Canon
Annual Report 2013

Plain-text annual report

C A N O N A N N U A L R E P O R T 2 0 1 3 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 3 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 Change (%) Net sales Operating profit Income before income taxes Net income attributable to Canon Inc. Net income attributable to Canon Inc. stockholders per share: —Basic —Diluted Total assets Canon Inc. stockholders’ equity 2013 ¥ 3,731,380 337,277 347,604 230,483 ¥ 3,479,788 323,856 342,557 224,564 ¥ 200.78 ¥ 191.34 200.78 ¥ 4,242,710 ¥ 2,910,262 191.34 ¥ 3,955,503 ¥ 2,598,026 +7.2 +4.1 +1.5 +2.6 +4.9 +4.9 +7.3 +12.0 2013 $ 35,536,952 3,212,162 3,310,514 2,195,076 $ 1.91 1.91 $ 40,406,762 $ 27,716,781 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 JPY105=U.S.$1, the approximate exchange rate on the Tokyo Foreign Exchange Market as of December 30, 2013, solely for the convenience of the reader. 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) 3,209,201 3,706,901 3,557,433 3,479,788 3,731,380 Net Income Attributable to Canon Inc. (Millions of yen) 246,603 248,630 224,564 230,483 131,647 300,000 200,000 100,000 0 2009 2010 2011 2012 2013 2009 2010 2011 2012 2013 Net Income Attributable to Canon Inc. Stockholders per Share (Yen) ROE/ROA (%) 204.49 204.48 200.78 200.78 199.71 199.70 191.34 191.34 106.64 106.64 9.2 9.6 6.3 6.3 8.7 5.7 8.4 5.6 10.0 8.0 6.0 4.0 0 4.9 3.4 2009 2010 2011 2012 2013 2009 2010 2011 2012 2013 Basic Diluted ROE ROA 01 CO RPORAT E P R OF ILE T A B L E O F C O N T E N T S Canon develops, manufactures and markets a growing lineup of STRATEGY 02 TO OUR STOCKHOLDERS copying machines, printers, cameras and industrial and other equipment. Through these products, the Company meets grow- ing customer needs that are becoming increasingly diversified and sophisticated. Today, the Canon brand is recognized and trusted throughout the world. BUSINESS SEGMENT 10 AT A GLANCE 12 OFFICE BUSINESS UNIT In 1996, Canon launched its Excellent Global Corporation Plan 14 IMAGING SYSTEM BUSINESS UNIT with the aim of becoming a company worthy of admiration and 16 INDUSTRY AND OTHERS BUSINESS UNIT respect the world over. Currently, the Company is working to achieve 18 2013 TOPICS the overwhelming No. 1 position in its existing core businesses and expand related and peripheral businesses by strengthening its advanced solutions business, centered on innovative products, and through other measures. At the same time, Canon is nurturing its operations in the fields of medical equipment and industrial equip- ment, the latter including intelligent robots, to establish new core businesses. The Company is working to fulfill its responsibilities to investors and society, emphasizing sound corporate governance and stepping up the implementation of activities that contribute to envi- ronmental and social sustainability. CO RPORAT E P HIL OSOP HY: Kyosei Canon’s corporate philosophy is kyosei. It conveys our dedication to seeing all people, regardless of cul- ture, customs, language or race, harmoniously living and working together in happiness into the future. Unfortunately, current factors related to economies, resources and the environment make realiz- ing kyosei difficult. Canon strives to eliminate these factors through corporate activ- ities rooted in kyosei. Truly global companies must foster good relations with customers and communities, as well as with govern- ments, regions and the environment as part of their fulfillment of social responsibilities. CORPORATE STRUCTURE 20 CORPORATE GOVERNANCE 24 RESEARCH & DEVELOPMENT FINANCIAL SECTION 26 PRODUCTION 28 SALES & MARKETING 30 CORPORATE SOCIAL RESPONSIBILITY 34 FINANCIAL OVERVIEW 48 TEN-YEAR FINANCIAL SUMMARY 50 CONSOLIDATED BALANCE SHEETS 51 CONSOLIDATED STATEMENTS OF INCOME 51 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 52 CONSOLIDATED STATEMENTS OF EQUITY 54 CONSOLIDATED STATEMENTS OF CASH FLOWS 55 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 93 MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING 94 REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM For this reason, Canon’s goal is to contribute to global prosperity and the well-being of mankind as we continue our efforts to bring CORPORATE DATA 96 TRANSFER AND REGISTRAR’S OFFICE 96 STOCKHOLDER INFORMATION the world closer to achieving kyosei. CO RPORAT E GOAL Canon sees itself growing and prospering over the next 100, and even 200, years. Toward this end, the Company has been promot- ing its Excellent Global Corporation Plan, launching Phase IV of the initiative in 2011. Building on the financial strengths that the Company has continuously reinforced through the implementation of the plan, Canon aims to join the ranks of the world’s top 100 com- panies in terms of major management indicators. 97 MAJOR CONSOLIDATED SUBSIDIARIES Cover Photo: The Cinema EOS System Its ultra-high-sensitivity 4K camera succeeded in capturing the world’s-fi rst video of the comet ISON from the International Space Station. (The picture is a concept image.) 02 STRATEGY Business Segment Corporate Structure Financial Section Corporate Data T O O U R S T O C K H O L D E R S Fujio Mitarai Chairman & CEO Canon Inc. TO OUR STOCKHOLDERS 03 At Canon, we believe that change is progress and transformation is advancement. With this in mind, we will ride the wave of economic recovery and carry out further reforms in order to return Canon to a path of growth. Performance in 2013 In 2013, conditions in the world economy remained item deserving of special attention is our gross profit very challenging despite initial expectations of recovery. ratio, the most important performance indicator for com- Although the U.S. and Japanese economies headed toward panies in the manufacturing sector, which, at 48.2%, sur- moderate recoveries in the latter half of the year, economic passed that of the previous year despite the challenging stagnation in Europe remained unabated while China and business conditions we faced. other emerging nations faced slowdowns in growth. As for Over the five years since the collapse of Lehman Brothers, exchange rates, the yen depreciated significantly, reflect- the contraction of the world economy has posed extremely ing a correction of its historically high value against the serious challenges for global companies like Canon. U.S. dollar and the euro during the previous several years. Regardless of these challenges, Canon has generated aver- Supported by the effects of the weak yen, we contin- age annual net income in excess of ¥200 billion for a cumu- ued striving to boost the appeal of Canon products as lative total of more than ¥1 trillion over the period. We well as maintain and improve our sound financial posi- have also maintained a very healthy financial position with tion while working relentlessly to enhance productivity year-end cash and cash equivalents of around ¥790 billion, and reduce costs. Accordingly, we achieved year-on-year the equivalent of approximately 2.4 months of net sales. sales and profit growth for the first time in three years. Moreover, our stockholders’ equity ratio rose 2.9 points to In 2013, our office multifunction devices (MFDs) and 68.6%. Among Fortune 500 companies as of the end of 2013, laser printers performed well and we enjoyed increased this places Canon among the top 10 in the world. sales of inkjet printers thanks to an expanded lineup In addition, during these five years, Canon has actively of new products. Also, despite the decline in unit sales made large-scale investments, including the acquisition of compact digital cameras due mainly to the prolifera- of Océ, while executing share buybacks totaling some tion of smartphones, we were able to maintain our No. ¥350 billion. We have pursued a rigorous cash flow man- 1 global market share in terms of sales volume for both agement approach aimed at maintaining a robust finan- compact digital cameras and interchangeable-lens digital cial position while solidifying our preparations for the cameras. As a result, consolidated net sales for the year future. This has enabled us to protect jobs and generate amounted to ¥3,731.4 billion, up 7.2% from the previous abundant cash reserves. In this way, despite the adverse year. Moreover, a rigorous Groupwide effort to lower oper- conditions we faced in 2013, we declared an annual cash ating expenses, together with an improved gross profit dividend of ¥130.00 per share, the same level as 2012 ratio, led to operating profit of ¥337.3 billion, an increase of 4.1% from the previous year. (which included a commemorative dividend that we issued to commemorate our 75th anniversary), underscor- Having just summed up our performance in 2013, one ing our stable, yet proactive shareholder return policy. 04 STRATEGY Business Segment Corporate Structure Financial Section Corporate Data Excellent Global Corporation Plan Canon launched the Excellent Global Corporation Plan our copying machine and camera offerings, laying in 1996 and, over the nearly 20 years since it was intro- the groundwork for the successes that we enjoy today duced, we have reinforced our business foundation while also enabling us to become an essentially debt- through the Plan’s various phases. free company. During Phase I (1996—2000), we focused on shifting During Phase III (2006—2010), we sought to expand from nonconsolidated business management to consol- Canon’s business scope, broadening our businesses in idated business management while stressing the impor- the printing and medical equipment fields while actively tance of total optimization over partial optimization, carrying out M&A activities. and of profit over sales. By emphasizing the importance And in 2011, under the slogan “Aiming for the Summit: of cash-flow management and comprehensively elimi- Speed & Sound Growth,” we embarked on Phase IV, span- nating waste, we were able to reduce our debt by more ning the five-year period through 2015. Focusing on the than half while also significantly increasing productiv- six key strategies explained below, Phase IV calls for pro- ity through the introduction of the cell production sys- active, quick reforms ahead of the dramatically chang- tem and other measures. ing times along with the achievement of sound business In Phase II (2001—2005), we focused on reinforcing growth through the further expansion of our corporate Canon’s product competitiveness. We fully digitalized scale while maintaining high profitability. 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 pro- duction reforms playing a major role, based on changing our mindset with a focus on total optimization and profit- ability. Recognized the need for digitalization and raised product competi- tiveness by enhancing our development infra- structure and reinforc- ing key components. Strove to achieve “Sound Growth,” seek- ing high growth levels by establishing new businesses while raising the profitability of exist- ing businesses. With the global economy plunging into the global recession, shifted direction towards “improving the quality of management.” Set up an even stronger financial structure and increased momentum towards a dramatic leap forward from now. Tackle again the chal- lenge 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 Strategy 1 Achieving the overwhelming No. 1 position in all core businesses and expanding related and peripheral businesses In 2013, within the office MFD segment, we enhanced share of global sales volume through the launch of high- our color machine lineup centered on the imageRUN- value-added models incorporating large image sensors NER ADVANCE series while also promptly responding to and other advanced features that distinguish our products the solutions needs of offices utilizing cloud computing from smartphones. Furthermore, an ultrahigh-sensitivity and other new network environments. Also, decisively 4K cinema camera from our Cinema EOS System lineup acting on the market shift from offset to digital print- was used to successfully capture the world’s first video ing, we have bolstered our commercial printing business of the comet ISON from the International Space Station, through the integration of Océ. Furthermore, we posted an achievement that added to the praise our Cinema EOS an increase in sales volume of inkjet printers through the System has already garnered. introduction of new products offering enhanced support Within the industrial equipment segment, we will for cloud services and launched new large-format print- expedite the development of flat-panel-display lithogra- ers that have enabled us to capture several major orders. phy systems used to produce high-resolution panels for We also worked to expand sales of our DreamLabo com- smartphones and other mobile devices, as well as next- mercial photo printer. generation semiconductor lithography systems incorpo- As for interchangeable-lens digital cameras, Canon rating nanoimprint lithography technology supporting retained the No. 1 share worldwide in terms of unit sales the miniaturization of electronic features. In these ways, on the back of solid performances by new products tar- we will solidify our position in the lithography equip- geting advanced-amateur users. And within the compact ment sector. digital camera segment, we also maintained our No. 1 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 The Cinema EOS System combines a compact, lightweight body with easy-to-use functions and an attractive low price is widely used in motion picture production. 06 STRATEGY Business Segment Corporate Structure Financial Section Corporate Data Strategy 2 Developing new business through globalized diversification and establishing the Three Regional Headquarters management system For Canon, realizing sustainable future growth while Europe, is finally beginning to take shape. competing against some of the world’s leading compa- With regard to medical equipment, we are already nies would prove difficult if we focused on innovation expanding shipments of our mainstay digital radiogra- from Japan alone. For this reason, we have been mak- phy systems while in the industrial equipment segment ing rapid progress in establishing our Three Regional we look forward to growing our network camera system Headquarters management system. In Japan, one of the business. The market for network cameras and camera three regions, we have entered the clinical evaluation systems is expected to grow by more than 20% annually, stage for a photoacoustic mammography device capa- potentially surpassing ¥1 trillion in the future. ble of the early detection of breast cancer. In the United Our MR (mixed reality) system, which merges the real States, Canon Virginia, Inc. plans to commence produc- and virtual worlds in real time, has also earned high tion in 2015 of a DNA diagnostic system developed by marks from automakers, construction companies, univer- Canon U.S. Life Sciences, Inc. And in Europe, with Océ sities and other research institutions. We are also focus- as a member of the Canon Group, we have designated ing our energies on commercializing a high-definition their facilities as the development base for high-speed 4K-resolution display for professional use that comple- printers. Through this allocation, the globally diver- ments our Cinema EOS System, as well as Super Machine sified structure that we envision, with new businesses Vision technology that would be used as “robotic eyes” in emerging continuously from Japan, North America and production processes. Photoacoustic Mammography captures images of blood vessels around tumorous tissue using laser radiation. If realized, it would enable nearly pain-free exams without exposure to X-rays. The Professional Use Display realizes faithful color reproduction, high resolution and high-contrast performance, equipped with an image engine for display use developed by Canon and meets professionals’ advanced video production needs. TO OUR STOCKHOLDERS 07 Strategy 3 Establishing a world-leading globally optimized production system As part of our cost-reduction efforts, Canon is focusing on production. In the Americas and Europe as well, we will boosting in-house production and promoting automation. take advantage of automated production systems, mainly With respect to increasing in-house production, we for consumables, to realize localized production. By are identifying parts that account for high total pur- shortening the distance from factory to market, we will chasing costs with the aim of bringing the production be able to deliver products to consumers in a timely man- of these items in-house. In 2013, for example, Canon ner while reducing transportation costs and inventory in Hi-Tech (Thailand) Ltd. began manufacturing printed cir- transit. In Asia, in addition to working to disperse the risk cuit boards and, in the future, we also intend to expand posed by concentrating production in a single location, in-house production to Canon Prachinburi (Thailand) Ltd. we will enhance employee welfare programs and train- and Canon Vietnam Co., Ltd. ing systems to improve worker retention levels and raise As for our efforts to promote automation, in 2013 we productivity. In accordance with this strategy, in 2013 we began deploying robots for the assembly of select EF lens established new companies in Thailand, the Philippines units at our Utsunomiya Plant in Japan. As we realize and Brazil, which have launched production of MFDs, additional enhancements for these systems to raise pro- laser printers and digital cameras, respectively, in addi- duction capacity, we will further hone our automation tion to other products. technologies to make possible the automated assembly of Based on a comprehensive evaluation of such factors as cameras and lens bodies. In accordance with our produc- foreign exchange fluctuations, wages, taxation systems, tion strategy for the future, in Japan, in addition to man- infrastructure and country risk, Canon will continue ufacturing high-value-added products, we will make use striving to build a globally optimized production system of our automation technologies to maintain and expand from the perspective of total optimization. Accelerate Cost Reduction by Expansion of New Production Sites (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) Major Production Sites New Production Sites (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) (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:222)(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) 08 STRATEGY Business Segment Corporate Structure Financial Section Corporate Data Strategy 4 Comprehensively reinforcing global sales capabilities Building the foundations of Strategy 5 an environmentally advanced corporation As we see the economic scale of emerging nations, espe- In addition to fulfilling our social responsibilities to the cially across Asia, exceeding that of developed countries, we natural environment, Canon aims to be a company that are expanding and upgrading our sales networks and prod- actively achieves corporate growth while protecting the uct lineups in accordance with the situation in each coun- environment. As we strive to raise the performance of try. In China, in the roughly 350 cities with a population of our products, we develop energy-saving technologies and one million or more, we are working to swiftly bolster our materials with low environmental burden to minimize office equipment through the establishment of branches our environmental impact and cut carbon dioxide emis- and offices. In India, we plan to increase the number of sions. In 2013, we focused our energies on developing Canon-brand retail stores we have been rolling out in South and promoting MFDs with exceptional environmental and Southeast Asia from the current 108 locations to 300 by performance, successfully achieving a year-on-year reduc- 2015, and will continue opening stores in other countries as tion in averaged life-cycle CO2 emissions per product that well. In Brazil, meanwhile, we began local production of com- exceeded our 3% target. pact digital cameras in 2013, while in Russia we are making Additionally, in 1990, we launched our toner cartridge efforts to strengthen our sales capabilities. Additionally, collection and recycling program and now carry out the in Africa, we have established Canon Kenya Limited. localized recycling of cartridges in Japan, the United As for developed countries, we are working to expand States, China and France. In 1996, we also started a collec- our market share by reinforcing online sales initiatives tion service in Japan for used ink cartridges, and this pro- in the consumer segment, and enhancing our ability to gram has since been expanded to include Asia, Oceania, respond to mass procurement orders from global clients North America and Europe. in the office segment. Canon established Canon Kenya in January 2013 to capture demand in the fast-growing markets of eastern Africa and enhance its marketing and support structure. Canon recycles ink cartridges to minimize waste, collecting ink car- tridges in ways that are convenient for customers and reusing recov- ered materials. TO OUR STOCKHOLDERS 09 Strategy 6 Imparting a corporate culture, and cultivating human resources befitting a truly excellent global company In Conclusion The global economic map is undergoing a major trans- The global economy seems to have bottomed out in formation in the wake of rapid advances in globalization 2013 and is expected to recover moderately in 2014 and networking. In order to ensure that Canon develops despite uncertainty about economic trends in emerg- as a truly excellent global company worthy of admira- ing countries. tion and respect for 100, and even 200, years, we must We have bolstered our defenses through the have an exceptional global workforce capable of not only challenges we have faced while diligently making winning in the face of global competition but also deliv- preparations to go on the offensive when the oppor- ering innovation. tunity arises. In 2014, we aim to generate year-on-year At Canon sales companies around the world we increases in both sales and profit under a basic policy already have many locally hired employees in upper man- focusing on further reforms aimed at returning Canon agement positions. In Europe, our largest regional mar- to a growth track. ket, the presidents of all of our sales companies are from We have consistently transformed ourselves ahead the region. We will continue endeavoring to acknowl- of dramatic changes in the times and business environ- edge and respond flexibly to the diversified value per- ment, creating products that were the first of their kind spectives of local communities, respecting their cultures in the world and that were No. 1 in their industries. and customs. At the same time, we will foster and impart Canon’s history is a history of embracing challenges, Canon’s corporate culture of continuously embracing the and we believe that change is progress and transforma- challenge of innovation while nurturing global human tion is advancement. We will call on our enterprising resources who can excel on the world stage. spirit and the San-Ji (“Three Selfs”) Spirit that have been a part of our company since its founding, taking the ini- tiative to transform ourselves once again and return to a path of growth. We look forward to your continued understanding and support. Fujio Mitarai Chairman & CEO Canon Inc. Managers from Group companies worldwide gather at the Canon Global Management Institute in Japan to study corporate strategies and engage in cross-cultural exchanges. 10 Strategy BUSINESS SEGMENT Corporate Structure Financial Section Corporate Data A T A G L A N C E Business Units Main Products OF FICE BU SI NES S UN IT Office Multifunction Devices (MFDs) Digital Production Printing Systems Laser Printers High Speed Continuous Feed Printers IMA GI NG SY ST EM BU SI NES S UN IT IN D USTRY A ND OTHER S BU SI NES S UN IT Interchangeable Lens Digital Cameras Digital Camcorders Inkjet Printers Broadcast Equipment Flat Panel Display (FPD) Lithography Equipment Digital Radiography Systems Semiconductor Lithography Equipment Network Cameras (cid:129)Office Multifunction Devices (MFDs) (cid:129)Laser Multifunction Printers (MFPs) (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)Digital Compact 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)Multimedia Projectors (cid:129)Broadcast Equipment (cid:129)Calculators (cid:129)Semiconductor Lithography Equipment (cid:129)Flat Panel Display (FPD) Lithography Equipment (cid:129)Digital Radiography Systems (cid:129)Ophthalmic Equipment (cid:129)Vacuum Thin-Film Deposition Equipment (cid:129)Organic LED (OLED) Panel Manufacturing Equipment (cid:129)Die Bonders (cid:129)Micromotors (cid:129)Network Cameras (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 comprehen- sive range of multifunction devices (MFDs), printers, and other equipment featuring high image quality, high resolution, and high speed. Leveraging these products, Canon works in close collaboration with various Group com- panies and alliance partners to deliver opti- mal solutions tailored to match the customer’s business operations. These include various doc- ument solutions, such as office document man- agement 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 digi- tal cameras, digital camcorders, digital cinema cameras, interchangeable lenses, inkjet print- ers, and calculators. Canon’s digital cameras, digital camcorders and digital cinema cameras, designed to deliver unparalleled image quality, have earned particularly high acclaim world- wide, thanks to in-house developed lenses, CMOS image sensors, and image processors. Also widely popular are Canon’s inkjet print- ers, which are easy to use and produce beauti- ful pictures at high speeds. Applying optical technologies and image- processing technologies amassed over many years, Canon provides high-value-added prod- ucts to a wide range of industries. The Company is already prominent globally as a manufac- turer of flat panel display (FPD) lithography equipment and semiconductor lithography 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. 53.6% 38.8% 1,987,269 1,917,943 2,000,073 1,645,076 1,757,575 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0 2009 2010 2011 2012 2013 1,500,000 1,391,327 1,448,938 1,405,971 1,301,160 1,312,044 1,000,000 500,000 0 500,000 2009 2010 2011 2012 2013 432,958 420,863 407,840 400,000 357,998 374,870 10.0% 300,000 200,000 100,000 0 2009 2010 2011 2012 2013 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 SEGMENT Corporate Structure Financial Section Corporate Data 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. 