lived assets: Japan Americas Europe Asia and Oceania Total Millions of yen 2012 2011 2010 ¥ 720,286 939,873 1,014,038 805,591 ¥ 3,479,788 ¥ 1,032,598 112,163 91,904 159,435 ¥ 1,396,100 ¥ 694,450 961,955 1,113,065 787,963 ¥ 3,557,433 ¥ 1,070,412 85,824 83,296 89,334 ¥ 1,328,866 ¥ 695,749 1,023,299 1,172,474 815,379 ¥ 3,706,901 ¥ 1,104,949 69,034 108,160 72,846 ¥ 1,354,989 Thousands of U.S. dollars 2012 $ 8,279,149 10,803,138 11,655,609 9,259,667 $ 39,997,563 $ 11,868,943 1,289,230 1,056,368 1,832,586 $ 16,047,127 Net sales are attributed to areas based on the location where the product is shipped to the customers. Other than in Japan and the United States, Canon does not conduct business in any individual country in which its sales in that country exceed 10% of consolidated net sales. Net sales in the United States are ¥763,870 million ($8,780,115 thou- sand), ¥779,652 million and ¥836,645 million for the years ended December 31, 2012, 2011 and 2010, respectively. Long-lived assets represent property, plant and equip- ment and intangible assets for each geographic area. 92 Strategy Business Units Management System FINANCIAL SECTION The following information is based on the location of the Company and its subsidiaries as of and for the years ended December 31, 2012, 2011 and 2010. In addition to the disclosure requirements under U.S. GAAP, Canon discloses this infor- mation in order to provide financial statements users with useful information. Millions of yen 2012: Net sales: Japan Americas Europe Asia and Oceania Corporate and eliminations Consolidated External customers Intersegment Total Operating cost and expenses Operating profit Total assets ¥ 834,406 1,829,834 2,664,240 2,336,536 ¥ 327,704 ¥ 1,206,702 ¥ 932,987 23,767 956,754 937,111 19,643 ¥ ¥ 339,918 ¥ 1,010,922 5,650 1,016,572 972,585 43,987 ¥ ¥ 457,592 ¥ 701,473 781,836 1,483,309 1,437,527 45,782 ¥ ¥ 548,583 ¥ — (2,641,087) (2,641,087) (2,527,827) (113,260) ¥ ¥ 1,402,708 ¥ 3,479,788 — 3,479,788 3,155,932 ¥ 323,856 ¥ 3,955,503 2011: Net sales: External customers Intersegment Total Operating cost and expenses Operating profit Total assets ¥ 807,883 1,873,157 2,681,040 2,273,336 ¥ 407,704 ¥ 1,236,468 ¥ 952,833 16,217 969,050 948,593 ¥ 20,457 ¥ 250,131 ¥ 1,109,256 4,681 1,113,937 1,069,489 ¥ 44,448 ¥ 427,030 ¥ 687,461 744,179 1,431,640 1,388,580 ¥ 43,060 ¥ 442,263 ¥ — (2,638,234) (2,638,234) (2,500,636) (137,598) ¥ ¥ 1,574,835 ¥ 3,557,433 — 3,557,433 3,179,362 ¥ 378,071 ¥ 3,930,727 2010: Net sales: External customers Intersegment Total Operating cost and expenses Operating profit Total assets ¥ 854,208 1,974,591 2,828,799 2,398,439 ¥ 430,360 ¥ 1,321,572 ¥ 1,008,200 7,975 1,016,175 993,310 ¥ 22,865 ¥ 251,587 ¥ 1,163,452 3,489 1,166,941 1,126,521 ¥ 40,420 ¥ 472,785 ¥ 681,041 723,423 1,404,464 1,357,663 ¥ 46,801 ¥ 421,250 ¥ — (2,709,478) (2,709,478) (2,556,584) (152,894) ¥ ¥ 1,516,626 ¥ 3,706,901 — 3,706,901 3,319,349 ¥ 387,552 ¥ 3,983,820 Thousands of U.S. dollars 2012: Net sales: Japan Americas Europe Asia and Oceania Corporate and eliminations Consolidated External customers Intersegment Total Operating cost and expenses Operating profit Total assets $ 9,590,874 21,032,574 30,623,448 26,856,735 $ 3,766,713 $ 13,870,138 $ 10,723,989 273,183 10,997,172 10,771,390 $ 225,782 $ 3,907,103 $ 11,619,793 64,943 11,684,736 11,179,138 $ 505,598 $ 5,259,678 $ 8,062,907 8,986,622 17,049,529 16,523,299 $ 526,230 $ 6,305,552 $ — (30,357,322) (30,357,322) (29,055,482) $ (1,301,840) $ 16,123,081 $ 39,997,563 — 39,997,563 36,275,080 $ 3,722,483 $ 45,465,552 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING 93 M A N A G E M E N T ’ S R E P O R T O N I N T E R N A L C O N T R O L O V E R F I N A N C I A L R E P O R T I N G The 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 of 1934, as amended, as a process designed by, or under the supervision of, the company’s principal executive and principal financial officers and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) pro- vide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the 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 inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Canon’s management assessed the effectiveness of internal control over financial reporting as of December 31, 2012. In mak- ing this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (the “COSO criteria”). Based on its assessment, management concluded that, as of December 31, 2012, Canon’s internal control over financial reporting was effective based on the COSO criteria. Canon’s independent registered public accounting firm, Ernst & Young ShinNihon LLC, has issued an audit report on the effectiveness of Canon’s internal control over financial reporting. 