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0 Net Sales (Millions of yen) 1,917,943 2,000,073 1,757,575 2013 Review Amid the moderately growing market for office multi- function devices (MFDs), driven mainly by color mod- els, we worked to increase sales in the area of MFDs and to expand the lineup of next-generation models of the imageRUNNER ADVANCE series with improved performance and increased functions. Our sales in the Americas struggled somewhat, whereas our unit sales in Japan, where demand was firm throughout the year, increased steadily. Moreover, sales performance in Europe and China was as strong as that of 2012. As a result, our office MFD sales outperformed the year 2012. While sales of color machines were generally robust in all geographic regions, sales of the imageRUNNER ADVANCE C5200 and 2011 2012 2013 C2200 series were particularly strong. Digital production printing systems delivered solid sales performance in Asia and Oceania. The growth in unit sales of the imagePRESS C7010VP series in the Americas, in addition to orders received from large cus- tomers in Japan, contributed to the overall sales growth. OFFICE BUSINESS UNIT 13 The imageRUNNER ADVANCE C2200 Series features models with improved operability, productivity and security that are designed to maximize ease of use. The imagePRESS C7010VP 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. The Océ ColorStream 3000 Twin Series are high-speed, continuous-feed commer- cial printers for applications requiring high speed and high quality such as the printing of invoices, direct mail, etc. as demanded by the data print services (DPS) market. As for Canon’s laser multifunction printers (MFPs) and in the solutions business. Canon will further improve laser printers for small to mid-sized businesses, unit sales image quality and other areas to become the over- of color machines in the Americas and Europe increased, whelming industry leader. We will also strengthen our while overall unit sales surpassed the year of 2012. market competitiveness by launching models powered In the area of OEM-brand laser multifunction print- by a new engine that delivers major cost-reduction bene- ers and laser printers, both unit sales and sales revenue fits. To achieve growth in emerging markets, we will tar- rose from the previous year as orders from OEM custom- get steady increases in market share by working in close ers increased owing to the expansion of the market size cooperation with Canon Finetech Inc., our consolidated for laser multifunction printers in the second half of subsidiary, and our sales companies. the year. In the production printing market, we will seize the Sales of high speed, continuous feed printers man- market trend of shift from offset printing to digital ufactured by Océ were strong particularly for the Océ printing, with the aim of securing the No. 1 position ColorStream 3000 Twin series. in the commercial printing sector. We will also further As a result of the above, sales for this business unit penetrate the package printing market in order to grow increased by 13.8% from the previous year, amounted to our business. ¥2,000.1 billion on a consolidated basis. With respect to laser printers, we will work to main- 2014 Initiatives The market for MFDs is regaining strength, underpinned by upgraded product lineups and improved conditions tain and improve our overwhelming No. 1 market posi- tion by launching powerful products that offer great competitive advantages. 14 Strategy BUSINESS SEGMENT Corporate Structure Financial Section Corporate Data 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) 1,405,971 1,448,938 1,312,044 2011 2012 2013 1,500,000 1,200,000 900,000 600,000 300,000 0 2013 Review As for interchangeable lens digital cameras area, although the market environment was difficult amid economic slowdowns in Europe and China, certain models such as EOS 5D Mark III and EOS Rebel T3i (EOS 600D in some areas) maintained strong performance. We also strived to increase sales by further expanding the product lineup including the launch of EOS 70D, which is equipped with an innovative AF technology called Dual Pixel CMOS AF, as well as EOS Rebel T5i (EOS 700D in some areas) and non-reflex camera EOS M2. As a result, although unit sales of interchangeable lens digital cameras were down from the previous year, we maintained our No.1 market share position in worldwide unit sales. As for digital compact cameras, although total sales volume declined due to the market slowdown and the increasing popularity of smartphones, sales volume increased from the previous year for high-added-value models incorporating features that differentiate them from smartphones, such as large-size image sensors. In the area of digital camcorders, we focused on the sales expansion of high value added products amid stag- nation in global demand. IMAGING SYSTEM BUSINESS UNIT 15 The EOS 70D, a digital SLR camera for ad- vanced amateurs, features Canon’s newly developed Dual Pixel CMOS AF autofocus technology that provides signifi cantly im- proved AF performance during Live View shooting and when shooting movies. The PIXMA MG7100 Series is designed for easy printing of photos and web pages even from smartphones or tablet PCs. The imagePROGRAF iPF9400, a 60 inch large-format inkjet printer equipped with a 12-color ink system for the graphic arts industry, achieves high image quality, improved smooth color reproduction and boosted productivity. Broadcast equipment delivered solid sales performance video recording functions, on top of basic performance. on the back of rising demand in emerging economies As for digital compact cameras, we will address the needs particularly China and the Middle East. Sales of DIGISUPER of people seeking to capture more beautiful images by 95 and other field lenses for live sports broadcasts were developing revolutionary products and applications brisk on a global basis. offering functions and enjoyment that smartphones can- As for inkjet printers, the overall market shrank as Asian not deliver. and other emerging economies rapidly lost momentum. Through its Cinema EOS System, Canon will strive to However, we launched new products designed to meet become the top player in the motion picture industry. customer needs including PIXMA MG7100 series with To this end, we will proactively address the needs of the improved cloud functions and smartphone compatibility news reporting and television content production mar- while making sales expansion efforts for each model. As kets, while offering solutions that incorporate peripheral a result, our inkjet printer sales increased, supported also equipment and 4K-resolution commercial-use displays. by the increase in sales volume of consumables. In addi- In inkjet printers, we will target further expansion of tion, sales of both large-format inkjet printers and related market share by pursuing Canon’s advantages, includ- consumables increased. ing connectivity with cameras, while also reinforcing As a result of these efforts, sales for this business unit our cloud-related capabilities. In addition, Canon will increased by 3.1% from the previous year to ¥1,448.9 bil- undertake active sales promotion for its DreamLabo lion on a consolidated basis. commercial photo printers, such as web-based services 2014 Initiatives In the market for interchangeable lens digital cameras, As for large-format inkjet printers, we will expand and upgrade our lineup and step up sales of systems that Canon will concentrate on introducing highly appealing deploy our color-matching technologies, with the aim products that excel against the competition in terms of of expanding overall sales. offering photo merchandise with high image quality. 16 Strategy BUSINESS SEGMENT Corporate Structure Financial Section Corporate Data 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 contributes to raising the bar for ophthalmic diagnosis precision through imaging technologies we have developed over the years. As we continue to focus on better image quality in a more compact design, we are always expanding our lineup of ophthalmic equipment in areas such as OCT devices capable of 3D scanning to support the diagnosis of retinal disorders that can lead to vision loss. Net Sales (Millions of yen) 420,863 407,840 374,870 2011 2012 2013 500,000 400,000 300,000 200,000 100,000 0 2013 Review In relation to semiconductor lithography equipment, capital investment for memory devices was heading for recovery in the second half of the year after prolonged weakness. As a result, sales of FPA-5550iZ i-line steppers, which have been highly trusted for many years for their stable quality and operating rate, and FPA-6300ES6a KrF scanners, which have been received well due to high pro- ductivity, increased. As for flat panel display (FPD) lithography equipment, as demand for high-resolution displays was increasing and the pace of increase in the use of liquid crystal display tele- visions in emerging economies was accelerating, invest- ment in equipment used to manufacture large-sized panels started to show signs of recovery, and sales increased. In medical equipment, new orders for portable prod- ucts and new products equipped with non-generator con- nection mode contributed to sales increase in the area of digital radiography systems. In the area of ophthalmic equipment, sales of retinal cameras, measuring instru- ments and other products were strong. As a result, unit sales in both areas increased significantly. As for network cameras, amid the trend for more INDUSTRY AND OTHERS BUSINESS UNIT 17 The FPA-5550iZ is an i-line stepper employ- ing the FPA-5500 platform with proven high performance and reliability, which enables high throughput such as short exposure time through a high-acceleration wafer stage. The CR-2 Plus AF is a digital non-mydriatic retinal camera with fundus auto-fl uorescence photography mode, and features four auto- matic functions, auto-fundus, auto-focus, auto-capture and automatic exposure func- tion, for easier and faster eye examinations. The Network Camera lineup offers advanced- function models, capable in various situa- tions, including a palm-sized full HD-model and a model for low-light conditions, which demonstrates its ability to monitor at night. digitization and larger numbers of pixels and corre- systems, we will emphasize wireless connectivity and sponding market expansion, we streamlined our busi- dynamic imaging, and in ophthalmic equipment we ness organization to enable us to speedily respond to will focus on high-value-added offerings, such as optical such developments, while promoting the sales particu- coherence tomography (OCT) devices. larly those of full HD compatible products. As a result, in In addition, Canon will target mass production of DNA the area of high image quality products, our sales grew at diagnostic systems. We will also promote clinical evalu- a higher pace than the market. ation into photoacoustic mammography technologies to Sales of document scanners manufactured by Canon enable swifter detection and more accurate diagnoses of Electronics Inc. increased, helped by brisk sales in the breast cancer than before. Americas and Europe. In the optical product field, Canon will work to Sales of semiconductor film deposition equipment enhance its technological capabilities in next-generation manufactured by Canon ANELVA Corporation, organic semiconductor lithography equipment in order to cap- LED (OLED) panel manufacturing equipment manufac- ture a large market share in the future. We will also target tured by Canon Tokki Corporation, and FA systems and the No. 1 market position in FPD lithography equipment semiconductor manufacturing equipment manufactured by launching new products to follow our high-definition by Canon Machinery Inc. were all sluggish due to the weak two-micron models. appetite for capital investment by corporate customers. The market for network cameras is expected to grow As a result of the above, sales for this business unit 20% or higher annually in the future. In response, Canon decreased by 8.1% on a consolidated basis to ¥374.9 billion. will seek the most effective customers among the broad 2014 Initiatives Canon will strive to establish a solid foundation for its medical equipment business. In digital radiography range of potential users, from governments to conve- nience stores, with the aim of building a solid track record of our solutions. 18 Strategy BUSINESS SEGMENT Corporate Structure Financial Section Corporate Data 2 0 1 3 T O P I C S OFFICE BUSINESS UNIT imageRUNNER ADVANCE Series Receive EPEAT Gold Rating In the new digital imaging equipment category of EPEAT®, eight models in Canon’s imageRUNNER ADVANCE series received an EPEAT Gold rating, the highest level of registration*. EPEAT is an environmental rating system, established to develop markets and encourage sales for greener electron- ics. Its approval is a prerequisite of the U.S. federal offices’ procurement. To be added to the EPEAT registry, an imaging device must meet at least 33 required environmental performance criteria, including reduction or elimination of toxic substances and energy conservation features. Products may achieve higher ratings by meeting some or all of 26 additional optional criteria. Gold qualification signifies that a product meets all required cri- teria and at least 75% of optional criteria. Canon will actively embrace EPEAT-related initiatives, inform consumers of environmental criteria as well as measure and reduce environmental impacts. At the same time, we will deliver products that meet environmental standards. * As of December 31, 2013. For more information, please refer to the EPEAT website (http://www.epeat.net) imageRUNNER ADVANCE C9280 PRO, EPEAT Gold rated IMAGING SYSTEM BUSINESS UNIT Cinema EOS System Captures Video of Comet ISON On November 23, 2013, an ultra-high-sensitivity 4K camera was used to success- fully capture video of the comet ISON from the International Space Station. In a world-first achievement, Canon’s Cinema EOS System was used to record the astronomical phenomenon. ISON was unique in that, among the many large comets that have passed through the solar system in recent years, none had traveled so close to the sun and thus be readily observable from earth. Accordingly, expectations were high that ISON would provide earthbound star- gazers with a rare performance that would not likely be repeated anytime soon. After the video was shot, however, the comet is believed to have largely broken up and evaporated, meaning that it will no longer be visible in the night sky. The clear video images of the rare comet captured by the Cinema EOS System, therefore, will likely prove of high value to the scientific community. Having already earned plaudits from Hollywood professionals and others working in the motion picture production industry, the Cinema EOS System’s latest out-of-this-world achievement raises the realm of imaging expression to an all-new height. Cinema EOS System equipment was used to capture video of the comet ISON 2013 TOPICS 19 IMAGING SYSTEM BUSINESS UNIT New Canon PIXMA MG7100 Series Delivers Enhanced Connectivity to Cloud Services as well as Smartphones and Tablet Devices Canon launched its PIXMA MG7100 series of inkjet printers, which sup- port the New PIXMA Cloud Link to allow accessing directly from smart- phones and tablet devices. New PIXMA Cloud Link enables access to various cloud services for printing from SNS (Social Networking Service) sites and online photo-sharing and storage-service sites, as well as Canon-original print content. Users can easily print out photos and documents stored in cloud-based services. The new PIXMA Print application for smartphones and tablet devices enables easy operation when away from home via an Internet connection. For high printing quality, our six-color ink system incorporates dye- based ink for vivid and beautiful photos, which realizes rich expression and color stability resulted from using gray ink, and pigment-based black ink for clear, easy-to-read texts in documents. PIXMA MG7100 series *Color variations may differ by region. INDUSTRY AND OTHERS BUSINESS UNIT Expanding the CXDI Wireless Digital Radiography Systems Lineup Canon has been expanding and upgrading its lineup of digital radiog- raphy (DR) systems, which can be used for imaging various body parts from limbs to abdomen, chest and head. We focus on wireless models that capture images without a connection with an X-ray generator. The Canon CXDI-701C Wireless DR system, featuring a non generator connec- tion mode, was released in 2013. Compared with conventional analogue technologies, DR systems are able to display preview images much more quickly. Due to its high effi- ciency, DR systems are becoming increasingly widespread in the medi- cal field. Moreover, models with the non generator connection mode do not need to synchronize signals with an X-ray generator, thus provid- CXDI Wireless Series ing them more freedom and versatility to their image-capture process. Furthermore, such devices can be easily integrated into existing X-ray sys- tems without making significant changes to their configurations. DR systems employ a scintillator that converts X-rays into visible light, and a flat-panel sensor to directly pick up the light to generate an image, enabling images to be displayed instantly. 20 Strategy Business Segment CORPORATE STRUCTURE Financial Section Corporate Data C O R P O R A T E G O V E R N A N C E Canon maintains sound corporate gover- nance as part of efforts to maximize its stockholders’ value and become a truly ex- cellent global corporation. Basic Policy and Corporate Governance Structure Canon recognizes that management supervision functions and management transparency are vital to strengthening 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 disclosure system for management activities. Board of Directors Important business matters are discussed and ratified during meetings of the Board of Directors and Executive Committee. As of March 28, 2014, the board consisted of 19 directors, including two outside directors. In order to At a monthly meeting of all company executives, CEO provides updates on earnings progress and important matters to implement in the future as a way to share crucial information. facilitate more practical and efficient decision making, the board is mostly composed of internal directors who have well-developed knowledge of the Company’s affairs. In addition, Canon has outside directors so as to take var- ious opinions on their broad experiences and insight in their respective fields of expertise in management’s decision-making process. Executive Officer System Canon is endeavoring to realize more flexible and efficient management operations by maintaining an appropriately sized organization of directors and pro- moting capable human resources with accumulated executive knowledge across specific business areas. Executive officers are appointed and dismissed by the Directors and Audit & Supervisory Board Members (as of April 1, 2014) Chairman & CEO Fujio Mitarai Executive Vice President & CFO Toshizo Tanaka Group Executive, Finance & Accounting Headquarters Group Executive, Facilities Management Headquarters Group Executive, Human Resources Management & Organization Headquarters Executive Vice President & CTO Toshiaki Ikoma Group Executive, Corporate R&D Group Executive, Medical Equipment Group Senior Managing Directors Yoroku Adachi Chairman & CEO, Canon U.S.A., Inc. Yasuo Mitsuhashi Chief Executive, Peripheral Products Operations Shigeyuki Matsumoto Group Executive, Device Technology Development Headquarters Toshio Homma Group Executive, Procurement Headquarters Hideki Ozawa President & CEO, Canon (China) Co., Ltd. Masaya Maeda Chief Executive, Image Communication Products Operations Directors Yasuhiro Tani Group Executive, Digital System Technology Development Headquarters Kenichi Nagasawa Group Executive, Corporate Intellectual Property & Legal Headquarters Naoji Otsuka Chief Executive, Inkjet Products Operations Masanori Yamada Group Executive, Network Visual Solution Business Promotion Headquarters Aitake Wakiya Deputy Group Executive, Finance & Accounting Headquarters Kazuto Ono Group Executive, Corporate Planning Development Headquarters Akiyoshi Kimura Chief Executive, Office Imaging Products Operations Eiji Osanai Group Executive, Production Engineering Headquarters Kunitaro Saida (Outside) Attorney Haruhiko Kato (Outside) President & CEO of Japan Securities Depository Center, Inc. Audit & Supervisory Board Members Kengo Uramoto Makoto Araki Tadashi Ohe (Outside) Osami Yoshida (Outside) Kuniyoshi Kitamura (Outside) CORPORATE GOVERNANCE 21 Governance Structure (as of April 1, 2014) Canon Inc. General Meeting of Shareholders Board of Directors Audit & Supervisory Board Representative Directors Chairman & CEO Executive Committee Management Strategy Committee Executive Vice President & CFO New Business Development Committee Executive Vice President & CTO Corporate Ethics and Compliance Committee Internal Control Committee Disclosure Committee Executive Officers Subsidiaries & Affiliates Corporate Audit Center Headquarters Administrative Divisions Office Business Unit Imaging System Business Unit Industry and Others Business Unit Marketing Subsidiaries & Affiliates Manufacturing Subsidiaries & Affiliates R&D Subsidiaries & Affiliates Board of Directors and have a term of office of one year. The number of executive officers was 17 as of April 1, 2014. Audit & Supervisory Board Canon has five members on the Audit & Supervisory Board, including three outside corporate auditors who have no personal, capital or business affiliations with the Company. 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 our independent regis- tered public accounting firm and the Corporate Audit Center. Canon has notified the stock exchanges in Tokyo, Nagoya, Fukuoka and Sapporo of the designation of out- side directors and members of the Audit & Supervisory Board as independent directors and auditors, as provided under the regulations of the stock exchanges. Internal Audits The Corporate Audit Center—the Company’s internal auditing arm—as a separate dedicated organization con- ducts audits and evaluations and provides guidance on every business without exception, including the Group companies in Japan and abroad, in line with the internal audit guidelines. It reports the auditing results directly to the Audit & Supervisory Board, the management top, to improve operations. As of March 28, 2014, the Center had 71 members, and will enhance the structure to reinforce the auditing functions. Internal Control Committee In response to the Sarbanes-Oxley Act, including Section 404, which came into force during 2006, Canon contin- ues to reinforce internal control systems and implement appropriate measures. The Internal Control Committee is responsible for Groupwide internal controls, including securing credibility of financial reporting. In order to strengthen internal controls, Canon con- ducts comprehensive evaluations of internal controls across areas that include accounting, management over- sight, legal compliance, IT systems and the promotion of corporate ethics. As of December 31, 2013, internal con- trol over financial reporting has been assessed as effective by management and our independent registered public accounting firm. (Please refer to pages 93 and 95.) Compliance Shortly after its founding, Canon established the San-ji (“Three Selfs”) Sprit principles: “self-motivation,” or taking At Group companies worldwide, employees carry with them compli- ance cards. 22 Strategy Business Segment CORPORATE STRUCTURE Financial Section Corporate Data the initiative and being proactive in all things; “self-man- agement,” or conducting oneself responsibly and being accountable for all one’s actions; and “self-awareness,” or understanding one’s situation and role in it. In 2001, Canon established the Canon Group Code of Conduct, inspired by the above Three Selfs. The Code has been translated into 13 languages from Japanese and each Group company makes efforts to enforce the Code. Detailed policies and measures concerning the com- pliance activities of Canon are decided at the Corporate Ethics and Compliance Committee. With management by the Compliance Office, these policies and measures are mainly carried out by compliance leaders at each head- quarters and Group company. Disclosure Canon makes every effort to disclose information on its management and business strategies as well as its per- formance results to all stakeholders in an accurate, fair and timely manner. To this end, Canon holds regular briefings and posts the latest information on its website together with a broad range of disclosure materials. Canon has formulated its own Disclosure Guidelines and established the Disclosure Committee, which makes deci- sions regarding information disclosure, including neces- sity, content and timing. The Disclosure Committee makes such decisions after receiving reports on information that might need to be disclosed from the person in charge of the disclosure working group at each headquarters. Signifi cant 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 companies 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 prac- tices of their home country in place of the corporate governance practices stipulated under the Manual. In such circumstances, the foreign private issuer is required to disclose the significant differences between the corporate governance practices under Section 303A of the Manual and those required in Japan. A sum- mary of these differences as they apply to the Company is pro- vided 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 directors as mem- bers of the board of directors. The NYSE Corporate Governance Rules require non-management directors of U.S. listed compa- nies to meet at regularly scheduled executive sessions with- out the presence of management. Unlike the NYSE Corporate Governance Rules, however, the Corporation Law does not require companies to implement an internal corporate organ or committee comprised solely of independent directors. Thus, the Company’s board of directors currently does not include any non-management directors. The Company currently has two outside directors under the Corporation Law. Under the Corporation Law, an “outside” direc- tor is any person who is not, and was not at any time during the past, an executive director (a director who engages in the execu- tion of business), executive officer, manager or employee of the Company or its subsidiaries. Such qualifications for an “outside” director are different from the director independence require- ments under the NYSE Corporate Governance Rules. In addition, pursuant to the regulations of the Japanese stock exchanges, the Company is required to have one or more “independent director(s)/audit & supervisory board member(s),” defined under the relevant regulations of the Japanese stock exchanges as “outside directors” or “outside audit & supervi- sory board members” (as defined under the Corporation Law), who are unlikely to have any conflicts of interests with the Company’s general shareholders. Each of the outside directors of the Company satisfies the “independent director/audit & super- visory board member” requirements under the regulations of the Japanese stock exchanges. The definition of “independent director/audit & supervisory board member” is different from that of the definition of independent director under the NYSE Corporate Governance Rules. 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 com- panies must have an audit committee, nominating committee and compensation committee, each composed entirely of inde- pendent directors, the Corporation Law does not require com- panies 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 CORPORATE GOVERNANCE 23 Countering Antisocial Forces Canon has formulated a basic policy stipulating that no Canon Group company shall maintain relationships of any kind with antisocial forces that represent a threat to social order and security. To uphold this basic policy, Canon has established a department dedicated to activities aimed at countering such parties while reinforcing cooperative ties with applicable public authorities. In addition, Canon’s Employment Regulations include a clause prohibiting such relationships, and the Company continues to step up efforts to ensure strict employee adherence. Risk Management As Canon pursues business expansion in various fields on a global scale, the business and other risks to which it may be exposed continue to diversify. With the goal of eliminating such risks altogether, while honoring the trust placed in it by its stakeholders, Canon works dili- gently to avoid or minimize its exposure, to this end assigning specifically designated management commit- tees to address key issues. In particular, the Executive Committee and various management committees engage in careful discussions regarding significant risk factors. The Corporate Audit Center preemptively identifies risk factors through audit activities. Also, Canon formulates in-house rules to guard against those risks and, in accordance with the policies formulated by the Internal Control Committee, strives to identify and assess relevant risks associated with individ- ual business processes. 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 determined by a resolution of the general meeting of shareholders. The allotment of com- pensation for each director from the total amount of compensa- tion 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, sub- ject to certain requirements which continue to be applicable 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 account- ing or to have any other area of expertise. Under the Corporation Law, the Audit & Supervisory Board may determine the auditing policies and methods for investigating the business and assets of a Company, and may resolve other matters concerning the exe- cution of the Audit & Supervisory Board Member’s duties. The Audit & Supervisory Board prepares auditors’ 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 reg- ulations 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 addition, 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 Segment CORPORATE STRUCTURE Financial Section Corporate Data R E S E A R C H & D E V E L O P M E N T The computational imaging technology combines two techniques: a technique of acquiring subject fi elds information (images, 3D shapes, motions and materials of objects in them) and another technique of reconstruction new images based on the information. Canon is continuously working to realize new visual expression. Seeking new possibilities, Canon is estab- lishing an R&D structure spanning Japan, the United States and Europe under the Three Regional Headquarters management system. At the same time, Canon will de- velop the medical and industrial fi elds into new business pillars. 2013 Top Ten U.S. Patent Holders by Company IBM* Samsung Electronics CANON Sony Microsoft Panasonic Toshiba Hon Hai Precision Industry QUALCOMM LG Electronics 6,809 4,676 3,817 3,098 2,660 2,601 2,416 2,279 2,103 1,947 * IBM is an abbreviation for International Business Machines Corporation. Source: U.S. Department of Commerce; based on weekly total numbers Upgrading Our Global R&D Structure Canon’s growth to date has been attributable to employ- ing strong technologies to develop competitive products, mainly in Japan, and then disseminating those offer- ings around the world. Going forward, the Company will expand and upgrade its R&D organizations in the United States and Europe, laying the foundation for the Three Regional Headquarters system that Canon envisions. In the United States, Canon will set up centers to pur- sue 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 Expenses and Patents Canon is bolstering R&D activities to enable the ongoing development of innovative products and services. In the year under review, R&D expenses amounted to ¥306.3 bil- lion, up 3.3%, or ¥9.9 billion, from the previous year. The ratio of R&D expenses to net sales was 8.2%. By segment, the Company allocated ¥105.2 billion (34.3% of total R&D expenses) to the Office Business Unit, ¥84.4 billion (27.6%) to the Imaging System Business Unit, and ¥25.7 billion (8.4%) to the Industry and Others Business Unit. Basic R&D expenses not allocated to specific business units amounted to ¥91.0 billion (29.7%). This focus on R&D activities has RESEARCH & DEVELOPMENT 25 Canon built a super high-sensitivity, 35 mm full-frame CMOS sensor prototype that can capture images of things not visible to the naked eye and has demonstrated its capability in exceptionally low-brightness shooting. Canon has integrated high-precision machine vision technology with information technology to develop intelligent robots that think and act on their own accord. This is one of many areas in which Canon has applied these technologies. cemented Canon’s high status in the field of intellectual property. In 2013, Canon was granted 3,817 patents in the United States, ranking it third in the world and the top- ranked Japanese company for a ninth consecutive year. Reinforcing Core Technologies 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 bolstering activities centered on key parts and key devices in order to enhance the competitiveness of its products. In 2013, Canon successfully developed a high-sensitivity 35 mm full-frame CMOS sensor exclusively for Full HD video cap- ture. The current limit for recording video of astral bodies with a commonly used electron-multiplying CCD sensor is magnitude-6 stars (equivalent to the visual capabilities of the naked eye). By comparison, the high-sensitivity CMOS sensor was able to capture video images of faint stars with magnitudes of 8.5 and higher.* In addition to astronomi- cal and natural observation, Canon is looking into apply- ing this CMOS sensor to medical research purposes as well as surveillance and crime-prevention equipment. Through the further development of innovative CMOS sensors, Canon aims to expand the realm of photographic possibili- ties while cultivating the world of visual expression. * The brightness of a star decreases 2.5-times with each numerical increase in magnitude. Medical and Industrial Equipment Canon is working to establish two new business pillars: medical equipment and industrial equipment. In medical devices, for some years Canon has been involved in the “CK Project” in collaboration with Kyoto University. Under the project, two of our technologies are currently at the clinical evaluation stage. One relates to a photoacoustic mammography device capable of diagnosing breast cancer more accurately than before, with minimal bodily impact during examination. The other relates to adap- tive optics scanning laser ophthalmoscopy (AO-SLO), which contributes to the examination of the retina at the cellular level and the early detection of lifestyle-related diseases. Furthermore, Canon is developing DNA diagnostic sys- tems using Canon’s unique technologies, including our expertise in CMOS sensor and inkjet methodologies, at our U.S. R&D Center. We aim to start the production from 2015 at Canon Virginia. If realized, the equipment will be the first Canon product born in the U.S. In the industrial equipment field, Canon is working to develop intelligent robots and other systems through cutting- edge application technologies by integrating high-precision machine vision technology with information technology that operates as the brains of robotic systems. Canon is pro- ceeding 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 Segment CORPORATE STRUCTURE Financial Section Corporate Data P R O D U C T I O N Canon works to maintain and expand production, using our automation technologies while manufacturing high-value-added products in Japan. (the Utsunomiya Plant, Japan) In addition to establishing a globally op- timized production system, Canon seeks improved quality and productivity by put- ting a priority on conducting production operations itself to ensure the progress of its manufacturing expertise. Establishing a Globally Optimized Production System Canon aims to establish a globally optimized produc- tion system that identifies the most suitable locations for the production of individual products based on a comprehensive assessment of various considerations. These factors include cost, taxation, logistics, the ease of parts procurement, and the workforce in each coun- try and region. An optimized system will lead to addi- tional improvements in productivity for the entire Belief in “Internal Production” Canon Group. In-House Production Automation Man-Machine Cell (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: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:0)(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:44)(cid:79)(cid:67)(cid:65)(cid:76)(cid:73)(cid:90)(cid:69)(cid:68) (cid:0) (cid:48)(cid:82)(cid:79)(cid:68)(cid:85)(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: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 In Thailand, Philippines, and Brazil, three manufac- turing subsidiaries started operations in 2013. In this way, we are reinforcing our production system globally to meet growing demand for our products. Improving Productivity 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 manufacturing by making full use of the expertise and insights of individual workers engaged in production. To this end, the Company has adopted a cell production PRODUCTION 27 “Man-machine cells” 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, enabling fur- ther improvement in quality and productivity. (Canon Hi-tech (Thailand) Ltd.) Canon promotes local production for local consumption, mainly of consumables, using automation. We work to lower transport costs and reduce in-transit shipments and inventories as well as to enhance speed-to-market timeliness by shortening the distance to key markets. (Canon Virginia, Inc.) system—an approach that fully utilizes the creativity of Meanwhile, by implementing IT innovations that link individual workers. Canon continues to improve produc- development, design, production, logistics, and sales tivity by making efforts to increase production efficien- and seek to achieve further efficiencies, Canon aims to cies in cell production while rolling out “man-machine establish advanced supply chain management that is cell” production systems that integrate manual and capable of withstanding fluctuations in demand. automated processes. For some time, Canon has prioritized in-house man- ufacturing, especially of image sensors and other key parts. At present, we are broadening this strategy to Environmental Friendly Manufacturing; Enhanced Product Quality In addition to efforts aimed at boosting productivity, include molds and production equipment, as well as Canon promotes manufacturing operations that are automation of production itself. In the United States, friendly to the global environment while striving to for example, we have implemented a business model for improve overall product quality. With respect to man- toner cartridges that incorporates everything from auto- ufacturing, we prioritize purchases of environmen- mated production to sales, collection, and recycling in tally friendly products and parts and actively shift to the region of consumption of our products, and we plan transportation modes that have minimal environmen- to apply this model in Europe as well. In Japan, more- tal impact. To offer customers products that are safe over, we introduced automated equipment in part of the while also providing trust and satisfaction, we imple- assembly process for interchangeable lenses for digital ment stringent quality control measures at every pro- SLR cameras, which requires a high degree of precision, cess, from planning, development, procurement, and in 2013. In addition to creating high-value-added prod- production to sales and after-sales service, based on our ucts, Canon will expedite efforts to raise productivity in basic concept of quality, “no trouble, no claims.” order to strengthen the cost-competitiveness of manu- facturing products in Japan. 28 Strategy Business Segment CORPORATE STRUCTURE Financial Section Corporate Data S A L E S & M A R K E T I N G Canon (China) Co., Ltd. has held “Canon Grand Fairs,” targeting the market of the country’s 1.3 billion consumers including general consumers, to further spread and improve the Canon brand. The fi rst fair was run in September 2012 and until March 2014 it was carried out in Beijing, Chengdu and Guangzhou. Canon reinforces its sales and marketing ca- pabilities by providing innovative products and advanced solutions tailored to meet the characteristics of each region. Composition of Sales by Region Asia and Oceania 22.3% ¥831.1 billion The Americas 28.4% ¥1,059.5 billion Net Sales ¥3,731.4 billion Japan 19.2% ¥715.9 billion Europe 30.1% ¥1,124.9 billion General Review In all existing core businesses, Canon is strengthening its sales, marketing, and service capabilities by responding to actual conditions based on analyses of the features of each region. In 2013, Canon sought to enhance its sales organiza- tion in China and cultivate that market further. We also focused on upgrading our sales networks in India, Russia, South America, and other emerging markets. In the office equipment sector, we reinforced our solutions capabilities centered on the imageRUNNER ADVANCE series while further strengthening our busi- ness targeting the commercial printing sector through the integration of Océ. We also reinforced the Global Major Account activities to provide worldwide support for elite clients developing their operations globally. For consumers, we worked to boost sales by launching products tailored to the market needs of specific coun- tries and regions. Japan In the year under review, sales in Japan amounted to ¥715.9 billion, equivalent to 19.2% of consolidated net sales. Thanks to proactive marketing, Canon maintained its No.1 position in the interchangeable lens digital cam- era market, with record-high shipments of both cameras SALES & MARKETING 29 With the completion of a new headquarters with total fl oor space of 65,000 m2, Canon U.S.A., Inc. has been transformed from a regional marketing company into a developer, manufacturer and marketer of products not available in Japan, and is going to create new value. Canon installed a Camera Service Center during IAAF World Championships Moscow 2013, providing world class service and technical support for professional photographers behind the scenes. and lenses. We also made full use of the Nishi-Tokyo Data Center, which opened in 2012 and features state-of-the art facilities and security systems. In addition to stepping up data center services, we focused on expanding other outsourcing offerings, including cloud services aimed at enhancing competitiveness and addressing managerial problems and system administration services to support stable operation of systems. The Americas Sales in the Americas came to ¥1,059.5 billion, 28.4% of consolidated net sales. For Canon Americas, 2013 was a year for upgrading its capabilities, in which we completed construction of our regional headquarters building in Melville, New York, and we commenced operations at a camera produc- tion facility in Brazil, our first manufacturing foray into South America. We also established Canon Solutions America, Inc. and completed integration of the sales net- works for Canon and Océ products. Now, we have a con- tinuous system from product sales to solutions services and after-sales support. This provided a major impetus to cross-selling of various offerings, including office multifunction devices, production printers, and large- format printers. Europe (Europe, Middle East, Africa) In Europe sales amounted to ¥1,124.9 billion (30.1% of consolidated net sales). In 2013, under challenging economic circumstances, Canon Europe maintained and increased market share in key segments such as cameras, consumer inkjet and pro- duction printing. Canon’s acquisition of Belgium-based solutions spe- cialist I.R.I.S. Group in 2013 was an important milestone in the strategy to accelerate growth in services and solu- tions. New Canon-Océ cross-selling opportunities with Canon Business Services also contributed to growth. Canon Europe strengthened its sales and marketing functions in emerging markets, with increased presence in Africa. Asia and Oceania In 2013, sales in Asia and Oceania amounted to ¥831.1 bil- lion, 22.3% of consolidated net sales. Canon China held the Canon Grand Fair in Chengdu to further improve the company’s brand image in the Midwestern market that has future growth potential. In South and Southeast Asia, we promoted establishing Canon “Image Square” brand retail stores and opened the 108th outlet in India and the second one in Vietnam. In Oceania, we stepped up sales in New Zealand and worked to expand our solutions business. 30 Strategy Business Segment CORPORATE STRUCTURE Financial Section Corporate Data 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 Vietnam Co., Ltd. continues the Canon Friendship School Chain Project. A program designed to establish educational environments for chil- dren living in economically disadvantaged areas. We are building new schools, enlarging or renovating old schools and furnishing them with donated desks, chairs, book shelves, and other items. Canon is promoting CSR activities with the aim of becoming a truly excellent global corporation that is admired and respected the world over. Canon Virginia, having acquired Responsible Recycling (R2) certifi cation, is evidence of Canon’s dedication as a company to managing products across their lifecycle from production through to collecting and recycling. Canon’s Basic Approach to CSR Canon recognizes that its corporate activities are sup- ported by the development of society as a whole, and con- tributes to the realization of a better society as a good corporate citizen, effectively leveraging its advanced tech- nological strengths, global business deployment, and diverse, specialized human resources. Environmental Activities In 2013, Canon Virginia was named as the first manu- facturer to achieve Responsible Recycling Practices for Electronics Recyclers (R2) certification. The United States Environmental Protection Agency (EPA) was involved in establishing the R2 private indus- try inspection system. Moreover, eight models in Canon’s imageRUNNER ADVANCE series received an EPEAT® Gold rating, the highest level of registration, in digital imag- ing equipment category, which was set up in 2013*. An approval from the environmental rating system is a pre- requisite of the federal offices’ procurement. The U.S. government promotes safer and more effective recycling of electrical and electronic equipment by using R2-accredited recyclers. To be registered under EPEAT, man- ufacturers must entrust the recycling of all its used prod- ucts to R2 or other-accredited recyclers. Canon Virginia will implement ever more effective recycling measures CORPORATE SOCIAL RESPONSIBILITY 31 Canon Europe, as a WWF (World Wide Fund for Nature) Conservation Partner, is working to provide a range of support that goes beyond its participation in Arctic expedition, such as sponsoring the WWF-Canon Global Photo Network. ©Alexey Ebel/WWF-Canon The “Eyes on Yellowstone” program releases videos of wildlife in their natural environment online. These vid- eos are used to educate children around the world. as a recycler for the Group, while Canon will expedite to manage the lifecycle of its products, from development to recycling, within the Group. Social Contribution Activities Canon conducts wide-ranging social contribution activi- ties in all parts of the world, as a “good corporate citizen.” * For more details, please see page 18. 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 awareness of climate change in the Arctic. In 2013, Alexey Ebel, a Russian professional wildlife photographer, accompanied a team of WWF experts and scientists on the Laptev Sea expedition sponsored by Canon. He dedicated his time to documenting the Arctic environment during the expedition to raise awareness of the need for protection. Canon and WWF share the hope that the power of images will expose the state of the envi- ronment in the rapidly changing Arctic landscape. Wildlife Protection in Yellowstone National Park Canon U.S.A. supports “Eyes on Yellowstone,” an edu- cational 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. Canon Foundation Announces Fourth Grant Program Recipients The Canon Foundation aims to contribute to the ongo- ing prosperity and well-being of mankind. It has offered two research grant programs, known as the Creation of Industrial Infrastructure grant and Pursuit of Ideals grant. In 2013, 16 projects were selected for the fourth research grant program. The Tsuzuri Project Canon and the non-profit organization Kyoto Culture Association jointly promote a project called the “Tsuzuri Project” (Official title: Cultural Heritage Inheritance Project.) The aim of the project is to preserve original cul- tural assets while maximizing the effective use of high- resolution facsimiles of cultural assets. These facsimiles are created by blending Canon’s latest digital technology and traditional Japanese crafts, such as gold leaf craft- work. As a result of the project, original cultural assets can be kept in the more favorable environment of muse- ums while copies can be used for educational purposes and public exhibits. Since the program began in 2007, the 32 Strategy Business Segment CORPORATE STRUCTURE Financial Section Corporate Data In 2013, the Tsuzuri Project created high-resolution fac- similes of eight sliding doors owned by the Tenkyu-in Temple, a subtemple of the Myoshinji Temple, and donated them to the Tenkyu-in Temple. (Above: sliding doors with a picture of a tiger in a bamboo grove) Without regard to national origin, race, and other matters of background, Canon hires, trains, and promotes per- sonnel that can excel as a member of a global enterprise so that it can grow sustainability as a global company. cumulative total of reproduced and donated items has reached 27 (as of March 2013.) Canon Image Bridge “Canon Image Bridge” is a social contribution initiative launched in 2013 to cover the entire Asian region. It follows the “Image Light of Hope” project in China spearheaded by Canon China since 2008. In the new initiative, Canon China and other members of the Canon Asia Marketing Group will serve as a bridge linking elementary and mid- dle school children in various nations and regions of Asia via exchange cards. These cards are composed of photo- graphs taken by children and words of their impressions. Canon collects the exchange cards and distributes them to children throughout Asia to foster cross-cultural commu- nication. In 2013, around 4,200 children from 134 schools took part in this photo exchange project. Addressing the Issue of Conflict Minerals Seeking to ensure that customers can use Canon prod- ucts with peace of mind, the Canon Group works together with business partners and industry entities to address the issue of conflict minerals. Since 2012, Canon has held briefing sessions for domestic and overseas business partners at 16 locations to gain their understanding of the issue and request cooperation with related inquiries and, since 2013, the Company has been con- ducting full-scale investigations targeting products produced at manufacturing bases across the entire Canon Group. Although tracing the complicated supply chain to confirm the origins of four types of metals used in prod- ucts is no easy task, the Company has newly constructed a conflict minerals information management system and is accumulating essential data to enable the verification of conflict-free minerals at the parts and materials level. Based on procedures performed through February 2014, no specific parts or materials have been found that have funded armed groups in conflict regions as defined by U.S. legislation. Because, however, there remain many parts and materials for which the smelters located upstream in the supply chain have not been iden- tified, Canon continues working to increase the accuracy of inquiries and determine whether the supply chain is conflict-free. In accordance with the U.S. Dodd-Frank Wall Street Reform and Consumer Protection Act, Canon will report to the U.S. Securities and Exchange Commission by the end of May 2014 on the progress the Canon Group is mak- ing to address the conflict minerals issue and also disclose the information on the Company’s website. Cultivating Diverse Human Resources Canon works constantly to foster global human resources capable of performing 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 2013, we contin- uously pursued initiatives geared specifically towards programs focused on developing local instructors at our manufacturing subsidiaries in Southeast Asia and China. 