94 Strategy Business Units Management System FINANCIAL SECTION R E P O R T O F I N D E P E N D E N T R E G I S T E R E D P U B L I C A C C O U N T I N G F I R M The Board of Directors and Stockholders of Canon Inc. We have audited the accompanying consolidated balance sheets of Canon Inc. and subsidiaries as of December 31, 2012 and 2011, and the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2012, all expressed in Japanese yen. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence support- ing the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial 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 consolidated financial position of Canon Inc. and subsidiaries at December 31, 2012 and 2011, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2012, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Canon Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2012, based on crite- ria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 28, 2013 expressed an unqualified opinion thereon. We have also recomputed the translation of the consolidated financial statements as of and for the year ended December 31, 2012 into United States dollars. In our opinion, the consolidated financial statements expressed in Japanese yen have been translated into United States dollars on the basis described in Note 2. March 28, 2013 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 95 R E P O R T O F I N D E P E N D E N T R E G I S T E R E D P U B L I C A C C O U N T I N G F I R M The Board of Directors and Stockholders of Canon Inc. We have audited Canon Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Canon Inc. and subsidiaries’ management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over finan- cial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effec- tive internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes 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 reasonable assurance that transac- tions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding pre- vention or timely detection of unauthorized acquisition, use or disposition of the company’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 inade- quate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, Canon Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Canon Inc. and subsidiaries as of December 31, 2012 and 2011, and the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2012, all expressed in Japanese yen, and our report dated March 28, 2013 expressed an unqualified opinion thereon. March 28, 2013 96 Strategy Business Units Management System FINANCIAL SECTION T R A N S F E R A N D R E G I S T R A R ’ S O F F I C E S T O C K H O L D E R I N F O R M A T I O N Canon Inc. 30-2, Shimomaruko 3-chome, Ohta-ku, Tokyo 146-8501, Japan Manager of the Register of Stockholders Mizuho Trust & Banking Co., Ltd. 2-1, Yaesu 1-chome, Chuo-ku, Tokyo 103-8670, Japan Depositary and Agent with Respect to American Depositary Receipts for Common Shares JPMorgan Chase Bank, N.A. 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 York stock exchanges American Depositary Receipts are traded on the New York Stock Exchange (CAJ). Ordinary General Meeting of Shareholders: March 28, 2013, in Tokyo Further Information: For publications or information, please contact the Public Affairs Headquarters, Canon Inc., Tokyo, or access Canon’s Website at www.canon.com TRANSFER AND REGISTRAR’S OFFICE / STOCKHOLDER INFORMATION / MAJOR CONSOLIDATED SUBSIDIARIES 97 M A J O R C O N S O L I D A T E D S U B S I D I A R I E S (As of December 31, 2012) Marketing & Other Canon Marketing Japan Inc. Canon System and Support Inc. Canon Software Inc. Canon IT Solutions Inc. Canon U.S.A., Inc. Canon Canada Inc. Canon Business Solutions, Inc. Canon Latin America, Inc. Canon Europa N.V. Canon Europe Ltd. Canon Ru LLC Canon (UK) Ltd. Canon Deutschland GmbH Canon (Schweiz) AG Canon Nederland N.V. Canon France S.A.S. Canon Middle East FZ-LLC Canon (China) Co., Ltd. Canon Hongkong Co., Ltd. Canon Singapore Pte. Ltd. Canon Australia Pty. Ltd. * Canon Business Solutions, Inc. changed its name to “Canon Solutions America, Inc.” effective January 1, 2013. Manufacturing Canon Precision Inc. Fukushima Canon Inc. Canon Chemicals Inc. Canon Components, Inc. Canon Electronics Inc. Canon Finetech Inc. Nisca Corporation Canon Tokki Corporation Canon ANELVA Corporation Nagahama Canon Inc. Canon Machinery Inc. Oita Canon Materials Inc. Oita Canon Inc. Nagasaki Canon Inc. Canon Virginia, Inc. Canon Bretagne S.A.S. Océ-Technologies B.V. OPTOPOL Technology S.A. Canon Dalian Business Machines, Inc. Canon (Suzhou) Inc. Canon Zhongshan Business Machines Co., Ltd. Canon Zhuhai, Inc. Canon Inc., Taiwan Canon Vietnam Co., Ltd. Canon Hi-Tech (Thailand) Ltd. Canon Opto (Malaysia) Sdn. Bhd. Research & Development Canon Research Centre France S.A.S. Canon Information Systems Research Australia Pty. Ltd. CANON INC. 30-2, Shimomaruko 3-chome, Ohta-ku, Tokyo 146-8501, Japan ©Canon Inc. 2013 PUB.BEP022 0313 

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