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 34 FINANCIAL OVERVIEW 48 TEN-YEAR FINANCIAL SUMMARY 50 CONSOLIDATED BALANCE SHEETS 51 CONSOLIDATED STATEMENTS OF INCOME 51 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 52 CONSOLIDATED STATEMENTS OF EQUITY 54 CONSOLIDATED STATEMENTS OF CASH FLOWS 55 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 93 MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING 94 REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 34 Strategy Business Segment Corporate Structure FINANCIAL SECTION Corporate Data FINANCIAL OVERVIEW 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 2013, although the U.S. and Japanese economies began heading toward moder- ate recoveries during the latter half of the year, the economic downturn in Europe continued to drag on while the econo- mies of emerging countries such as China faced slowdowns. As such, contrary to expectations at the beginning of the year, the global economy remained stagnant. As for exchange rates, the correction of the historic high value of the yen continued, with a trend toward a weaker yen growing increasingly clear. Market environment As for the markets in which Canon operates amid these con- ditions, owing to the economic slowdown, flat demand led to a continuation of the harsh business environment espe- cially for consumer products. Among MFDs, color models continued to drive growth while demand for laser printers realized a turnaround toward recovery. Although demand for interchangeable-lens digital cameras continued to show strong growth in Japan, demand overseas fell short of the pre- vious year’s level as the economic rebound in such markets as Europe and China takes longer than expected. As for digital compact cameras, demand continued to shrink in both devel- oped countries as well as emerging markets. Overall market demand for inkjet printers, hit by the prolonged economic downturn, also declined in all major markets. In the industry and others sector, a rebound in capital investment for mem- ory devices led to a pickup in demand for semiconductor lithography equipment in the latter half of the year, while demand for lithography equipment used in the production of FPDs showed healthy market growth for mid- and small- size panels used mainly in smartphones and tablet PCs, and a modest recovery for large-size panels. The average value of the yen during the year was ¥97.84 against the U.S. dollar, a year-on-year depreciation of approx- imately ¥18, and ¥130.01 against the euro, a year-on-year depreciation of approximately ¥27. Summary of operations Despite the decline in demand for digital compact cameras and industrial equipment, net sales for the year increased 7.2% to ¥3,731.4 billion (U.S.$35,537 million) from the pre- vious year. This was realized through the steady demands for MFDs and laser printers, along with an increase in sales of inkjet printers, made possible through sales-promotion efforts despite the harsh conditions posed by the shrinking inkjet printer market, as well as the positive effects of favor- able currency exchange rates. The gross profit ratio rose 0.8 points year on year to 48.2% thanks to the effects of ongoing cost-cutting efforts along with the depreciation of the yen. Despite an increase in foreign-currency-denominated operat- ing expenses after conversion into yen due to the depreciation of the yen, Group-wide efforts to thoroughly reduce spending contributed to limiting the increase in operating expenses to just ¥1,461.1 billion (U.S.$13,916 million), an increase of 10.2% year on year. Consequently, operating profit increased by 4.1% to ¥337.3 billion (U.S.$3,212 million). Other income decreased by ¥8.4 billion (U.S.$80 million) due to foreign currency exchange losses while income before income taxes increased by 1.5% year on year to ¥347.6 billion (U.S.$3,311 million). Net income attributable to Canon Inc. increased by 2.6% to ¥230.5 billion (U.S.$2,195 million). Accordingly, Canon achieved increases in both sales and profit. Key performance indicators The following are the key performance indicators (“KPIs”) that Canon uses in managing its business. The changes from year to year in these KPIs are set forth in the table shown on page 35. Revenues As Canon pursues the goal to become a truly excellent global company, one indicator upon which Canon’s manage- ment places strong emphasis is revenue. The following are some of the KPIs related to revenue that management con- siders to be important. FINANCIAL OVERVIEW 35 Net sales is one such KPI. Canon derives net sales primarily from the sale of products and, to a much lesser extent, pro- vision 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 devel- opment, Canon has been striving to shorten product develop- ment lead times in order to launch new, competitively priced products at a faster pace. Furthermore, Canon has further achieved cost reductions through enhancement of efficiency in its production. Canon believes that these achievements have contributed to improving Canon’s gross profit ratio, and will continue pursuing the curtailment of product develop- ment lead times and reductions of production costs. Operating profit ratio (ratio of operating profit to net sales) and R&D expense to net sales ratio are considered to be KPIs by Canon. Canon is focusing on two areas for improvement. Canon is striving to control and reduce its selling, general and administrative expenses as its first key point. Secondly, Canon’s R&D policy is designed to maintain adequate spend- ing in core technology to sustain Canon’s leading position in its current business areas and to exploit opportunities in other markets. Canon believes such investments will create the basis for future success in its business and operations. Cash flow management Canon also places significant emphasis on cash flow manage- ment. The following are the KPIs relating to cash flow man- agement that Canon’s management believes to be important. Inventory turnover measured in days is a KPI because it measures the efficiency of supply chain management. Inventories have inherent risks of becoming obsolete, 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 capi- tal requirements primarily with cash flow from operations. Management also seeks debt-free operations. For a manu- facturing company like Canon, it generally takes consider- able time to realize profit from a business due to lead times required for R&D, manufacturing and sales has to be fol- lowed for success. Therefore, management believes that it is important to have sufficient financial strength so that the Company does not have to rely on external funds. Canon has continued to reduce its dependency on external funds for capital investments in favor of generating the necessary funds from its own operations. Canon Inc. stockholders’ equity to total assets ratio is another KPI for Canon. Canon believes that its stockholders’ equity to total assets ratio measures its long-term sustainabil- ity. Canon also believes that achieving a high or rising stock- holders’ equity ratio indicates that Canon has maintained a strong financial position or further improved its ability to fund debt obligations and other unexpected expenses. In the long-term, Canon’s management believes a high stockhold- ers’ equity ratio will enable the company to maintain a high level of stable investments for its future operations and devel- opment. As Canon puts strong emphasis on its R&D activities, management believes that it is important to maintain a sta- ble financial base and, accordingly, a high level of its stock- holders’ equity to total assets ratio. KEY PERFORMANCE INDICATORS 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 2013 2012 2011 2010 2009 ¥3,731,380 ¥3,479,788 47.4% 8.5% 9.3% 57 days 0.1% 65.7% 48.2% 8.2% 9.0% 52 days 0.1% 68.6% ¥3,557,433 48.8% 8.7% 10.6% 46 days 0.3% 64.9% ¥3,706,901 48.1% 8.5% 10.5% 35 days 0.3% 66.4% ¥3,209,201 44.5% 9.5% 6.8% 39 days 0.3% 69.9% Note: Inventory turnover measured in days; Inventory divided by net sales for the previous six months, multiplied by 182.5. 36 Strategy Business Segment Corporate Structure FINANCIAL SECTION Corporate Data 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 provi- sions related to their functionality, is recognized when the equipment is installed at the customer site and the spe- cific criteria of the equipment functionality are success- fully tested and demonstrated by Canon. Service revenue is derived primarily from separately priced product mainte- nance contracts on equipment sold to customers and is mea- sured at the stated amount of the contract and recognized as services are provided. Canon also offers separately priced product mainte- nance contracts for most office products, for which the cus- tomer typically pays a stated base service fee plus a variable amount based on usage. Revenue from these service main- tenance contracts is measured at the stated amount of the contract and recognized as services are provided and vari- able 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, reve- nue is first allocated considering the relative fair value of the lease and non-lease deliverables based upon the estimated rel- ative fair values of each element. Lease deliverables generally include equipment, financing and executory costs, while non- lease deliverables generally consist of product maintenance contracts and supplies. For all other arrangements with multiple elements, Canon allocates revenue to each element based on its relative selling price if such element meets the criteria for treatment as a sep- arate 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. In 2011, the sales incentive program accrual were quite diffi- cult to estimate compared to prior years because of the sig- nificant fluctuation in consumer product supplies from our manufacturing facilities, due to the earthquake in Japan and the flooding in Thailand. Although Canon utilized available data to produce its best estimate of promotion payments to be claimed in 2012, actual claims in 2012 were not as high as Canon had estimated. Moreover, in recent years, as a result of the market conditions and customer preferences, usage of incentive programs has shifted from mail-in rebates to instant rebates. Accordingly, the historical data relating to mail-in- rebates could not be used to determine instant rebates. Given the limited experience with instant rebates, this led Canon to maintain its estimated accruals for a longer period of time. As 2012 progressed and new information became available, Canon reviewed the 2011 accrual balance in order to deter- mine whether the accrual needed to be revised during 2012. By using new additional statistical information and gathering sales and inventory data from customers. Canon was able to revise its estimates. Estimated product warranty costs are recorded at the time revenue is recognized and are included in selling, gen- eral and administrative expenses. Estimates for accrued prod- uct warranty costs are based on historical experience, and are affected by ongoing product failure rates, specific prod- uct class failures outside of the baseline experience, material usage and service delivery costs incurred in correcting a prod- uct 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 fac- tors 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 custom- er’s inability to meet its financial obligations to Canon, due FINANCIAL OVERVIEW 37 for example to bankruptcy filings or deterioration in the customer’s operating results or financial position. If circum- stances related to customers change, estimates of the recov- erability of receivables are further adjusted. Valuation of inventories Inventories are stated at the lower of cost or market value. Cost is determined by the average method for domestic inven- tories and principally the first-in, first-out method for over- seas 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 salabil- ity and for indications of obsolescence to determine if inven- tories should be written-down to market value. Judgments and estimates must be made and used in connection with establishing such allowances in any accounting period. In estimating the market value of its inventories, Canon consid- ers the age of the inventories and the likelihood of spoilage or changes in market demand for its inventories. Impairment of long-lived assets Long-lived assets, such as property, plant and equipment, and acquired intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the carrying amount of the asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized in the amount by which the carry- ing amount of the asset exceeds the fair value of the asset. Determining the fair value of the asset involves the use of esti- mates and assumptions. Property, plant and equipment Property, plant and equipment are stated at cost. Depreciation is calculated principally by the declining-balance method, except for certain assets which are depreciated by the straight- line method over the estimated useful lives of the assets. Goodwill and other intangible assets Goodwill and other intangible assets with indefinite useful lives are not amortized, but are instead tested for impairment annually in the fourth quarter of each year, or more frequently if indicators of potential impairment exist. Canon performs its impairment test of goodwill using the two-step approach at the reporting unit level, which is one level below the oper- ating segment level. All goodwill is assigned to the report- ing unit or units that benefit from the synergies arising from each business combination. If the carrying amount assigned to the reporting unit exceeds the fair value of the reporting unit, Canon performs the second step to measure an impair- ment charge in the amount by which the carrying amount of a reporting unit’s goodwill exceeds its implied fair value. Fair value of a reporting unit is determined primarily based on the discounted cash flow analysis which involves estimates of projected future cash flows and discount rates. Estimates of projected future cash flow are primarily based on Canon’s forecast of future growth rates. Estimates of discount rates are determined based on the weighted average cost of capital, which considers primarily market and industry data as well as specific risk factors. Intangible assets with finite useful lives consist primarily of software, license fees, patented technolo- gies and customer relationships. Software and license fees are amortized using the straight-line method over the estimated useful lives, which range from 3 years to 5 years for software and 5 years to 10 years for license fees. Patented technologies are amortized using the straight-line method principally over the estimated useful life of 3 years. Customer relationships are amortized principally using the declining-balance method over the estimated useful life of 5 years. Income tax uncertainties Canon considers many factors when evaluating and estimat- ing income tax uncertainties. These factors include an evalua- tion of the technical merits of the tax positions as well as the amounts and probabilities of the outcomes that could be real- ized upon settlement. The actual resolutions of those uncer- tainties 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 valuations. Inherent in these valuations are key assump- tions, including discount rates and expected return on plan assets. Management must consider current market condi- tions, including changes in interest rates, in selecting these assumptions. Other assumptions include assumed rate of increase in compensation levels, mortality rate, and with- drawal rate. Changes in assumptions inherent in the valu- ation are reasonably likely to occur from period to period. Actual results that differ from the assumptions are accumu- lated and amortized over future periods and, therefore, gen- erally affect future pension expenses. While management believes that the assumptions used are appropriate, the dif- ferences may affect employee retirement and severance ben- efit costs in the future. In preparing its financial statements for 2013, Canon esti- mated a weighted-average discount rate used to determine 38 Strategy Business Segment Corporate Structure FINANCIAL SECTION Corporate Data benefit obligations of 1.6% for Japanese plans and 3.8% for foreign plans and a weighted-average expected long-term rate of return on plan assets of 3.1% for Japanese plans and 5.2% for foreign plans. In estimating the discount rate, Canon uses available information about rates of return on high-quality fixed-income government and corporate bonds currently available and expected to be available during the period to the maturity of the pension benefits. Canon establishes the expected long-term rate of return on plan assets based on management’s expectations of the long- term return of the various plan asset categories in which it invests. Management develops expectations with respect to each plan asset category based on actual historical returns and its current expectations for future returns. Decreases in discount rates lead to increases in actuarial pension benefit obligations which, in turn, could lead to an increase in service cost and amortization cost through amor- tization of actuarial gain or loss, a decrease in interest cost, and vice versa. For 2013, a decrease of 50 basis points in the discount rate increases the projected benefit obligation by approximately ¥97,589 million (U.S.$929 million). The net effect of changes in the discount rate, as well as the net effect of other changes in actuarial assumptions and experience, is deferred until subsequent periods. Decreases in expected returns on plan assets may increase net periodic benefit cost by decreasing the expected return amounts, while differences between expected value and actual fair value of those assets could affect pension expense in the following years, and vice versa. For 2013, a change of 50 basis points in the expected long-term rate of return on plan assets would cause a change of approximately ¥4,713 million (U.S.$45 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 2013 ¥3,731,380 337,277 347,604 230,483 change +7.2% +4.1% +1.5% +2.6% 2012 change 2011 ¥3,479,788 323,856 342,557 224,564 -2.2% -14.3% -8.5% -9.7% ¥3,557,433 378,071 374,524 248,630 Thousands of U.S. dollars 2013 $35,536,952 3,212,162 3,310,514 2,195,076 Sales Canon’s consolidated net sales in 2013 totaled ¥3,731,380 mil- lion (U.S.$35,537 million), representing a 7.2% increase from the previous year. This was realized through steady demands for MFDs and laser printers, along with an increase in sales of inkjet printers as well as the positive effects of favorable cur- rency exchange rates, despite the decline in demand for digi- tal compact cameras and industrial equipment. Overseas operations are significant to Canon’s operating results and generated 80.8% of total net sales in 2013. Such sales are denominated in the applicable local currency and are subject to fluctuations in the value of the yen relative to those currencies. Despite efforts to reduce the impact of cur- rency fluctuations on operating results, including localiza- tion 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 signif- icant effect on its results of operations. The average value of the yen during the year was ¥97.84 against the U.S. dollar, a year-on-year depreciation of approx- imately ¥18, and ¥130.01 against the euro, a year-on-year depreciation of approximately ¥27. The effects of foreign exchange rate fluctuations positively affected net sales by approximately ¥514,000 million (U.S.$4,895 million) in 2013. This favorable impact consisted of approximately ¥257,000 million (U.S.$2,448 million) for the U.S. dollar denominated sales, ¥193,600 million (U.S.$1,844 million) for the euro denominated sales and ¥63,400 million (U.S.$604 million) for other foreign currency denominated sales. Return on Sales (%) 7.0 6.7 6.5 6.2 9 6 3 0 4.1 2009 2010 2011 2012 2013 FINANCIAL OVERVIEW 39 Cost of sales Cost of sales principally reflects the cost of raw materials, parts and labor used by Canon in the manufacture of its products. A portion of the raw materials used by Canon is imported or includes imported materials. Many of these raw materials are subject to fluctuations in world market prices accompanied by fluctuations in foreign exchange rates that may affect Canon’s cost of sales. Other components of cost of sales include depreciation expenses, maintenance expenses, light and fuel expenses, and rent expenses. The ratio of cost of sales to net sales for 2013 and 2012 was 51.8% and 52.6%, respectively. Income before income taxes Income before income taxes in 2013 was ¥347,604 million (U.S.$3,311 million), an increase of 1.5% from 2012, and con- stituted 9.3% of net sales. Income taxes Provision for income taxes in 2013 decreased by ¥2,024 mil- lion (U.S.$19 million) from 2012. The effective tax rate dur- ing 2013 remained consistent with 2012. The effective tax rate for 2013 was 31.1%, which was lower than the statutory tax rate in Japan. This was mainly due to the tax credit for R&D expenses. Gross profit Canon’s gross profit in 2013 increased by 9.0% to ¥1,798,421 million (U.S.$17,128 million) from 2012. The gross profit ratio also increased by 0.8 points year on year to 48.2%. The growth of gross profit ratio was achieved due to the cost reductions and production innovation along with the positive effects of the depreciation of the yen. Operating expenses The major components of operating expenses are payroll, R&D, advertising expenses and other marketing expenses. Despite group-wide efforts to thoroughly reduce spending, total operating expenses increased by 10.2% to ¥1,461,144 mil- lion (U.S.$13,916 million) in 2013 mainly due to the negative effect of depreciation of the yen. Operating profit Operating profit in 2013 increased 4.1% to a total of ¥337,277 million (U.S.$3,212 million) from 2012. The ratio of operating profit to net sales decreased 0.3% to 9.0% from 2012. Other income (deductions) Other income (deductions) for 2013 decreased ¥8,374 million (U.S.$80 million) to ¥10,327 million (U.S.$98 million), owing primarily to foreign currency exchange losses. Net income attributable to Canon Inc. As a result, net income attributable to Canon Inc. in 2013 increased by 2.6% to ¥230,483 million (U.S.$2,195 million), which represents 6.2% of net sales. Segment information Canon divides its businesses into three segments: the Office Business Unit, the Imaging System Business Unit and the Industry and Others Business Unit. (cid:129)The Office Business Unit mainly includes Office multifunc- tion devices (MFDs) / Laser multifunction printers (MFPs) / Laser printers / Digital production printing systems / High speed continuous feed printers / Wide-format printers / Document solutions (cid:129)The Imaging System Business Unit mainly includes Interchangeable lens digital cameras / Digital compact cameras / Digital camcorders / Digital cinema cameras / Interchangeable lenses / Inkjet printers / Large-format ink- jet printers / Commercial photo printers / Image scanners / Multimedia projectors / Broadcast equipment / Calculators (cid:129)The Industry and Others Business Unit mainly includes Semiconductor lithography equipment / Flat panel display (FPD) lithography equipment / Digital radiography systems / Ophthalmic equipment / Vacuum thin-film deposition equip- ment / Organic LED (OLED) panel manufacturing equipment / Die bonders / Micromotors / Network cameras / Handy termi- nals / Document scanners Sales by Segment (Millions of yen) Sales by Geographic Area (Millions of yen) 3,731,380 3,706,901 3,479,788 3,557,433 3,209,201 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 3,706,901 3,731,380 3,557,433 3,479,788 3,209,201 2009 2010 2011 2012 2013 2009 2010 2011 2012 2013 Japan Americas Europe Asia and Oceania 40 Strategy Business Segment Corporate Structure FINANCIAL SECTION Corporate Data Sales by segment Please refer to the table of sales by segment in Note 21 of the Notes to Consolidated Financial Statements. Canon’s sales by segment are summarized as follows: SALES BY SEGMENT Office Imaging System Industry and Others Eliminations Total 2013 ¥2,000,073 1,448,938 374,870 (92,501) ¥3,731,380 change +13.8% +3.1% -8.1% — +7.2% Millions of yen 2012 change 2011 ¥1,757,575 1,405,971 407,840 (91,598) ¥3,479,788 -8.4% +7.2% -3.1% — -2.2% ¥1,917,943 1,312,044 420,863 (93,417) ¥3,557,433 Thousands of U.S. dollars 2013 $19,048,314 13,799,410 3,570,190 (880,962) $35,536,952 Within the Office Business Unit, as for office MFDs, sales of color models increased from 2012 led by the imageRUNNER ADVANCE C5200/C2200 series. Results for high speed contin- uous feed printers and wide-format printers, sales of the Océ ColorStream 3000 series showed solid growth. With regard to laser printers, laser multifunction models recorded strong growth contributing to a year-on-year increase in sales vol- ume. As a result, sales for the business unit totaled ¥2,000.1 billion (U.S.$19,048 million) in 2013, an increase of 13.8% year on year, while operating profit totaled ¥266.9 billion (U.S.$2,542 million), increasing 31.1%. Within the Imaging System Business Unit, interchangeable- lens digital cameras maintained their top market share despite the challenging environment, which was marked by a drop in demand in Europe and China due to the economic down- turn, although demand in Japan continued to expand. In par- ticular, the EOS 5D Mark III and 70D advanced-amateur-model digital SLR cameras continued to realize healthy growth. Furthermore, in Japan, the new entry-level EOS Digital Rebel SL1 and T5i cameras proved popular. As for digital compact cameras, although total sales volume declined due to the mar- ket slowdown and the increasing popularity of smartphones, sales volume increased from 2012 for high-added-value mod- els incorporating features that differentiate them from smart- phones, such as large-size image sensors and models like the PowerShot SX50 HS and SX510 HS, which feature high- magnification zoom lenses. With regard to inkjet printers, despite the harsh market environment due to the rapid fall in demand in emerging markets, sales volume showed solid growth thanks to efforts to boost sales through the introduc- tion of new products offering enhanced support for cloud services. As a result, sales for the business unit increased by 3.1% to ¥1,448.9 billion (U.S.$13,799 million) in 2013, while operating profit totaled ¥203.8 billion (U.S.$1,941 million), a decrease of 3.1%. In the Industry and Others Business Unit, within semiconduc- tor lithography equipment, despite an increase in sales volume for memory devices in the latter half of the year 2013 fueled by renewed investment in capital expenditure by memory manufacturers, sales volumes for the year decreased slightly owing to restrained capital expenditure in the first half. As for FPD lithography equipment, sales volume remained the same as for the previous year amid the recovery in investment for large-size panels. With respect to medical equipment, sales vol- ume for Canon’s mainstay digital radiography systems steadily increased. Consequently, sales for the business unit totaled ¥374.9 billion (U.S.$3,570 million) in 2013, a decrease of 8.1% year on year, while operating profit recorded a loss of ¥25.3 bil- lion (U.S.$241 million), declining by ¥31.2 billion (U.S.$298 mil- lion) from 2012. Intersegment sales of ¥92,501 million (U.S.$880,962 million), representing 2.4% of total sales, are eliminated from total sales for the three segments, and are described as “Eliminations.” Sales by geographic area Please refer to the table of sales by geographic area in Note 21 of the Notes to Consolidated Financial Statements. A geographical analysis indicates that net sales in 2013 increased in all areas except Japan. In Japan, sales slightly decreased in 2013 due to the slow- down in the Industry and Others Business, although the interchangeable-lens digital cameras continued to expand. In the Americas, despite the decline in sales of digital com- pact cameras from the previous year due to the significant slowdown in the market, increased sales of inkjet printers including consumable supplies, along with the depreciation of the yen against the U.S. dollar, caused sales to increase by 12.7% in 2013. In Europe, although sales of interchangeable lens digital cameras declined due to shifting to low-end models as well as declining sales of digital compact cameras owing to shrinking market, amid increasing uncertainty in European economy sales of inkjet printers and MFDs showed steady sales growth. As a result, along with the effect of depreciation of the yen, sales increased by 10.9% in 2013. In Asia and Oceania, sales of interchangeable lens digital cameras, which have been an engine for solid growth in Asia and Oceania, showed a slowdown in growth. In addition sales of digital compact cameras and laser printers faced harsh con- ditions. Inkjet printers including consumable supplies, on the other hand, showed steady sales growth. Reflecting these factors and the effect of depreciation of the yen, net sales increased by 3.2% in 2013. FINANCIAL OVERVIEW 41 A summary of net sales by geographic area is provided below. SALES BY REGION Japan Americas Europe Asia and Oceania Total 2013 ¥ 715,863 1,059,501 1,124,929 831,087 ¥ 3,731,380 change -0.6% +12.7% +10.9% +3.2% +7.2% Millions of yen 2012 change 2011 ¥ 720,286 939,873 1,014,038 805,591 ¥3,479,788 +3.7% -2.3% -8.9% +2.2% -2.2% ¥ 694,450 961,955 1,113,065 787,963 ¥ 3,557,433 Thousands of U.S. dollars 2013 $ 6,817,743 10,090,486 10,713,609 7,915,114 $35,536,952 Note: This summary of net sales by geographic area is determined by the location where the product is shipped to the customers. Operating profit by segment Please refer to the table of segment information in Note 21 of the Notes to Consolidated Financial Statements. Operating profit for the Office Business Unit in 2013 increased by ¥63,330 million (U.S.$603 million) to ¥266,908 million (U.S.$2,542 million). This increase resulted from the sales increase. Operating profit for the Imaging System Business Unit in 2013 decreased by ¥6,524 million (U.S.$62 million) to ¥203,794 million (U.S.$1,941 million). This decrease resulted primarily from the increase in expense due to depreciation of the yen. Operating profit for the Industry and Others Business Unit in 2013 declined by ¥31,241 million (U.S.$298 million), largely owing to the decrease in sales. FOREIGN OPERATIONS AND FOREIGN CURRENCY TRANSACTIONS Canon’s marketing activities are performed by subsidiaries in various regions in local currencies, while the cost of sales is generally in yen. Given Canon’s current operating structure, appreciation of the yen has a negative impact on net sales and the gross profit ratio. To reduce the financial risks from changes in foreign exchange rates, Canon utilizes derivative financial instruments, which consist principally of forward currency exchange contracts. The operating profit on foreign operation sales is usually lower than that from domestic operations because foreign operations consist mainly of marketing activities. Marketing activities are generally less profitable than production activ- ities, which are mainly conducted by the Company and its domestic subsidiaries. Please refer to the table of geo- graphic information in Note 21 of the Notes to Consolidated Financial Statements. LIQUIDITY AND CAPITAL RESOURCES C a s h a n d c a s h e qu i v a l e n t s i n 2 013 i n c r e a s e d by ¥122,231 million (U.S.$1,164 million) to ¥788,909 million (U.S.$7,513 million), compared with ¥666,678 million in 2012 and ¥773,227 million in 2011. Canon’s cash and cash equivalents are typically denominated both in Japanese yen and in U.S. dollars, with the remainder denominated in foreign currencies. Net cash provided by operating activities in 2013 increased by ¥123,565 million (U.S.$1,177 million) from the previous year to ¥507,642 million (U.S.$4,835 million). Cash flow from operating activities consisted of the following key compo- nents: the major component of Canon’s cash inflow is cash received from customers, and the major components of Canon’s cash outflow are payments for parts and materials, selling, general and administrative expenses, R&D expenses and income taxes. For 2013, cash inflow from cash received from customers increased due to the increase in sales. There were no signif- icant changes in Canon’s collection rates. Cash outflow for payments for parts and materials decreased, as a result of our efforts to decrease inventory. Cash outflow for payments for selling, general and administrative expenses increased due to the impact of Japanese Yen on operating expenses denom- inated in foreign currencies. On the other hand, operation expenses in local currency base declined due to cost reduc- tion activities of group companies. Cash outflow for income taxes increased due to the increase in taxable income. Net cash used in investing activities in 2013 was ¥250,212 million (U.S.$2,383 million), increasing by ¥37,472 million (U.S.$357 million) from ¥212,740 million in 2012, due to the increasing amount of time deposits included in short-term investments. Purchases of fixed assets were focused on items relevant to new products. Canon defines “free cash flow” by deducting cash flows from investing activities from cash flows from operating activities. For 2013, free cash flow totaled ¥257,430 million (U.S.$2,452 million) as compared with ¥171,337 million for 2012. Canon’s management recognizes that constant and intensive investment in facilities and R&D is required to maintain and strengthen the competitiveness of its prod- ucts. Canon’s management seeks to meet its capital require- ments with cash flow principally earned from its operations. Therefore, its capital resources are primarily sourced from internally generated funds. Accordingly, Canon has included information with regard to free cash flow, as its management frequently monitors this indicator, and believes that such indicator is beneficial to 42 Strategy Business Segment Corporate Structure FINANCIAL SECTION Corporate Data the understanding of investors. Furthermore, Canon’s man- agement believes that this indicator is significant in under- standing Canon’s current liquidity and the alternatives uses in financing activities because it takes into consideration its operating and investing activities. Canon refers to this indi- cator together with relevant U.S. GAAP financial measures shown in its consolidated statements of cash flows and con- solidated balance sheets for cash availability analysis. Net cash used in financing activities totaled ¥222,181 million (U.S.$2,116 million) in 2013, mainly resulting from repurchase of treasury stock of ¥50,007 million (U.S.$476 million), and dividends of ¥155,627 million (U.S.$1,482 million). The Company paid dividends in 2013 of ¥135.00 per share. To the extent Canon relies on external funding for its liquidity and capital requirements, it generally has access to various funding sources, including the issuance of additional share capital, long-term debt or short-term loans. While Canon has been able to obtain funding from its traditional financing sources and from the capital markets, and believes it will con- tinue to be able to do so in the future, there can be no assur- ance 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 ¥1,299 million (U.S.$12 mil- lion) at December 31, 2013 compared with ¥1,866 million at December 31, 2012. Long-term debt (excluding the cur- rent portion) amounted to ¥1,448 million (U.S.$14 mil- lion) at December 31, 2013 compared with ¥2,117 million at December 31, 2012. Canon’s long-term debt mainly consists of lease obligations. In order to facilitate access to global capital markets, Canon obtains credit ratings from two rating agencies: Moody’s Investors Services, Inc. (“Moody’s”) and Standard and Poor’s Ratings Services (“S&P”). In addition, Canon maintains a rating from Rating and Investment Information, Inc. (“R&I”), a rating agency in Japan, for access to the Japanese capital market. As of March 14, 2014, Canon’s debt ratings are: Moody’s: Aa1 (long-term); S&P: AA (long-term), A-1+ (short-term); and R&I: AA+ (long-term). Canon does not have any rating down- grade triggers that would accelerate the maturity of a mate- rial amount of its debt. A downgrade in Canon’s credit ratings or outlook could, however, increase the cost of its borrowings. Following the natural disasters which occurred in 2011, Canon determined that its concerted focus on decreasing levels of total inventory, even for competitive and strong- selling products, had resulted in shortages of finished goods, adversely affecting its ability to capitalize on selling opportunities. As a consequence, Canon re-evaluated its pri- orities for targeting levels of finished goods inventory, and decided on a new management policy to increase levels of finished goods inventories at sales locations as a buffer in order to increase its resilience in response to unexpected natural or man-made disasters and consequent production line stoppages. Canon’s initiative in recent periods to opti- mize inventory levels is intended to maintain an appropriate balance among relevant imperatives, including minimiz- ing working capital, avoiding undue exposure to the risk of inventory obsolescence, and maintaining the ability to sus- tain sales despite the occurrence of unexpected disasters. Ref lecting the foregoing circumstances, Canon’s total inventory turnover ratios were 52, 57, and 46 days at the end of the years 2013, 2012, and 2011, respectively and the increases over the last three years are in line with Canon’s expectations and its revised inventory management policy. Increase in property, plant and equipment on an accrual basis in 2013 amounted to ¥188,826 million (U.S.$1,798 mil- lion) compared with ¥270,457 million in 2012 and ¥226,869 million in 2011. For 2014, Canon projects its increase in prop- erty, plant and equipment will be approximately ¥210,000 million (U.S.$2,000 million). Employer contributions to Canon’s worldwide defined ben- efit pension plans were ¥48,515 million (U.S.$462 million) in 2013, ¥30,421 million in 2012, and ¥30,510 million in 2011. In addition, employer contributions to Canon’s world- wide defined contribution pension plans were ¥14,383 mil- lion (U.S.$137 million) in 2013, ¥13,021 million in 2012, and ¥12,511 million in 2011. Increase in Property, Plant and Equipment (Millions of yen) 270,457 216,128 226,869 188,826 158,976 300,000 200,000 100,000 0 3.0 2.5 2.0 1.5 1.0 0.5 0 Working Capital Ratio Return on Canon Inc. Stockholders’ Equity (%) 2.57 2.41 2.47 2.69 2.38 9.6 9.2 8.7 8.4 12 9 6 3 0 4.9 2009 2010 2011 2012 2013 2009 2010 2011 2012 2013 2009 2010 2011 2012 2013 FINANCIAL OVERVIEW 43 Working capital in 2013 increased by ¥199,814 million (U.S.$1,903 million), to ¥1,437,635 million (U.S.$13,692 million), compared with ¥1,237,821 million in 2012 and ¥1,259,457 million in 2011. Canon believes its working capi- tal will be sufficient for its requirements for the foreseeable future. Canon’s capital requirements are primarily depen- dent on management’s business plans regarding the levels and timing of purchases of fixed assets and investments. The working capital ratio (ratio of current assets to current liabil- ities) for 2013 was 2.69 compared to 2.47 for 2012 and to 2.41 for 2011. Return on assets (net income attributable to Canon Inc. divided by the average of total assets) was 5.6% in 2013, com- pared to 5.7% in 2012 and 6.3% in 2011. Return on Canon Inc. stockholders’ equity (net income attributable to Canon Inc. divided by the average of total Canon Inc. stockholders’ equity) was 8.4% in 2013 compared with 8.7% in 2012 and 9.6% in 2011. The debt to total assets ratio was 0.1%, 0.1% and 0.3% as of December 31, 2013, 2012 and 2011, respectively. Canon had short-term loans and long-term debt of ¥2,747 million (U.S.$26 million) as of December 31, 2013, ¥3,983 million as of December 31, 2012 and ¥11,711 million as of December 31, 2011. 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- balance sheet arrangements or other contractually narrow or limited purposes. Canon provides guarantees for bank loans of its employ- ees, affiliates and other companies. Canon will 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 1 year to 10 years in the case of affiliates and other companies. The maximum amount of undiscounted payments Canon would have had to make in the event of default by all borrowers was ¥12,315 million (U.S.$117 million) at December 31, 2013. The carrying amounts of the lia- bilities recognized for Canon’s obligations as a guarantor under those guarantees at December 31, 2013 were insignificant. CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS The following summarizes Canon’s contractual obligations at December 31, 2013. Contribution to defined benefit pension plans Total 20,649 ¥ 219,538 20,649 ¥150,549 Note: The table does not include provisions for uncertain tax positions and related accrued interest and penalties, as the specific timing of future payments related to these obligations cannot be projected with reasonable certainty. See Note 12, Income Taxes in the Notes to Consolidated Financial Statements for further details. Contribution to defined benefit pension plans reflects the expected amount only for the next fiscal year, since contributions beyond the next fiscal year are not currently determinable due to uncertainties related to changes in actuarial assumptions, returns on plan assets and changes to plan membership. 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: 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 ¥ 2,482 211 96,064 26,218 73,914 ¥ 1,213 32 28,523 ¥ 1,098 101 37,915 ¥ 171 48 16,446 ¥ — 30 13,180 26,218 73,914 — — — — — — — — — ¥39,114 ¥16,665 ¥13,210 Total Less than 1 year 1-3 years 3-5 years More than 5 years Payments due by period $ 23,637 2,010 914,895 $ 11,552 305 271,648 $ 10,457 962 361,096 $ 1,628 458 156,628 $ — 285 125,523 249,695 703,943 249,695 703,943 — — — — — — — — — $ 372,515 $ 158,714 $ 125,808 Contribution to defined benefit pension plans Total 196,657 $2,090,837 196,657 $1,433,800 44 Strategy Business Segment Corporate Structure FINANCIAL SECTION Corporate Data Canon provides warranties of generally less than one year against defects in materials and workmanship on most of its consumer products. Estimated product warranty related costs are established at the time revenue are recognized and are included in selling, general and administrative expenses. Estimates for accrued product warranty costs are primarily based on historical experience, and are affected by ongoing product failure rates, specific product class failures outside of the baseline experience, material usage and service delivery costs incurred in correcting a product failure. As of December 31, 2013, accrued product warranty costs amounted to ¥10,890 million (U.S.$104 million). At December 31, 2013, commitments outstanding for the purchase of property, plant and equipment were approxi- mately ¥26,218 million (U.S.$250 million), and commitments outstanding for the purchase of parts and raw materials were approximately ¥73,914 million (U.S.$704 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 2014, Canon expects to contribute ¥13,589 mil- lion (U.S.$129 million) to its Japanese defined benefit pen- sion plans and ¥7,060 million (U.S.$67 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 2013 marks the third year of the Excellent Global Corporation Plan, its 5-year (2011-2015) management plan. The slogan of the fourth phase (“Phase IV”) is “Aiming for the Summit—Speed & Sound Growth” and there are three core strategies related to R&D: (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 is pursuing collaboration among the government, industry and academia, and has strengthened relationships with universities and other research institutes worldwide, such as Kyoto University, Tokyo Institute of Technology, Osaka University, Stanford University, the University of Arizona, and the New Energy and Industrial Technology Development Organization to assist with fundamental research and to develop cutting-edge technologies. Additionally, Canon is currently working on a collaborative research with Massachusetts General Hospital (MGH) and Brigham and Women’s Hospital (BWH) to develop biomedical optical imag- ing and medical robotics technologies at the Healthcare Optics Research Laboratory in Cambridge, Massachusetts, founded in June of 2013. Canon has fully introduced 3D-CAD systems across the Canon Group, boosting R&D efficiency to curtail product development times and costs. Moreover, Canon enhanced and evolved its simulation, measurement, and analysis 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 ¥306,324 mil- lion (U.S.$2,917 million) in 2013, ¥296,464 million in 2012 and ¥307,800 million in 2011. The ratios of R&D expenses to the consolidated total net sales for 2013, 2012 and 2011 were 8.2%, 8.5% and 8.7%, respectively. Canon believes that new products protected by patents will not easily allow competitors to compete with them, and will give them an advantage in establishing standards in the market and industry. Canon obtained the third greatest number of private sec- tor patents in 2013, according to the United States patent annual list, released by IFI CLAIMS® Patent Services. R&D Expenses (Millions of yen) 400,000 300,000 304,600 315,817 307,800 306,324 296,464 200,000 100,000 0 2009 2010 2011 2012 2013 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 mar- ketable 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, 2013. Available-for-sale securities Debt securities Due within one year Due after one year through five years Due after five years Fund trusts Equity securities Millions of yen Thousands of U.S. dollars Cost Fair value Cost Fair value ¥ — 10 819 68 18,112 ¥19,009 ¥ — 10 778 68 34,536 ¥35,392 $ — 95 7,800 648 172,495 $ 181,038 $ — 95 7,409 648 328,915 $ 337,067 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, 2013. All of the foreign exchange contracts described in the following table have a contractual maturity date in 2014. 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 ¥198,039 (7,299) ¥147,729 (6,795) ¥28,931 (598) ¥374,699 (14,692) ¥ 40,844 (27) ¥ 3,882 28 ¥ — — ¥ 44,726 1 U.S.$ Euro Others Total $1,886,086 (69,514) $1,406,943 (64,714) $275,533 (5,696) $3,568,562 (139,924) $ 388,991 (257) $ 36,971 267 $ — — $ 425,962 10 46 Strategy Business Segment Corporate Structure FINANCIAL SECTION Corporate Data All of Canon’s long-term debt is fixed rate debt. Canon expects that fair value changes and cash f lows resulting from reasonable near-term changes in interest rates will be immaterial. Accordingly, Canon believes interest rate risk is insignificant. See also Note 9 of the Notes to Consolidated Financial Statements. Changes in the fair value of derivative financial instru- ments designated as cash f low hedges, including foreign currency exchange contracts associated with forecasted intercompany sales, are reported in accumulated other comprehensive income (loss). These amounts are subse- quently reclassified into earnings through other income (deductions) in the same period as the hedged items affect earnings. Substantially all such amounts recorded in accu- mulated other comprehensive 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 effectiveness. Changes in the fair value of a foreign currency 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. The amount of the hedging ineffectiveness was not mate- rial for the years ended December 31, 2013, 2012 and 2011. The amounts of net losses excluded from the assessment of hedge effectiveness (time value component) which was recorded in other income (deductions) was ¥111 million (U.S.$1 million), ¥221 million and ¥457 million for the years ended December 31, 2013, 2012 and 2011, 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 As for the outlook in 2014, there are signs of brightness among developed countries with steady economic growth in the U.S. and Japan, and the European economy expected to realize a turnaround toward recovery. Although uncertain- ties remain in emerging countries such as China, since they are expected to maintain their course of moderate expansion, the global economy, having bottomed out in 2013, is also expected to realize a moderate recovery. The year 2014 represents the fourth year of Phase IV (2011– 2015) of the Excellent Global Corporation Plan. The Canon Group will work in unity, taking steps to realize sound busi- ness growth and overcome challenges to firmly return to a path of growth. In order to achieve its targets, Canon will implement var- ious measures under a basic policy of carrying out further reforms in order to return to the growth track. (cid:129) Bolstering Strengths of Existing Core Businesses by Creating Outstanding Hit Products Canon aims to improve its market share for existing core businesses, developing appealing products that outper- form the competition, not only in terms of basic per- formance, but also cost and usability. At the same time, Canon will strengthen the development of businesses derived from existing core businesses. (cid:129) Securely Launch and Steadily Expand New Businesses Canon will work to accelerate the business expansion of network camera systems for which significant growth is expected. The Company will also focus on strengthen- ing its business foundation for 4K reference displays and mixed-reality systems, while also concentrating on the commercialization of Super Machine Vision. In the medi- cal field, Canon aims to realize the early launch of DNA diagnostic systems. (cid:129) Holistically Developing Global Sales Forces In emerging markets, Canon will work to expand sales networks and enhance product lineups in accordance with conditions in each country. In developed countries, in addition to boosting the Company’s ability to respond to Internet-based and other direct-order sales, Canon will strengthen its response to the centralized purchasing practices used by global corporations when procuring office products. (cid:129) Optimizing the Global Production System Based on such factors as changes in local conditions in each country, Canon will work to realize the optimized global allocation of its production assets. The Company will also work to maintain or expand its production in Japan through automation, while also accelerating local- ized production of mainly consumables in the Americas and Europe through automated production systems. FINANCIAL OVERVIEW 47 (cid:129) Exploring a New Dimension of Cost Reductions Canon will strive to further accelerate procurement reforms as well as expand in-house production and promote automation. Additionally, the Company will work to significantly reduce product development times and achieve cost savings, promoting prototype-less pro- duction through the utilization of its super computer. Furthermore, it will move forward with the fundamen- tal reform of manufacturing through the utilization of 3D printers. In addition to the above, in order to return to a path of growth in the face of the dramatically changing business environment, Canon will select and concentrate on techno- logical themes that will open the way to the future, further enhance product quality management, effectively make use of the Company’s workforce, and carry out reforms such as thoroughly strengthening information security. 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 currency exchange rate fluctuations; the uncertainty of Canon’s abil- ity to implement its plans to localize production and other measures to reduce the impact of foreign currency exchange rate fluctuations; uncertainty as to economic conditions 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 products that incorporate new technology on a timely basis, are competi- tively priced, and achieve market acceptance; the possibil- ity 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. 48 Strategy Business Segment Corporate Structure FINANCIAL SECTION Corporate Data TEN-YEAR FINANCIAL SUMMARY 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) 2013 2012 2011 2010 ¥ 715,863 3,015,517 3,731,380 107.2% ¥ 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% 230,483 6.2% 86,398 306,324 223,158 188,826 224,564 6.5% 248,630 7.0% 246,603 6.7% 83,134 296,464 211,973 270,457 81,232 307,800 210,179 226,869 94,794 315,817 232,327 158,976 ¥ 1,448 2,910,262 4,242,710 ¥ 2,117 2,598,026 3,955,503 ¥ 3,368 2,551,132 3,930,727 ¥ 4,131 2,645,782 3,983,820 ¥ ¥ 200.78 200.78 130.00 4,115 2,913 191.34 191.34 130.00 4,015 2,308 ¥ 204.49 204.48 120.00 4,280 3,220 ¥ 199.71 199.70 120.00 4,520 3,205 Average number of common shares in thousands Number of employees 1,147,934 194,151 1,173,648 196,968 1,215,832 198,307 1,234,817 197,386 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 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 TEN-YEAR FINANCIAL SUMMARY 49 2009 2008 2007 2006 2005 2004 ¥ 702,344 2,506,857 3,209,201 78.4% ¥ 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% ¥ 856,205 2,897,986 3,754,191 108.3% ¥ 849,734 2,618,119 3,467,853 108.4% 131,647 4.1% 309,148 7.6% 488,332 10.9% 455,325 11.0% 384,096 10.2% 343,344 9.9% 78,009 304,600 277,399 216,128 112,810 374,025 304,622 361,988 132,429 368,261 309,815 428,549 116,809 308,307 235,804 379,657 106,250 286,476 205,727 383,784 111,770 275,300 174,397 318,730 Thousands of U.S. dollars (except per share amounts) 2013 $ 6,817,743 28,719,209 35,536,952 107.2% 2,195,076 6.2% 822,838 2,917,371 2,125,314 1,798,343 ¥ 4,912 2,688,109 3,847,557 ¥ 8,423 2,659,792 3,969,934 ¥ 8,680 2,922,336 4,512,625 ¥ 15,789 2,986,606 4,521,915 ¥ 27,082 2,604,682 4,043,553 ¥ 28,651 2,209,896 3,587,021 $ 13,790 27,716,781 40,406,762 ¥ 106.64 106.64 110.00 4,070 2,115 ¥ 246.21 246.20 110.00 5,820 2,215 ¥ 377.59 377.53 110.00 7,450 5,190 ¥ 341.95 341.84 83.33 6,780 4,567 ¥ 288.63 288.36 66.67 4,780 3,460 ¥ 258.53 257.85 43.33 3,880 3,273 $ 1.91 1.91 1.24 39.19 27.74 1,234,482 168,879 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 Notes: 1. U.S. dollar amounts are translated from yen at the rate of U.S.$1 = JPY105, the approximate exchange rate on the Tokyo Foreign Exchange Market as of December 30, 2013. 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. 50 Strategy Business Segment Corporate Structure FINANCIAL SECTION Corporate Data CONSOLIDATED BALANCE SHEETS Canon Inc. and Subsidiaries December 31, 2013 and 2012 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, 12 and 17) Total current assets Noncurrent receivables (Note 18) Investments (Note 3) Property, plant and equipment, net (Notes 6 and 7) Intangible assets, net (Note 8) Other assets (Notes 7, 8, 11 and 12) Total assets LIABILITIES AND EQUITY Current liabilities: Short-term loans and current portion of long-term debt (Note 9) Trade payables (Note 10) Accrued income taxes (Note 12) Accrued expenses (Notes 11 and 18) Other current liabilities (Notes 6, 12 and 17) Total current liabilities Long-term debt, excluding current installments (Note 9) Accrued pension and severance cost (Note 11) Other noncurrent liabilities (Note 12) Total liabilities Commitments and contingent liabilities (Note 18) Equity: Canon Inc. stockholders’ equity: Common stock Authorized 3,000,000,000 shares; issued 1,333,763,464 shares in 2013 and 2012 Additional paid-in capital Legal reserve (Note 13) Retained earnings (Note 13) Accumulated other comprehensive income (loss) (Note 14) Treasury stock, at cost; 196,764,060 shares in 2013 and 180,972,173 shares in 2012 Total Canon Inc. stockholders’ equity Noncontrolling interests Total equity Total liabilities and equity See accompanying Notes to Consolidated Financial Statements. Millions of yen 2013 2012 Thousands of U.S. dollars (Note 2) 2013 ¥ 788,909 47,914 608,741 553,773 286,605 2,285,942 19,276 70,358 1,278,730 145,075 443,329 ¥ 4,242,710 ¥ 1,299 307,157 53,196 315,536 171,119 848,307 1,448 229,664 96,514 1,175,933 ¥ 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 1,201,201 174,762 402,029 63,091 3,212,692 (80,646) (861,666) 2,910,262 156,515 3,066,777 ¥ 4,242,710 174,762 401,547 61,663 3,138,976 (367,249) (811,673) 2,598,026 156,276 2,754,302 ¥ 3,955,503 $ 7,513,419 456,324 5,797,533 5,274,029 2,729,571 21,770,876 183,581 670,076 12,178,381 1,381,667 4,222,181 $ 40,406,762 12,371 $ 2,925,305 506,629 3,005,105 1,629,704 8,079,114 13,790 2,187,276 919,182 11,199,362 1,664,400 3,828,848 600,867 30,597,067 (768,057) (8,206,344) 27,716,781 1,490,619 29,207,400 $ 40,406,762 CONSOLIDATED BALANCE SHEETS / CONSOLIDATED STATEMENTS OF INCOME / CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 51 CONSOLIDATED STATEMENTS OF INCOME Canon Inc. and Subsidiaries Years ended December 31, 2013, 2012 and 2011 Millions of yen Net sales Cost of sales (Notes 6, 8, 11 and 18) Gross profit Operating expenses (Notes 1, 6, 8, 11, 15 and 18): 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, 17 and 20) Income before income taxes Income taxes (Note 12) Consolidated net income Less: Net income attributable to noncontrolling interests Net income attributable to Canon Inc. Net income attributable to Canon Inc. stockholders per share (Note 16): Basic Diluted Cash dividends per share See accompanying Notes to Consolidated Financial Statements. 2013 2012 ¥ 3,731,380 ¥ 3,479,788 ¥ 3,557,433 1,820,670 1,736,763 1,932,959 1,798,421 1,829,822 1,649,966 2011 1,154,820 306,324 1,461,144 337,277 1,029,646 296,464 1,326,110 323,856 1,050,892 307,800 1,358,692 378,071 6,579 (550) 4,298 10,327 347,604 108,088 239,516 6,792 (1,022) 12,931 18,701 342,557 8,432 (988) (10,991) (3,547) 374,524 110,112 232,445 120,415 254,109 9,033 5,479 ¥ 230,483 ¥ 224,564 ¥ 248,630 7,881 Thousands of U.S. dollars (Note 2) 2013 $ 35,536,952 18,409,133 17,127,819 10,998,286 2,917,371 13,915,657 3,212,162 62,657 (5,238) 40,933 98,352 3,310,514 1,029,409 2,281,105 86,029 $ 2,195,076 Yen U.S. dollars (Note 2) ¥ 200.78 ¥ 200.78 130.00 191.34 ¥ 204.49 204.48 191.34 120.00 130.00 $ 1.91 1.91 1.24 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Canon Inc. and Subsidiaries Years ended December 31, 2013, 2012 and 2011 Consolidated net income Other comprehensive income (loss), net of tax (Note 14): Foreign currency translation adjustments Net unrealized gains and losses on securities Net gains and losses on derivative instruments Pension liability adjustments Comprehensive income Less: Comprehensive income attributable to noncontrolling interests Comprehensive income attributable to Canon Inc. See accompanying Notes to Consolidated Financial Statements. Millions of yen 2012 2011 ¥ 232,445 ¥ 254,109 Thousands of U.S. dollars (Note 2) 2013 $ 2,281,105 133,735 3,265 (4,880) (12,787) 119,333 351,778 (54,086) (2,116) (449) (38,377) (95,028) 159,081 10,824 ¥ 340,954 1,765 ¥ 157,316 2,395,962 62,971 19,581 311,133 2,789,647 5,070,752 139,885 $ 4,930,867 2013 ¥ 239,516 251,576 6,612 2,056 32,669 292,913 532,429 14,688 ¥ 517,741 52 Strategy Business Segment Corporate Structure FINANCIAL SECTION Corporate Data CONSOLIDATED STATEMENTS OF EQUITY Canon Inc. and Subsidiaries Millions of yen 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 14): 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 14): 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 Equity transactions with noncontrolling interests and other Dividends to Canon Inc. stockholders Dividends to noncontrolling interests Transfer to legal reserve Comprehensive income: Net income Other comprehensive income, net of tax (Note 14): 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, 2013 Accumulated other comprehensive Legal income (loss) reserve ¥ 174,762 ¥ 400,425 ¥ 57,930 ¥ 2,965,237 ¥ (390,459) Additional paid-in capital Common stock Retained earnings Treasury stock ¥ (562,113) Total Canon Inc. stockholders’ equity Noncontrolling interests ¥ 2,645,782 ¥ 163,855 ¥ 2,809,637 Total equity 1,193 (609) (152,784) 1,074 (1,074) 584 (247) (152,784) (2,838) — 337 (152,784) (2,838) — 248,630 248,630 5,479 254,109 (53,251) (2,017) (462) (35,584) (46) (102) 174,762 401,572 59,004 3,059,298 (481,773) (99,618) (661,731) (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 (449) (38,377) 159,081 (99,766) 162,535 2,713,667 (16) 152 (1,866) (1,730) (13,591) (142,362) 2,659 (2,659) (142,362) — (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) (9) (17) (149,942) 3,148 117 3,265 (4,882) (14,580) 340,954 (149,968) 2 1,793 10,824 (4,880) (12,787) 351,778 (149,968) 156,276 2,754,302 174,762 401,547 61,663 3,138,976 (367,249) (811,673) 2,598,026 489 295 (655) 129 (11,182) (155,627) 1,428 (1,428) (155,627) — (3,267) (11,053) (155,627) (3,267) — 230,483 230,483 9,033 239,516 249,791 249,791 1,785 251,576 6,097 2,056 29,314 ¥ 174,762 ¥ 402,029 ¥ 63,091 ¥ 3,212,692 ¥ (80,646) (7) (7) 6,097 515 6,612 2,056 32,669 532,429 (50,007) ¥ (861,666) ¥ 2,910,262 ¥ 156,515 ¥ 3,066,777 2,056 29,314 517,741 (50,007) — 3,355 14,688 (49,993) CONSOLIDATED STATEMENTS OF EQUITY 53 Thousands of U.S. dollars (Note 2) Accumulated other comprehensive income (loss) $ 1,664,400 $ 3,824,257 $ 587,267 $ 29,895,010 $ (3,497,610) $ (7,730,219) $ 24,743,105 $ 1,488,343 $ 26,231,448 Total Canon Inc. stockholders’ equity Additional paid-in capital Noncontrolling interests Common stock Treasury stock Retained earnings Legal reserve Total equity 4,657 2,809 (6,238) 1,228 (106,495) (1,482,162) 13,600 (13,600) (1,482,162) — (31,114) (105,267) (1,482,162) (31,114) — 2,195,076 2,195,076 86,029 2,281,105 2,378,962 2,378,962 17,000 2,395,962 58,067 58,067 4,904 62,971 $ 1,664,400 $ 3,828,848 $ 600,867 $ 30,597,067 $ (66) (66) 19,581 279,181 19,581 311,133 139,885 5,070,752 (476,257) (476,257) (768,057) $ (8,206,344) $ 27,716,781 $ 1,490,619 $ 29,207,400 19,581 279,181 4,930,867 — 31,952 (476,125) Balance at December 31, 2012 Equity transactions with noncontrolling interests and other Dividends to Canon Inc. stockholders Dividends to noncontrolling interests Transfer to legal reserve Comprehensive income: Net income Other comprehensive income, net of tax (Note 14): 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, 2013 See accompanying Notes to Consolidated Financial Statements. 54 Strategy Business Segment Corporate Structure FINANCIAL SECTION Corporate Data CONSOLIDATED STATEMENTS OF CASH FLOWS Canon Inc. and Subsidiaries Years ended December 31, 2013, 2012 and 2011 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 Decrease in trade receivables (Increase) decrease in inventories Increase (decrease) in trade payables Increase (decrease) in accrued income taxes Increase (decrease) in accrued expenses Increase (decrease) in accrued (prepaid) pension and severance cost Other, net Net cash provided by operating activities Cash 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: Cash paid during the year for: Interest Income taxes See accompanying Notes to Consolidated Financial Statements. Millions of yen 2013 2012 2011 Thousands of U.S. dollars (Note 2) 2013 ¥ 239,516 ¥ 232,445 ¥ 254,109 $ 2,281,105 275,173 10,638 — 39 664 16,791 45,040 85,577 (108,622) (9,432) (15,635) (15,568) (16,539) 507,642 (233,175) 1,763 (5,771) 4,528 (12,483) (4,914) (296) 136 (250,212) 1,483 (2,334) (547) (155,627) (50,007) (15,149) (222,181) 86,982 122,231 666,678 ¥ 788,909 258,133 11,242 7 1,527 (610) 7,487 5,030 (24,805) (102,293) 12,427 (30,089) 261,343 8,937 598 8,130 7,368 29,129 9,991 (109,983) 35,766 (25,653) 8,938 5,515 8,061 384,077 (2,315) (16,796) 469,562 (316,211) 4,861 (417) (238,129) 3,273 (2,160) 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 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 2,620,695 101,314 — 371 6,324 159,914 428,952 815,019 (1,034,495) (89,829) (148,905) (148,267) (157,512) 4,834,686 (2,220,714) 16,790 (54,962) 43,124 (118,886) (46,800) (2,819) 1,296 (2,382,971) 14,124 (22,229) (5,210) (1,482,162) (476,257) (144,276) (2,116,010) 828,400 1,164,105 6,349,314 $ 7,513,419 500 ¥ 108,950 ¥ 1,084 98,096 914 ¥ 120,696 4,762 $ 1,037,619 CONSOLIDATED STATEMENTS OF CASH FLOWS / NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 55 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 indus- try and other products. Office products consist mainly of office multifunction devices (“MFDs”), laser multifunction printers (“MFPs”), laser printers, digital production printing systems, high speed continuous feed printers, wide-format printers and document solutions. Imaging system products consist mainly of interchangeable lens digital cameras, digi- tal compact cameras, digital camcorders, digital cinema cam- eras, interchangeable lenses, inkjet printers, large-format inkjet printers, commercial photo printers, image scanners, multimedia projectors, broadcast equipment and calculators. Industry and other products consist mainly of semiconduc- tor lithography equipment, flat panel display (“FPD”) lithog- raphy equipment, digital radiography systems, ophthalmic equipment, vacuum thin-film deposition equipment, organic LED (“OLED”) panel manufacturing equipment, die bond- ers, micromotors, network cameras, handy terminals and document scanners. Canon’s consolidated net sales for the years ended December 31, 2013, 2012 and 2011 were distrib- uted as follows: the Office Business Unit 53.6%, 50.5% and 53.9%, the Imaging System Business Unit 38.8%, 40.4% and 36.9%, the Industry and Others Business Unit 10.0%, 11.7% and 11.8%, and elimination between segments 2.4%, 2.6% and 2.6%, respectively. These percentages were computed by divid- ing segment net sales, including intersegment sales, by con- solidated net sales, based on the segment operating results described in Note 21. Sales are made principally under the Canon brand name, almost entirely through sales subsidiaries. These subsidiar- ies are responsible for marketing and distribution, and pri- marily sell to retail dealers in their geographic area. 80.8%, 79.3% and 80.5% of consolidated net sales for the years ended December 31, 2013, 2012 and 2011 were generated outside Japan, with 28.4%, 27.0% and 27.0% in the Americas, 30.1%, 29.1% and 31.3% in Europe, and 22.3%, 23.2% and 22.2% in Asia and Oceania, respectively. Canon sells laser printers on an OEM basis to Hewlett- Packard Company; such sales constituted 17.6%, 17.0% and 19.3% of consolidated net sales for the years ended December 31, 2013, 2012 and 2011, respectively, and are included in the Office Business Unit. Canon’s manufacturing operations are conducted pri- marily at 28 plants in Japan and 18 overseas plants which are located in countries or regions such as the United States, Germany, France, the Netherlands, Taiwan, China, Malaysia, Thailand, Vietnam and Philippines. (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 standards of the countries of their domicile. Certain adjustments and reclassifications have been incor- porated in the accompanying consolidated financial state- ments to conform with U.S. generally accepted accounting principles (“GAAP”). These adjustments were not recorded in the statutory books of account. (c) Principles of Consolidation The consolidated financial statements include the accounts of the Company, its majority owned subsidiaries and those vari- able interest entities where the Company or its consolidated subsidiaries are the primary beneficiaries. All significant inter- company 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 loss of ¥1,992 million ($18,971 thousand) for the year ended December 31, 2013, a net gain of ¥9,130 million 56 Strategy Business Segment Corporate Structure FINANCIAL SECTION Corporate Data for the year ended December 31, 2012 and a net loss of ¥3,287 million for the year ended December 31, 2011, respectively. (f) Cash Equivalents All highly liquid investments acquired with original maturi- ties 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 ¥183,078 million ($1,743,600 thousand) and ¥141,729 million at December 31, 2013 and 2012, 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, projected discounted cash flows or other valuation techniques as appro- priate. Unrealized holding gains and losses, net of the related tax effect, are reported as a separate component of accumu- lated 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 securi- ties 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 recognized in other comprehensive income (loss). For debt securities for which the declines are deemed to be other-than-temporary and there is an intent to sell, impairments in their entirety are recognized in earnings. For equity securities for which the declines are deemed to be other-than-temporary, impairments in their entirety are recognized in earnings. Canon recognizes an impairment loss to the extent by which the cost basis of the investment exceeds the fair value of the investment. Realized gains and losses are determined 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 over- seas inventories. (j) Impairment of Long-Lived Assets Long-lived assets, such as property, plant and equipment, and acquired intangible assets subject to amortization, are reviewed for impairment whenever events or changes in cir- cumstances 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-balance method, except for certain assets which are depreciated by the straight- line method over the estimated useful lives of the assets. The depreciation period ranges from 3 years to 60 years for buildings and 1 year to 20 years for machinery and equipment. Assets leased to others under operating leases are stated at cost and depreciated to the estimated residual value of the assets by the straight-line method over the lease term, gener- ally from 2 years to 5 years. (l) Goodwill and Other Intangible Assets Goodwill and other intangible assets with indefinite use- ful lives are not amortized, but are instead tested for impair- ment annually in the fourth quarter of each year, or more  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 57 frequently if indicators of potential impairment exist. Canon performs its impairment test of goodwill using the two-step approach at the reporting unit level, which is one level below the operating segment level. All goodwill is assigned to the reporting unit or units that benefit from the synergies arising from each business combination. If the car- rying amount assigned to the reporting unit exceeds the fair value of the reporting unit, Canon performs the second step to measure an impairment charge in the amount by which the carrying amount of a reporting unit’s goodwill exceeds its implied fair value. Intangible assets with finite useful lives consist primar- ily of software, license fees, patented technologies and cus- tomer relationships. Software and license fees are amortized using the straight-line method over the estimated useful lives, which range from 3 years to 5 years for software and 5 years to 10 years for license fees. Patented technologies are amortized using the straight-line method principally over the estimated useful life of 3 years. Customer relationships are amortized principally using the declining-balance method over the esti- mated useful life of 5 years. Certain costs incurred in connec- tion with developing or obtaining internal-use software are capitalized. These costs consist primarily of payments made to third parties and the salaries of employees working on such software development. Costs incurred in connection with developing internal-use software are capitalized at the application development stage. In addition, Canon develops or obtains certain software to be sold where related costs are capitalized after establishment of technological feasibility. (m) Environmental Liabilities Liabilities for environmental remediation and other 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 information develops or circumstances change. Costs of future obligations are not discounted to their present values. (n) Income Taxes Deferred tax assets and liabilities are recognized for the esti- mated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and oper- ating 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 tem- porary 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 tech- nical merits, that the tax positions will be sustained upon examination by the tax authorities. Benefits from tax posi- tions that meet the more-likely-than-not recognition thresh- old are measured at the largest amount of benefit that 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. 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 related revenue is recognized ratably over the lease term. When equipment leases are bundled with product maintenance contracts, revenue is allocated based upon the estimated relative fair value of the lease and non-lease deliverables. Lease deliver- ables generally include equipment, financing and executory costs, while non-lease deliverables generally consist of prod- uct maintenance contracts and supplies. Revenue from sales of optical equipment, such as semicon- ductor lithography equipment and FPD lithography equip- 58 Strategy Business Segment Corporate Structure FINANCIAL SECTION Corporate Data ment 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. For all other arrangements with multiple elements, Canon allocates revenue to each element based on its relative selling price if such element meets the criteria for treatment as a sep- arate 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. Canon regularly adjusts its estimates each period in the ordinary course of establishing sales incentive program accruals based on cur- rent information. During the year ended December 31, 2012, Canon revised its estimates for sales incentive program accru- als based on new information which was not available at the time that the accrual was established due to unique circum- stances, such as the earthquake in Japan and the flooding in Thailand that occurred in 2011 as well as a recent shift in usage of incentive programs from mail-in rebates to instant rebates. This change in estimate caused an increase in net income attributable to Canon Inc. of ¥10,785 million, and an increase in basic and diluted net income attributable to Canon Inc. stockholders per share of ¥9.19 each. During the years ended December 31, 2013 and 2011, such adjustments were not significant. Canon also 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 govern- mental authorities are excluded from revenues in the consoli- dated 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 ¥86,398 million ($822,838 thousand), ¥83,134 million and ¥81,232 million for the years ended December 31, 2013, 2012 and 2011, respectively. (t) Shipping and Handling Costs Shipping and handling costs totaled ¥47,460 million ($452,000 thousand), ¥38,499 million and ¥43,308 million for the years ended December 31, 2013, 2012 and 2011, 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 current 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 relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking vari- ous 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 transactions are highly effective in offsetting changes in cash flows of hedged items. When it is determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, Canon discontinues hedge accounting prospectively. Changes in the fair value of a derivative that is designated and quali- fies 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 hedg- ing ineffectiveness are included in other income (deductions). Gains and losses related to the components of hedging instru- ments 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 February 2013, the FASB issued an amendment which requires entities to provide information about the amounts reclassified out of accumulated other comprehensive income by component, and to present, either on the face of the state- ment where net income is presented or in the notes, sig- nificant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income. Canon adopted this amended guidance from the quarter beginning January 1, 2013. This adoption did not have a material impact on Canon’s consolidated results of operations and financial condition. See Note 14 of the Notes to Consolidated Financial Statements.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 59 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 dol- lars at the rate of ¥105 = U.S.$1, the approximate exchange rate prevailing on the Tokyo Foreign Exchange Market on December 30, 2013. This translation should not be con- strued as a representation 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, 2013 and 2012 were as follows: December 31 Millions of yen 2013: Noncurrent: Government bonds Corporate bonds Fund trusts Equity securities Millions of yen 2012: Current: Corporate bonds Noncurrent: Government bonds Corporate bonds Fund trusts Equity securities Thousands of U.S. dollars 2013: Noncurrent: Government bonds Corporate bonds Fund trusts Equity securities Cost Gross unrealized holding gains Gross unrealized holding losses ¥ 338 ¥ 491 68 18,112 ¥ 19,009 — 16 — 16,450 ¥ 16,466 ¥ 31 26 — 26 ¥ 83 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 Cost Gross unrealized holding gains Gross unrealized holding losses $ 3,219 $ 4,676 648 172,495 $ 181,038 — 152 — 156,667 $ 156,819 $ 296 247 — 247 $ 790 Fair value ¥ 307 481 68 34,536 ¥ 35,392 Fair value ¥ 30 ¥ 181 560 1,234 21,335 ¥ 23,310 Fair value $ 2,923 4,581 648 328,915 $ 337,067 60 Strategy Business Segment Corporate Structure FINANCIAL SECTION Corporate Data Maturities of available-for-sale debt securities included in investments in the accompanying consolidated balance sheets were as follows at December 31, 2013: 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 Cost ¥ — 10 819 ¥ 829 Fair value ¥ — 10 778 ¥ 788 Cost $ — 95 7,800 $ 7,895 Fair value $ — 95 7,409 $ 7,504 Gross realized gains were ¥2,360 million ($22,476 thou- sand), ¥238 million and ¥204 million for the years ended December 31, 2013, 2012 and 2011, respectively. Gross real- ized losses, including write-downs for impairments that were other-than-temporary, were ¥2 million ($19 thousand), ¥1,545 million and ¥4,281 million for the years ended December 31, 2013, 2012 and 2011, respectively. At December 31, 2013, substantially all of the available-for- sale securities with unrealized losses had been in a continu- ous unrealized loss position for less than twelve months. Time deposits with original maturities of more than three months are ¥47,914 million ($456,324 thousand) and ¥28,292 million at December 31, 2013 and 2012, respectively, and are included in short-term investments in the accompanying con- solidated balance sheets. Aggregate cost of non-marketable equity securities accounted for under the cost method totaled ¥14,794 mil- lion ($140,895 thousand) and ¥14,808 million at December 31, 2013 and 2012, respectively. These investments were not evaluated for impairment at December 31, 2013 and 2012, 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 ¥18,937 million ($180,352 thou- sand) and ¥17,345 million at December 31, 2013 and 2012, respectively. Canon’s share of the net earnings (losses) in affili- ated companies accounted for by the equity method, included in other income (deductions), were losses of ¥664 million ($6,324 thousand), earnings of ¥610 million and losses of ¥7,368 million for the years ended December 31, 2013, 2012 and 2011, respectively. 4. TRADE RECEIVABLES Trade receivables are summarized as follows: December 31 Notes Accounts Less allowance for doubtful receivables Millions of yen 2013 ¥ 15,461 606,010 621,471 (12,730) ¥ 608,741 2012 ¥ 17,207 569,138 586,345 (12,970) ¥ 573,375 Thousands of U.S. dollars 2013 $ 147,247 5,771,524 5,918,771 (121,238) $ 5,797,533 5. INVENTORIES Inventories are summarized as follows: December 31 Finished goods Work in process Raw materials NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 61 Millions of yen 2013 ¥ 406,443 128,120 19,210 ¥553,773 2012 ¥ 391,194 139,923 20,506 ¥ 551,623 Thousands of U.S. dollars 2013 $ 3,870,886 1,220,191 182,952 $ 5,274,029 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 Thousands of U.S. dollars 2013 2012 ¥ 272,233 $ 2,690,324 1,447,838 1,586,827 112,919 3,419,817 (2,159,453) ¥ 1,260,364 14,952,610 16,534,352 701,381 34,878,667 (22,700,286) $ 12,178,381 2013 ¥ 282,484 1,570,024 1,736,107 73,645 3,662,260 (2,383,530) ¥ 1,278,730 Depreciation expenses for the years ended December 31, 2013, 2012 and 2011 were ¥223,158 million ($2,125,314 thou- sand), ¥211,973 million and ¥210,179 million, respectively. Amounts due for purchases of property, plant and equip- ment were ¥33,585 million ($319,857 thousand) and ¥38,893 million at December 31, 2013 and 2012, respectively, and are included in other current liabilities in the accompany- ing consolidated balance sheets. Fixed assets presented in the consolidated statements of cash flows include property, plant and equipment and intangible assets. 62 Strategy Business Segment Corporate Structure FINANCIAL SECTION Corporate Data 7. FINANCE RECEIVABLES AND OPERATING LEASES Finance receivables represent financing leases which con- sist 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 6 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 2013 ¥ 278,621 9,566 (2,184) (29,875) 256,128 (7,323) 248,805 (91,025) ¥ 157,780 2012 ¥ 231,221 8,863 (2,598) (27,521) 209,965 (6,908) 203,057 (74,168) ¥ 128,889 Millions of yen 2013 ¥ 6,908 (1,278) 212 1,481 ¥ 7,323 2012 ¥ 7,039 (1,304) 1,922 (749) ¥ 6,908 Thousands of U.S. dollars 2013 $ 2,653,533 91,105 (20,800) (284,524) 2,439,314 (69,743) 2,369,571 (866,904) $ 1,502,667 Thousands of U.S. dollars 2013 $ 65,790 (12,171) 2,019 14,105 $ 69,743  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 63 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, 2013 and 2012 are not significant. The cost of equipment leased to customers under operat- ing leases included in property, plant and equipment, net at December 31, 2013 and 2012 was ¥103,403 million ($984,790 thousand) and ¥80,186 million, respectively. Accumulated depreciation on equipment under operating leases at December 31, 2013 and 2012 was ¥78,821 million ($750,676 thousand) and ¥58,433 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, 2013. Year ending December 31: Millions of yen Thousands of U.S. dollars 2014 2015 2016 2017 2018 Thereafter Financing leases Operating leases Financing leases Operating leases ¥ 109,408 82,900 51,963 25,423 8,427 500 ¥ 7,639 4,154 2,148 1,070 309 419 $ 1,041,981 789,524 494,886 242,124 80,257 4,761 $ 72,752 39,562 20,457 10,190 2,943 3,991 ¥ 278,621 ¥ 15,739 $ 2,653,533 $ 149,895 8. GOODWILL AND OTHER INTANGIBLE ASSETS Intangible assets subject to amortization acquired during the years ended December 31, 2013 and 2012 totaled ¥42,630 mil- lion ($406,000 thousand) and ¥34,196 million, which primarily consist of software of ¥37,419 million ($356,371 thousand) and ¥33,985 million, respectively. The weighted average amortiza- tion periods for intangible assets in total acquired during the years ended December 31, 2013 and 2012 are approximately 4 years. The weighted average amortization periods for software acquired during the years ended December 31, 2013 and 2012 are approximately 4 years. The components of intangible assets subject to amortization at December 31, 2013 and 2012 were as follows: December 31 Millions of yen Software Customer relationships Patented technologies License fees Other December 31 Thousands of U.S. dollars Software Customer relationships Patented technologies License fees Other 2013 2012 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 ¥ 271,425 50,792 29,067 13,194 32,319 ¥ 396,797 Gross carrying amount $ 2,585,000 483,733 276,829 125,657 307,800 $ 3,779,019 Accumulated amortization ¥ 167,411 39,957 24,027 7,902 16,094 ¥ 255,391 Accumulated amortization $ 1,594,390 380,543 228,829 75,257 153,276 $ 2,432,295 2013 64 Strategy Business Segment Corporate Structure FINANCIAL SECTION Corporate Data Aggregate amortization expense for the years ended December 31, 2013, 2012 and 2011 was ¥52,015 million ($495,381 thousand), ¥46,160 million and ¥51,164 million, respectively. Estimated amortization expense for intangible assets currently held for the next five years ending December 31 is ¥46,573 million ($443,552 thousand) in 2014, ¥31,898 million ($303,790 thousand) in 2015, ¥21,241 million ($202,295 thousand) in 2016, ¥12,464 million ($118,705 thou- sand) in 2017, and ¥7,371 million ($70,200 thousand) in 2018. Intangible assets not subject to amortization other than goodwill at December 31, 2013 and 2012 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, 2013 and 2012 were as follows: Years ended December 31 Millions of yen 2013: Balance at beginning of year Goodwill acquired during the year Translation adjustments and other Balance at end of year Millions of yen 2012: Balance at beginning of year Goodwill acquired during the year Translation adjustments and other Balance at end of year Thousands of U.S. dollars 2013: Balance at beginning of year Goodwill acquired during the year Translation adjustments and other Balance at end of year Office ¥ 111,348 4,083 23,981 ¥ 139,412 Office ¥ 102,060 — 9,288 ¥ 111,348 Office $ 1,060,457 38,886 228,390 $ 1,327,733 Imaging System ¥ 12,674 — 1,203 ¥ 13,877 Imaging System ¥ 12,088 — 586 ¥ 12,674 Imaging System $ 120,705 — 11,457 $ 132,162 Industry and Others ¥ 6,821 — 1,530 ¥ 8,351 Industry and Others ¥ 4,873 961 987 ¥ 6,821 Industry and Others $ 64,962 — 14,572 $ 79,534 Total ¥ 130,843 4,083 26,714 ¥ 161,640 Total ¥ 119,021 961 10,861 ¥ 130,843 Total $ 1,246,124 38,886 254,419 $ 1,539,429 9. SHORT-TERM LOANS AND LONG-TERM DEBT Short-term loans consisting of bank borrowings at December 31, 2013 and 2012 were ¥54 million ($514 thousand) and ¥319 million, respectively. The weighted average interest rates on short-term loans outstanding at December 31, 2013 and 2012 were 3.75% and 4.00%, respectively. Long-term debt consisted of the following: December 31 Loans, principally from banks, maturing in installments through 2024; bearing weighted average interest of 1.15% and 1.94% at December 31, 2013 and 2012, respectively Capital lease obligations Less current portion Millions of yen 2013 2012 ¥ 211 2,482 2,693 (1,245) ¥ 1,448 ¥ 132 3,532 3,664 (1,547) ¥ 2,117 Thousands of U.S. dollars 2013 $ 2,010 23,637 25,647 (11,857) $ 13,790  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 65 The aggregate annual maturities of long-term debt outstanding at December 31, 2013 were as follows: Year ending December 31: 2014 2015 2016 2017 2018 Thereafter Millions of yen ¥ 1,245 880 319 171 48 30 Thousands of U.S. dollars $ 11,857 8,381 3,038 1,629 457 285 ¥ 2,693 $ 25,647 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 obliga- tions due to the bank. 10. TRADE PAYABLES Trade payables are summarized as follows: December 31 Notes Accounts Millions of yen 2013 ¥ 8,005 299,152 ¥ 307,157 2012 ¥ 11,971 313,264 ¥ 325,235 Thousands of U.S. dollars 2013 $ 76,238 2,849,067 $ 2,925,305 66 Strategy Business Segment Corporate Structure FINANCIAL SECTION Corporate Data 11. EMPLOYEE RETIREMENT AND SEVERANCE BENEFITS The Company and certain of its subsidiaries have contribu- tory and noncontributory defined benefit pension plans cov- ering substantially all of their employees. Benefits payable 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 substantially all of their employees. The amounts of cost recognized for the defined contribu- tion pension plans of the Company and certain of its subsid- iaries for the years ended December 31, 2013, 2012 and 2011 were ¥14,383 million ($136,981 thousand), ¥13,021 million and ¥12,511 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: December 31 Japanese plans Foreign plans Change in benefit obligations: Benefit obligations at beginning of year ¥ 651,520 ¥ 626,924 25,738 Service cost Thousands of U.S. dollars 2013 $ 6,204,952 247,667 111,000 Millions of yen 2013 2012 Millions of yen 2013 2012 11,788 26,005 11,655 — 14,959 (19,297) — — 684,842 651,520 6,049 (18,979) — — — ¥ 364,609 ¥ 262,130 5,884 9,448 14,299 2,617 8,981 (9,415) — 142,466 (183,780) 13,176 2,315 45,145 (10,407) — (2,868) — — 98,901 46,366 486,572 364,609 6,522,305 Interest cost Plan participants’ contributions Actuarial loss Benefits paid Curtailments and settlements Foreign currency exchange rate changes Benefit obligations at end of year 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 Settlements Foreign currency exchange rate changes Fair value of plan assets at end of year Funded status at end of year 803,638 188,667 — (168,076) 25,290 249,534 192,033 20,640 28,705 2,617 (9,106) 2,315 7,832 (9,825) 495,452 448,736 4,718,590 41,593 22,589 84,382 19,810 — (17,648) — — 581,996 495,452 ¥ (102,846) ¥ (156,068) (17,466) — — — — (2,656) — — 70,793 31,889 360,527 249,534 ¥ (126,045) ¥ (115,075) 5,542,819 $ (979,486) 3,433,590 $ (1,200,429) Thousands of U.S. dollars 2013 $ 3,472,467 89,981 136,181 24,924 85,534 (89,668) (27,314) 941,914 4,634,019 2,376,514 196,571 273,381 24,924 (86,724) (25,295) 674,219  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 67 Amounts recognized in the consolidated balance sheets at December 31, 2013 and 2012 are as follows: December 31 Japanese plans Foreign plans Other assets Accrued expenses Accrued pension and severance cost Millions of yen 2013 2012 Thousands of U.S. dollars 2013 Millions of yen 2013 ¥ 559 ¥ — (103,405) (156,068) ¥ (102,846) ¥ (156,068) — $ — 5,323 ¥ — 1,106 ¥ (892) (984,809) (126,259) $ (979,486) ¥ (126,045) (116,063) ¥ (115,075) 2012 1,371 (383) Thousands of U.S. dollars 2013 $ 10,533 (8,495) (1,202,467) $ (1,200,429) Amounts recognized in accumulated other comprehensive income (loss) at December 31, 2013 and 2012 before the effect of income taxes are as follows: December 31 Japanese plans Foreign plans Actuarial loss Prior service credit Millions of yen 2013 2012 Thousands of U.S. dollars 2013 Millions of yen 2013 2012 Thousands of U.S. dollars 2013 ¥ 186,052 ¥ 253,748 (117,633) ¥ 80,725 ¥ 136,115 (105,327) $ 1,771,924 (1,003,114) $ 768,810 ¥ 50,344 (118) ¥ 50,226 ¥ 50,417 $ 479,467 (261) (1,124) ¥ 50,156 $ 478,343 The accumulated benefit obligation for all defined benefit plans was as follows: December 31 Japanese plans Foreign plans Accumulated benefit obligation ¥ 631,887 ¥ 620,589 $ 6,017,971 ¥ 464,195 ¥ 328,736 $ 4,420,905 Millions of yen 2013 2012 Thousands of U.S. dollars 2013 Millions of yen 2013 2012 Thousands of U.S. dollars 2013 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 accu- mulated benefit obligations in excess of plan assets are as follows: December 31 Japanese plans Foreign plans Millions of yen 2013 2012 Thousands of U.S. dollars 2013 Millions of yen 2013 2012 Thousands of U.S. dollars 2013 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 ¥ 676,308 ¥ 651,520 495,452 572,903 $ 6,441,028 5,456,219 ¥ 485,466 ¥ 360,742 244,296 358,315 $ 4,623,486 3,412,524 ¥ 611,602 ¥ 615,551 489,929 560,093 $ 5,824,781 5,334,219 ¥ 463,089 ¥ 324,869 244,296 358,315 $ 4,410,371 3,412,524 68 Strategy Business Segment Corporate Structure FINANCIAL SECTION Corporate Data 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, 2013, 2012 and 2011 consisted of the following components: Years ended December 31 Japanese plans Foreign plans Millions of yen 2013 2012 2011 Thousands of U.S. dollars 2013 Millions of yen 2013 2012 2011 Service cost Interest cost Expected return on plan assets Amortization of net transition obligation Amortization of prior service credit Amortization of actuarial loss Loss on curtailments and settlements ¥ 26,005 ¥ 25,738 ¥ 25,875 $ 247,667 ¥ 9,448 ¥ 5,884 ¥ 5,756 12,748 111,000 11,788 13,176 11,655 (15,273) 12,354 (16,485) (13,791) (145,458) 14,299 (13,949) (11,806) (12,112) — — 722 — — — — — (12,306) 13,546 (13,079) 16,277 (13,674) 14,462 (117,200) 129,010 (143) 2,005 (116) 1,351 (93) 621 (1,362) 19,095 — — — — 146 — — 1,390 ¥ 23,627 ¥ 26,933 ¥ 23,254 $ 225,019 ¥ 11,806 ¥ 8,489 ¥ 6,920 $ 112,438 Thousands of U.S. dollars 2013 $ 89,981 136,181 (132,847) Other changes in plan assets and benefit obligations recognized in other comprehensive income (loss) for the years ended December 31, 2013, 2012 and 2011 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 Curtailments and settlements Millions of yen 2013 2012 2011 Thousands of U.S. dollars 2013 ¥ (54,150) ¥ (21,753) ¥ 48,615 $ (515,714) (129,010) (13,546) (16,277) (14,462) Millions of yen 2013 2012 2011 Thousands of U.S. dollars 2013 ¥ 2,290 ¥ 31,661 ¥ 13,649 $ 21,810 (19,095) (2,005) (1,351) (621) — — (1,913) — — — — — 12,306 13,079 13,674 117,200 143 116 93 1,362 — — — — ¥ (55,390) ¥ (24,951) ¥ 45,192 $ (527,524) — (722) — — — (358) — — — — — (3,409) ¥ 70 ¥ 30,426 ¥ 13,121 $ 668 The estimated prior service credit and actuarial loss for the defined benefit pension plans that will be amortized from accumulated 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 ¥ (12,801) $ (121,914) ¥ (51) $ (486) 9,989 95,133 1,800 17,143  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 69 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 2013 1.6% 3.0% 2012 1.8% 3.0% 2013 3.8% 2.3% 2012 3.6% 2.2% 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 Canon determines the expected long-term rate of return based on the expected long-term return of the various asset categories in which it invests. Canon considers the current expectations for future returns and the actual historical returns of each plan asset category. Plan assets Canon’s investment policies are designed to ensure adequate plan assets are available to provide future payments of pen- sion 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 securities. Plan assets are invested in individual equity and debt securities using the guidelines of the “model” portfolio in order to produce a total return that will match the expected return on a mid-term to long-term basis. Canon evaluates the gap between expected return and actual return of invested plan assets on an annual basis to determine if such differences necessitate a revision in the formulation of the “model” portfolio. Canon revises the “model” portfolio when and to the extent considered necessary to achieve the expected long-term rate of return on plan assets. Canon’s model portfolio for Japanese plans consists of three major components: approximately 20% is invested in equity securities, approximately 55% is invested in debt secu- rities, and approximately 25% is invested in other investment vehicles, primarily consisting of investments in life insurance company general accounts. Japanese plans Foreign plans 2013 1.8% 3.0% 3.1% 2012 1.9% 3.0% 3.1% 2011 2.1% 3.0% 3.6% 2013 3.6% 2.2% 5.2% 2012 4.6% 2.4% 5.4% 2011 4.9% 2.9% 5.7% 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 30% is invested in equity securities, approximately 50% is invested in debt secu- rities, and approximately 20% 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 investing, Canon has investigated the business condition of the investee companies, and appropriately diversified investments by type of industry and other relevant factors. The debt securi- ties 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 appropri- ately 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 compa- nies 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 gov- ernments 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. 70 Strategy Business Segment Corporate Structure FINANCIAL SECTION Corporate Data The three levels of input used to measure fair value are more fully described in Note 20. The fair values of Canon’s pension plan assets at December 31, 2013 and 2012, by asset category, are as follows: December 31, 2013 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 ¥ 51,159 ¥ 10,347 — — ¥ — ¥ 51,159 ¥ — ¥ — 10,347 43,681 — — — 145,417 — 145,417 — 104,933 124,800 — — 124,800 44,192 — — 1,027 — 1,027 — 10,543 — 10,543 — 101,583 — 101,583 — 2,246 — 32,921 — 57,518 ¥ — — — — — — — ¥ — 43,681 104,933 44,192 2,246 32,921 57,518 — 9,569 — 9,569 — 5,098 — 5,098 — — 109,097 17,636 — 818 109,097 18,454 — 15,420 — 54,518 ¥ 186,306 ¥ 394,872 ¥ 818 ¥ 581,996 ¥ 87,873 ¥ 272,654 — — ¥ — 15,420 54,518 ¥ 360,527 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 (e) ¥ 34,387 ¥ — ¥ — ¥ 34,387 ¥ — ¥ Foreign companies 6,560 — — 6,560 13,149 — — Pooled funds (f) Debt securities: — 99,631 — 99,631 — 60,142 Government bonds (g) 20,301 — — 20,301 4,345 — — 1,064 8,425 — — 1,064 8,425 — — — 192,386 — 192,386 — 128,647 ¥ — — — — — — — ¥ — 13,149 60,142 4,345 21 — 128,647 — 21 — — 8,400 — 8,400 — 236 — 236 — — 113,179 9,813 — 1,306 113,179 11,119 — — 1,857 41,137 ¥ 61,248 ¥ 432,898 ¥ 1,306 ¥ 495,452 ¥ 17,494 ¥ 232,040 — — ¥ — 1,857 41,137 ¥ 249,534 Municipal bonds Corporate bonds Pooled funds (h) Mortgage backed securities (and other asset backed securities) Life insurance company general accounts Other assets  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 71 December 31, 2013 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 $ 487,229 $ 98,543 — — $ — $ 487,229 $ — $ — 98,543 416,010 — — — 1,384,924 — 1,384,924 — 999,363 1,188,571 — — 1,188,571 420,876 — — — — 9,781 — 9,781 — 21,390 100,410 — 100,410 — 313,533 967,457 — 967,457 — 547,790 $ — — — — — — — $ — 416,010 999,363 420,876 21,390 313,533 547,790 — 91,133 — 91,133 — 48,552 — 48,552 — 1,039,019 167,962 — — 7,790 1,039,019 175,752 — 146,857 — 519,219 $ 1,774,343 $ 3,760,686 $ 7,790 $ 5,542,819 $ 836,886 $ 2,596,704 — — $ — 146,857 519,219 $ 3,433,590 (a) The plan’s equity securities include common stock of the Company and certain of its subsidiaries in the amounts of ¥572 million ($5,448 thousand). (b) These funds invest in listed equity securities consisting of approximately 25% Japanese companies and 75% foreign companies for Japanese plans, and mainly foreign com- panies for foreign plans. (c) This class includes approximately 85% Japanese gov- ernment bonds and 15% foreign government bonds for Japanese plans, and mainly foreign government bonds for foreign plans. (d) These funds invest in approximately 30% Japanese gov- ernment bonds, 50% foreign government bonds, 5% Japanese municipal bonds, and 15% corporate bonds for Japanese plans. These funds invest in approximately 85% foreign government bonds and 15% 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 ¥565 million. (f) 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. (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 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. 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 securi- ties and government bonds, which are valued using unad- justed quoted market prices in active markets with sufficient volume and frequency of transactions. Level 2 assets are com- prised principally of pooled funds that invest in equity and debt securities, corporate bonds and investments in life insur- ance 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 val- ued 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 ¥818 million ($7,790 thousand) and ¥1,306 million at December 31, 2013 and 2012, respectively. Amounts of actual returns on, and purchases and sales of, these assets during the years ended December 31, 2013 and 2012 were not significant. 72 Strategy Business Segment Corporate Structure FINANCIAL SECTION Corporate Data Contributions Canon expects to contribute ¥13,589 million ($129,419 thousand) to its Japanese defined benefit pension plans and ¥7,060 million ($67,238 thousand) to its foreign defined benefit pension plans for the year ending December 31, 2014. 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 2014 2015 2016 2017 2018 2019–2023 12. INCOME TAXES Millions of yen ¥ 16,846 18,489 20,242 21,713 23,688 153,224 Thousands of U.S. dollars $ 160,438 176,086 192,781 206,790 225,600 1,459,276 Millions of yen ¥ 11,782 11,417 12,144 12,713 13,322 78,655 Thousands of U.S. dollars $ 112,210 108,733 115,657 121,076 126,876 749,095 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 2013: Income before income taxes Income taxes: Current Deferred Japanese ¥ 251,351 ¥ 75,134 4,005 ¥ 79,139 Millions of yen Foreign ¥ 96,253 ¥ 16,163 12,786 ¥ 28,949 Total ¥ 347,604 ¥ 91,297 16,791 ¥ 108,088 2012: Income before income taxes ¥ 257,640 ¥ 84,917 ¥ 342,557 Income taxes: Current Deferred ¥ 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 2013: Income before income taxes Income taxes: Current Deferred ¥ 67,671 21,047 ¥ 88,718 ¥ 23,615 8,082 ¥ 31,697 ¥ 91,286 29,129 ¥ 120,415 Thousands of U.S. dollars Japanese $ 2,393,819 Foreign $ 916,695 Total $ 3,310,514 $ 715,562 38,143 $ 753,705 $ 153,933 121,771 $ 275,704 $ 869,495 159,914 $ 1,029,409  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 73 The Company and its domestic subsidiaries are subject to a number of income taxes, which, in the aggregate, repre- sent a statutory income tax rate of approximately 38% for the year ended December 31, 2013 and approximately 40% for the years ended December 31, 2012 and 2011, respectively. 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 has been reduced from approximately 40% to 38% effective from the year ended December 31, 2013, and will be reduced to approximately 35% effective from the year ending December 31, 2016. Consequently, the statutory income tax rate utilized for deferred tax assets and liabilities which were or are 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 were reflected in income taxes in the consolidated statement of income for the year ended December 31, 2011. 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 2013 38.0% 0.9 (3.3) (5.4) 0.2 — 0.7 31.1% 2012 40.0% 0.8 (4.3) (5.7) (1.7) — 3.0 2011 40.0% 0.6 (4.3) (3.9) (0.5) 1.8 (1.5) 32.1% 32.2% Net deferred income tax assets and liabilities are included in the accompanying consolidated balance sheets under the fol- lowing captions: December 31 Prepaid expenses and other current assets Other assets Other current liabilities Other noncurrent liabilities Millions of yen 2013 ¥ 61,902 103,539 (3,621) (63,129) ¥ 98,691 2012 ¥ 62,358 121,934 (2,662) (44,712) ¥ 136,918 Thousands of U.S. dollars 2013 $ 589,543 986,086 (34,486) (601,229) $ 939,914 74 Strategy Business Segment Corporate Structure FINANCIAL SECTION Corporate Data The tax effects of temporary differences that give rise to the deferred tax assets and deferred tax liabilities at December 31, 2013 and 2012 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 2013 2012 ¥ 12,988 4,448 59,964 10,978 26,626 37,153 38,439 44,482 235,078 (35,055) 200,023 (10,876) (5,740) (6,160) (50,605) (671) (27,280) (101,332) ¥ 98,691 ¥ 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 Thousands of U.S. dollars 2013 $ 123,695 42,362 571,086 104,552 253,581 353,838 366,086 423,638 2,238,838 (333,857) 1,904,981 (103,581) (54,667) (58,667) (481,952) (6,390) (259,810) (965,067) $ 939,914 The net changes in the total valuation allowance were an increase of ¥2,888 million ($27,505 thousand) for the year ended December 31, 2013, and decreases of ¥1,621 million and ¥1,519 million for the years ended December 31, 2012 and 2011, respectively. Based upon the level of historical taxable income and pro- jections for future taxable income over the periods which the net deductible temporary differences are expected to reverse, management believes it is more likely than not that Canon will realize the benefits of these deferred tax assets, net of the existing valuation allowance, at December 31, 2013. At December 31, 2013, Canon had net operating losses which can be carried forward for income tax purposes of ¥167,138 million ($1,591,790 thousand) to reduce future tax- able income. Periods available to reduce future taxable income vary in each tax jurisdiction and generally range from one year to an indefinite period 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 ¥ 1,453 23,656 46,346 62,054 33,629 ¥ 167,138 Thousands of U.S. dollars $ 13,838 225,295 441,390 590,990 320,277 $ 1,591,790  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 75 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 ¥29,833 million ($284,124 thousand) for a portion of undis- tributed earnings of foreign subsidiaries that arose for the year ended December 31, 2013 and prior years because Canon currently does not expect to have such amounts dis- tributed or paid as dividends to the Company in the foresee- able future. Deferred tax liabilities will be recognized when Canon expects that it will realize those undistributed earn- ings in a taxable manner, such as through receipt of divi- dends or sale of the investments. At December 31, 2013, such undistributed earnings of these subsidiaries were ¥939,460 million ($8,947,238 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 Other Balance at end of year 2013 ¥ 7,711 312 388 (3,141) (347) 1,278 ¥ 6,201 Millions of yen 2012 ¥ 2,933 869 4,903 (1,546) (41) 593 ¥ 7,711 2011 ¥ 6,035 149 431 (2,139) (1,264) (279) ¥ 2,933 Thousands of U.S. dollars 2013 $ 73,438 2,971 3,695 (29,914) (3,305) 12,172 $ 59,057 The total amounts of unrecognized tax benefits that would reduce the effective tax rate, if recognized, are ¥6,201 million ($59,057 thousand) and ¥7,711 million at December 31, 2013 and 2012, respectively. Although Canon believes its estimates and assumptions of unrecognized tax benefits are reasonable, uncertainty regarding the final determination of tax audit settlements and any related litigation could affect the effective tax rate in the future period. Based on each of the items of which Canon is aware at December 31, 2013, no significant 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, 2013 and 2012, and interest and penalties included in income taxes for the years ended December 31, 2013, 2012 and 2011 are not significant. Canon files income tax returns in Japan and various for- eign 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 indi- cation by the tax authority that Canon will be subject to a transfer pricing examination in the near future, the tax authority could conduct a transfer pricing examination for years after 2006. In other major foreign tax jurisdictions, including the United States and the Netherlands, Canon is no longer subject to income tax examinations by tax author- ities for years before 2006 with few exceptions. The tax authorities are currently conducting income tax examina- tions of Canon’s income tax returns for years after 2005 in major foreign tax jurisdictions. 76 Strategy Business Segment Corporate Structure FINANCIAL SECTION Corporate Data 13. 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, 2013, 2012 and 2011 represent dividends paid out dur- ing those years and the related appropriations to the legal 14. OTHER COMPREHENSIVE INCOME (LOSS) reserve. Retained earnings at December 31, 2013 did not reflect current year-end dividends in the amount of ¥73,905 million ($703,857 thousand) which were approved by the stockholders in March 2014. 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 financial accounting standards of Japan. Such amount was ¥1,055,590 million ($10,053,238 thousand) at December 31, 2013. Retained earnings at December 31, 2013 included Canon’s equity in undistributed earnings of affiliated companies accounted for by the equity method in the amount of ¥16,423 million ($156,410 thousand). Changes in accumulated other comprehensive income (loss) for the years ended December 31, 2012 and 2011 are as follows: Millions of yen Foreign currency translation adjustments Unrealized gains and losses on securities Gains and losses on derivative instruments Pension liability adjustments Total Balance at December 31, 2010 ¥ (325,612) ¥ 3,020 ¥ 917 ¥ (68,784) ¥ (390,459) Adjustments for the year Balance at December 31, 2011 Adjustments for the year (53,251) (378,863) 131,129 (2,017) 1,003 3,143 Balance at December 31, 2012 ¥ (247,734) ¥ 4,146 (462) 455 (4,917) ¥ (4,462) (35,584) (104,368) (14,831) ¥ (119,199) (91,314) (481,773) 114,524 ¥ (367,249) Changes in accumulated other comprehensive income (loss) for the year ended December 31, 2013 are as follows: Millions of yen Balance at December 31, 2012 Equity transactions with noncontrolling interests and other Other comprehensive income (loss) before reclassifications Amounts reclassified from accumulated other comprehensive income (loss) Net change during the year Balance at December 31, 2013 Foreign currency translation adjustments Unrealized gains and losses on securities Gains and losses on derivative instruments Pension liability adjustments Total ¥ (247,734) ¥ 4,146 ¥ (4,462) ¥ (119,199) ¥ (367,249) (323) (1) (2) (329) (655) 249,791 7,449 (7,551) 27,153 276,842 — 249,468 ¥ 1,734 (1,352) 6,096 ¥ 10,242 9,607 2,054 ¥ (2,408) 2,161 28,985 ¥ (90,214) 10,416 286,603 ¥ (80,646)  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 77 Thousands of U.S. dollars Foreign currency translation adjustments Unrealized gains and losses on securities Gains and losses on derivative instruments Pension liability adjustments Total Balance at December 31, 2012 $ (2,359,372) $ 39,486 $ (42,495) $ (1,135,229) $ (3,497,610) Equity transactions with noncontrolling interests and other (3,076) (10) (19) (3,133) (6,238) Other comprehensive income (loss) before reclassifications Amounts reclassified from accumulated other comprehensive income (loss) Net change during the year Balance at December 31, 2013 2,378,962 70,943 (71,914) 258,600 2,636,591 — 2,375,886 $ 16,514 (12,876) 58,057 $ 97,543 91,495 19,562 20,581 99,200 276,048 2,729,553 $ (22,933) $ (859,181) $ (768,057) Reclassifications out of accumulated other comprehensive income (loss) for the year ended December 31, 2013 are as follows: Year ended December 31, 2013 Amount reclassified from accumulated other comprehensive income (loss)*1 Unrealized gains and losses on securities Gains and losses on derivative instruments Pension liability adjustments Millions of yen ¥ (2,358) 613 (1,745) 393 (1,352) 15,387 (5,780) 9,607 — 9,607 3,460 (1,037) 2,423 (262) 2,161 Thousands of U.S. dollars $ (22,457) 5,838 (16,619) 3,743 (12,876) 146,543 (55,048) 91,495 — 91,495 32,952 (9,876) 23,076 (2,495) 20,581 Affected line items in consolidated statements of income Other, net Income taxes Consolidated net income Net income attributable to noncontrolling interests Net income attributable to Canon Inc. Other, net Income taxes Consolidated net income Net income attributable to noncontrolling interests Net income attributable to Canon Inc. See Note 11 Income taxes Consolidated net income Net income attributable to noncontrolling interests Net income attributable to Canon Inc. Total amount reclassified, net of tax and noncontrolling interests ¥ 10,416 $ 99,200 *1 Amounts in parentheses indicate gains in consolidated statements of income. 78 Strategy Business Segment Corporate Structure FINANCIAL SECTION Corporate Data Tax effects allocated to each component of other comprehensive income (loss) and reclassification adjustments, including amounts attributable to noncontrolling interests, are as follows: Years ended December 31 2013: 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) 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) Before-tax amount Millions of yen Tax (expense) or benefit Net-of-tax amount ¥ 253,707 ¥ (2,131) ¥ 251,576 12,669 (2,358) 10,311 (12,145) 15,387 3,242 51,860 3,460 55,320 ¥ 322,580 (4,312) 613 (3,699) 4,594 (5,780) (1,186) (21,614) (1,037) (22,651) ¥ (29,667) 8,357 (1,745) 6,612 (7,551) 9,607 2,056 30,246 2,423 32,669 ¥ 292,913 ¥ 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)  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 79 Years ended December 31 2013: 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 $ 2,416,257 $ (20,295) $ 2,395,962 120,657 (22,457) 98,200 (115,667) 146,543 30,876 493,904 32,952 526,856 $ 3,072,189 (41,067) 5,838 (35,229) 43,753 (55,048) (11,295) 79,590 (16,619) 62,971 (71,914) 91,495 19,581 (205,847) (9,876) (215,723) $ (282,542) 288,057 23,076 311,133 $ 2,789,647 15. 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 stockhold- ers, 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 stockhold- ers, 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 stockhold- ers, 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, 2013, 2012 and 2011 was ¥95 million ($905 thousand), ¥364 million and ¥748 million, respectively, and is included in selling, general and adminis- trative 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: Year 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% 80 Strategy Business Segment Corporate Structure FINANCIAL SECTION Corporate Data A summary of option activity under the stock option plans as of and for the years ended December 31, 2013, 2012 and 2011 is presented below: Shares Weighted-average exercise price Yen U.S. dollars Weighted-average remaining contractual term Aggregate intrinsic value Year 2.5 Millions of yen ¥ 722 Thousands of U.S. dollars Outstanding at January 1, 2011 2,220,000 ¥ 4,354 Granted Exercised Forfeited 912,000 (65,800) (24,000) Outstanding at December 31, 2011 3,042,200 Exercised Forfeited Outstanding at December 31, 2012 Exercised Forfeited Outstanding at December 31, 2013 Exercisable at December 31, 2013 (10,800) (305,000) 2,726,400 (8,600) (60,400) 2,657,400 2,657,400 3,990 3,287 4,282 4,268 3,287 4,493 4,247 3,287 4,461 ¥ 4,245 ¥ 4,245 At December 31, 2013, all outstanding option awards were vested. 2.0 88 1.6 37 $ 31.30 42.49 $ 40.43 $ 40.43 1.0 1.0 ¥ 28 ¥ 28 $ 267 $ 267 A summary of the status of the Company’s nonvested shares at December 31, 2013, and changes during the year ended December 31, 2013, is presented below: Year ended December 31, 2013 Shares Weighted-average grant-date fair value Nonvested at beginning of year Vested Forfeited Nonvested at end of year 738,000 (738,000) — — Yen ¥ 772 772 — — U.S. dollars $ 7.35 7.35 — — The total fair value of shares vested during the years ended December 31, 2013, 2012 and 2011 was ¥570 million ($5,429 thousand), ¥848 million and ¥547 million, respectively. Cash received from the exercise of stock options for the years ended December 31, 2013, 2012 and 2011 was ¥28 million ($267 thousand), ¥35 million and ¥216 million, respectively.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 81 16. 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 Net income attributable to Canon Inc. 2013 ¥ 230,483 Millions of yen 2012 2011 ¥ 224,564 ¥ 248,630 Thousands of U.S. dollars 2013 $ 2,195,076 Average common shares outstanding 1,147,933,835 1,173,647,835 1,215,832,419 Number of shares Effect of dilutive securities: Stock options Diluted common shares outstanding 8,466 1,147,942,301 20,574 60,552 1,173,668,409 1,215,892,971 Net income attributable to Canon Inc. stockholders per share: Basic Diluted Yen U.S. dollars ¥ 200.78 200.78 ¥ 191.34 191.34 ¥ 204.49 204.48 $ 1.91 1.91 The computation of diluted net income attributable to Canon Inc. stockholders per share for the years ended December 31, 2013, 2012 and 2011 excludes certain outstanding stock options because the effect would be anti-dilutive. 82 Strategy Business Segment Corporate Structure FINANCIAL SECTION Corporate Data 17. 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 for- eign exchange contracts utilized by the Company and cer- tain 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 hedg- ing 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-per- formance by counterparties to derivative financial instru- ments, 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 con- dition, 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 com- ponent 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. 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 cer- tain 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, 2013 and 2012 are set forth below: December 31 To sell foreign currencies To buy foreign currencies Millions of yen 2013 ¥ 374,699 44,726 2012 ¥ 420,272 66,563 Thousands of U.S. dollars 2013 $ 3,568,562 425,962  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 83 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 bal- ance sheets at December 31, 2013 and 2012. Derivatives designated as hedging instruments December 31 Fair value Millions of yen Balance sheet location 2013 2012 Assets: Foreign exchange contracts Liabilities: Prepaid expenses and other current assets ¥ 44 Foreign exchange contracts Other current liabilities 2,267 Derivatives not designated as hedging instruments December 31 ¥ 443 4,472 Fair value Millions of yen Balance sheet location 2013 2012 Thousands of U.S. dollars 2013 $ 419 21,590 Thousands of U.S. dollars 2013 Assets: Foreign exchange contracts Liabilities: Prepaid expenses and other current assets ¥ 210 ¥ 388 $ 2,000 Foreign exchange contracts Other current liabilities 12,678 21,021 120,743 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, 2013, 2012 and 2011. 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 2013: Foreign exchange contracts 2012: Foreign exchange contracts 2011: Foreign exchange contracts Thousands of U.S. dollars 2013: Foreign exchange contracts ¥ 3,242 Other, net ¥ (15,387) Other, net ¥ (111) (8,207) Other, net (2,440) Other, net (785) Other, net 5,006 Other, net (221) (457) $30,876 Other, net $ (146,543) Other, net $ (1,057) 84 Strategy Business Segment Corporate Structure FINANCIAL SECTION Corporate Data Derivatives not designated as hedging instruments Years ended December 31 Gain (loss) recognized in income on derivative Foreign exchange contracts Other, net Location 2013 ¥(61,787) Millions of yen 2012 ¥(30,602) 2011 ¥11,168 Thousands of U.S. dollars 2013 $(588,448) 18. COMMITMENTS AND CONTINGENT LIABILITIES Commitments At December 31, 2013, commitments outstanding for the purchase of property, plant and equipment approximated ¥26,218 million ($249,695 thousand), and commitments outstanding for the purchase of parts and raw materials approximated ¥73,914 million ($703,943 thousand). Canon occupies sales offices and other facilities under lease arrangements accounted for as operating leases. Deposits made under such arrangements aggregated ¥13,448 million ($128,076 thousand) and ¥13,313 million at December 31, 2013 and 2012, respectively, and are included in noncurrent receivables in the accompanying consoli- dated balance sheets. Rental expenses under such operating lease arrangements amounted to ¥44,562 million ($424,400 thousand), ¥40,273 million and ¥38,167 million for the years ended December 31, 2013, 2012 and 2011, 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, 2013 are as follows: Year ending December 31: 2014 2015 2016 2017 2018 Thereafter Total future minimum lease payments Millions of yen ¥ 28,523 20,337 17,578 10,046 6,400 13,180 ¥ 96,064 Thousands of U.S. dollars $ 271,648 193,686 167,410 95,676 60,952 125,523 $ 914,895  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 pay- ment 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 ¥12,315 million ($117,286 thousand) at December 31, 2013. The carrying amounts of the liabilities recognized for Canon’s obligations as a guarantor under those guarantees at December 31, 2013 were 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, 2013 and 2012 are summarized as follows: Years ended December 31 Balance at beginning of year Addition Utilization Other Balance at end of year Millions of yen 2013 ¥ 12,163 13,467 (12,922) (1,818) ¥ 10,890 2012 ¥ 11,691 13,553 (12,503) (578) ¥ 12,163 Thousands of U.S. dollars 2013 $ 115,838 128,257 (123,067) (17,314) $ 103,714 Legal proceedings Canon is involved in various claims and legal actions aris- ing in the ordinary course of business. Canon has recorded provisions for liabilities when it is probable that liabilities have been incurred and the amount of loss can be reason- ably estimated. Canon reviews these provisions at least quar- terly and adjusts these provisions to reflect the impact of the negotiations, settlements, rulings, advice of legal coun- sel and other information and events pertaining to a particular case. Based on its experience, although litigation is inherently unpredictable, Canon believes that any damage amounts claimed in outstanding matters are not a mean- ingful indicator of Canon’s potential liability. In the opin- ion 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 Segment Corporate Structure FINANCIAL SECTION Corporate Data 19. 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, 2013 and 2012 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 2013 2012 2013 Long-term debt, including current installments ¥ (2,693) Foreign exchange contracts: Carrying amount Estimated fair value ¥ (2,693) Carrying amount Estimated fair value ¥ (3,664) ¥ (3,654) Carrying amount $ (25,647) Estimated fair value $ (25,647) Assets Liabilities 254 254 (14,945) (14,945) 831 831 (25,493) (25,493) 2,419 2,419 (142,333) (142,333) 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 f lows 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 20. 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 subjec- tive in nature and involve uncertainties and matters of sig- nificant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Concentrations of credit risk At December 31, 2013 and 2012, one customer accounted for approximately 15% and 18% 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. 20. FAIR VALUE MEASUREMENTS Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the mea- surement date. A three-level fair value hierarchy that priori- tizes 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 driv- ers are unobservable, which reflect the reporting entity’s own assumptions about the assumptions that market participants would use in establishing a price.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 87 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, 2013 and 2012. December 31 Millions of yen 2013: Assets: Cash and cash equivalents Available-for-sale (noncurrent): Government bonds Corporate bonds Fund trusts Equity securities Derivatives Total assets Liabilities: Derivatives Total liabilities 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 December 31 Thousands of U.S. dollars 2013: Assets: Cash and cash equivalents Available-for-sale (noncurrent): Government bonds Corporate bonds Fund trusts Equity securities Derivatives Total assets Liabilities: Derivatives Total liabilities Level 1 Level 2 ¥ — ¥ 183,078 307 — 11 34,536 — ¥ 34,854 ¥ ¥ — — — 141 57 — 254 ¥ 183,530 ¥ 14,945 ¥ 14,945 Level 3 ¥ — — 340 — — — ¥ 340 ¥ — ¥ — Total ¥ 183,078 307 481 68 34,536 254 ¥ 218,724 ¥ 14,945 ¥ 14,945 Level 1 Level 2 Level 3 Total ¥ — ¥141,729 ¥ — ¥141,729 30 181 — 159 21,335 — — — 116 1,075 — 831 ¥ 21,705 ¥ 143,751 ¥ ¥ — — ¥ 25,493 ¥ 25,493 — — 444 — — — ¥ 444 ¥ — ¥ — 30 181 560 1,234 21,335 831 ¥165,900 ¥ 25,493 ¥ 25,493 Level 1 Level 2 Level 3 Total $ — $1,743,600 $ — $1,743,600 2,923 — 105 328,915 — — 1,343 543 — 2,419 — 3,238 — — — 2,923 4,581 648 328,915 2,419 $ 331,943 $1,747,905 $ 3,238 $ 2,083,086 $ $ — — $ 142,333 $ 142,333 $ — $ — $ 142,333 $ 142,333 88 Strategy Business Segment Corporate Structure FINANCIAL SECTION Corporate Data 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, 2013 and 2012. 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 2013 ¥ 444 1 36 (141) ¥ 340 2012 ¥ 454 3 2 (15) ¥ 444 Thousands of U.S. dollars 2013 $ 4,229 9 343 (1,343) $ 3,238 Gains and losses included in earnings are mainly related to corporate bonds still held at December 31, 2013 and 2012, 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 years ended December 31, 2013 and 2012, there were no circumstances that required any significant assets or liabilities to be measured at fair value on a nonrecur- ring basis. 21. SEGMENT INFORMATION 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. The primary products included in each segment are as follows: Office Business Unit: Office multifunction devices (MFDs) / Laser multifunction printers (MFPs) / Laser printers / Digital production print- ing systems / High speed continuous feed printers / Wide- format printers / Document solutions Imaging System Business Unit: Interchangeable lens digital cameras / Digital compact cameras / Digital camcorders / Digital cinema cameras / Interchangeable lenses / Inkjet printers / Large-format ink- jet printers / Commercial photo printers / Image scanners / Multimedia projectors / Broadcast equipment / Calculators Industry and Others Business Unit: Semiconductor lithography equipment / Flat panel dis- play (FPD) lithography equipment / Digital radiography systems / Ophthalmic equipment / Vacuum thin-film deposition equipment / Organic LED (OLED) panel man- ufacturing equipment / Die bonders / Micromotors / Network cameras / Handy terminals / Document scanners The accounting policies of the segments are substantially the same as those described in the significant accounting pol- icies in Note 1. Canon evaluates performance of, and allocates resources to, each segment based on operating profit.  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 89 Information about operating results and assets for each segment as of and for the years ended December 31, 2013, 2012 Office Imaging System Industry and Others Corporate and eliminations Consolidated ¥ 1,993,898 ¥ 1,448,186 ¥ 289,296 ¥ — ¥ 3,731,380 and 2011 is as follows: Millions of yen 2013: Net sales: External customers Intersegment Total Operating cost and expenses Operating profit (loss) Total assets Depreciation and amortization Capital expenditures 6,175 2,000,073 1,733,165 ¥ 266,908 ¥ 954,803 88,344 54,644 752 1,448,938 1,245,144 ¥ 203,794 ¥ 584,856 56,564 44,112 2012: Net sales: External customers ¥ 1,751,960 ¥ 1,404,394 Intersegment Total Operating cost and expenses Operating profit Total assets 5,615 1,757,575 1,553,997 ¥ 203,578 ¥ 927,543 Depreciation and amortization 77,660 Capital expenditures 58,402 1,577 1,405,971 1,195,653 ¥ 210,318 ¥ 614,328 53,664 58,142 2011: Net sales: External customers ¥ 1,912,112 ¥ 1,311,023 Intersegment Total Operating cost and expenses Operating profit Total assets 5,831 1,917,943 1,658,678 ¥ 259,265 ¥ 907,433 Depreciation and amortization 93,196 Capital expenditures 53,888 1,021 1,312,044 1,100,750 ¥ 211,294 ¥ 452,809 45,609 48,192 85,574 374,870 400,201 ¥ (25,331) ¥ 328,202 37,072 27,040 ¥ 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 (92,501) (92,501) 15,593 ¥ (108,094) ¥ 2,374,849 93,193 101,682 — 3,731,380 3,394,103 ¥ 337,277 ¥ 4,242,710 275,173 227,478 ¥ — ¥ 3,479,788 (91,598) (91,598) 4,352 — 3,479,788 3,155,932 ¥ (95,950) ¥ 323,856 ¥ 2,075,733 ¥ 3,955,503 92,545 146,031 258,133 306,661 ¥ — ¥ 3,557,433 (93,417) (93,417) 23,371 — 3,557,433 3,179,362 ¥ (116,788) ¥ 378,071 ¥ 2,207,847 ¥ 3,930,727 92,853 122,753 261,343 262,481 Thousands of U.S. dollars 2013: Net sales: Office Imaging System Industry and Others Corporate and eliminations Consolidated External customers Intersegment Total Operating cost and expenses Operating profit (loss) $ 18,989,504 $ 13,792,248 $ 2,755,200 $ — $ 35,536,952 58,810 19,048,314 16,506,333 7,162 13,799,410 11,858,514 814,990 3,570,190 3,811,438 (880,962) (880,962) 148,505 — 35,536,952 32,324,790 $ 2,541,981 $ 1,940,896 $ (241,248) $ (1,029,467) $ 3,212,162 Total assets Depreciation and amortization Capital expenditures $ 9,093,362 $ 5,570,057 $ 3,125,733 $ 22,617,610 $ 40,406,762 841,371 520,419 538,705 420,114 353,067 257,524 887,552 968,400 2,620,695 2,166,457 90 Strategy Business Segment Corporate Structure FINANCIAL SECTION Corporate Data Intersegment sales are recorded at the same prices used in transactions with third parties. Expenses not directly associ- ated with specific segments are allocated based on the most reasonable measures applicable. Corporate expenses include certain corporate research and development expenses. Segment assets are based on those directly associated with each segment. Corporate assets primarily consist of cash and cash equivalents, investments, deferred tax assets, goodwill and corporate properties. Capital expenditures represent the additions to property, plant and equipment and intangible assets measured on an accrual basis. In 2013, based on the realignment of Canon’s inter- nal reporting structure, certain financial assets have been transferred from Corporate to the Office Business Unit. Corresponding amounts of total assets as of December 31, 2012 and 2011 have been reclassified to conform with the current year presentation. Information about product sales to external customers by business unit for the years ended December 31, 2013, 2012 and 2011 is as follows: Years ended December 31 Office Monochrome copiers Color copiers Printers Others Total Imaging System Cameras Inkjet printers Others Total Industry and Others Lithography equipment Others Total Consolidated 2013 Millions of yen 2012 2011 ¥ 312,973 ¥ 274,021 ¥ 276,225 381,848 841,436 457,641 1,993,898 973,517 363,070 111,599 1,448,186 62,116 227,180 289,296 ¥ 3,731,380 324,851 766,382 386,706 1,751,960 322,321 902,756 410,810 1,912,112 990,549 928,047 312,429 101,416 315,526 67,450 1,404,394 1,311,023 62,892 260,542 323,434 ¥ 3,479,788 81,556 252,742 334,298 ¥ 3,557,433 Thousands of U.S. dollars 2013 $ 2,980,695 3,636,648 8,013,676 4,358,485 18,989,504 9,271,590 3,457,810 1,062,848 13,792,248 591,581 2,163,619 2,755,200 $ 35,536,952  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 91 Information by major geographic area as of and for the years ended December 31, 2013, 2012 and 2011 is as follows: Net sales: Japan Americas Europe Asia and Oceania Total Long-lived assets: Japan Americas Europe Asia and Oceania Total 2013 ¥ 715,863 1,059,501 1,124,929 831,087 ¥ 3,731,380 ¥ 984,231 131,660 111,609 196,305 ¥ 1,423,805 Millions of yen 2012 ¥ 720,286 939,873 1,014,038 805,591 2011 ¥ 694,450 961,955 1,113,065 787,963 ¥ 3,479,788 ¥ 3,557,433 ¥ 1,032,598 ¥ 1,070,412 112,163 91,904 159,435 85,824 83,296 89,334 ¥ 1,396,100 ¥ 1,328,866 Thousands of U.S. dollars 2013 $ 6,817,743 10,090,486 10,713,609 7,915,114 $ 35,536,952 $ 9,373,629 1,253,905 1,062,943 1,869,571 $13,560,048 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 were ¥960,213 million ($9,144,886 thou- sand), ¥763,870 million and ¥779,652 million for the years ended December 31, 2013, 2012 and 2011, respectively. Long-lived assets represent property, plant and equip- ment and intangible assets for each geographic area. 92 Strategy Business Segment Corporate Structure FINANCIAL SECTION Corporate Data The following information is based on the location of the Company and its subsidiaries as of and for the years ended December 31, 2013, 2012 and 2011. 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 2013: Net sales: External customers Intersegment Total Japan Americas Europe Asia and Oceania Corporate and eliminations Consolidated ¥ 797,501 ¥ 1,056,096 ¥ 1,124,603 ¥ 753,180 ¥ — ¥ 3,731,380 1,855,181 11,774 53,281 881,765 (2,802,001) — 2,652,682 1,067,870 1,177,884 1,634,945 (2,802,001) 3,731,380 Operating cost and expenses 2,326,351 1,043,487 1,171,357 1,574,125 (2,721,217) 3,394,103 Operating profit Total assets 2012: Net sales: ¥ 326,331 ¥ 24,383 ¥ 6,527 ¥ 60,820 ¥ (80,784) ¥ 337,277 ¥ 1,152,398 ¥ 447,039 ¥ 496,549 ¥ 631,827 ¥ 1,514,897 ¥ 4,242,710 External customers ¥ 834,406 ¥ 932,987 ¥ 1,010,922 ¥ 701,473 ¥ — ¥ 3,479,788 Intersegment Total 1,829,834 23,767 5,650 781,836 (2,641,087) — 2,664,240 956,754 1,016,572 1,483,309 (2,641,087) 3,479,788 Operating cost and expenses 2,336,536 937,111 972,585 1,437,527 (2,527,827) 3,155,932 Operating profit Total assets ¥ 327,704 ¥ 19,643 ¥ 43,987 ¥ 45,782 ¥ (113,260) ¥ 323,856 ¥ 1,206,702 ¥ 339,918 ¥ 457,592 ¥ 548,583 ¥ 1,402,708 ¥ 3,955,503 2011: Net sales: External customers ¥ 807,883 ¥ 952,833 ¥ 1,109,256 ¥ 687,461 ¥ — ¥ 3,557,433 Intersegment Total 1,873,157 16,217 4,681 744,179 (2,638,234) — 2,681,040 969,050 1,113,937 1,431,640 (2,638,234) 3,557,433 Operating cost and expenses 2,273,336 948,593 1,069,489 1,388,580 (2,500,636) 3,179,362 Operating profit Total assets ¥ 407,704 ¥ 20,457 ¥ 44,448 ¥ 43,060 ¥ (137,598) ¥ 378,071 ¥ 1,236,468 ¥ 250,131 ¥ 427,030 ¥ 442,263 ¥ 1,574,835 ¥ 3,930,727 Thousands of U.S. dollars 2013: Net sales: External customers Intersegment Total Japan Americas Europe Asia and Oceania Corporate and eliminations Consolidated $ 7,595,248 $ 10,058,057 $ 10,710,505 $ 7,173,142 $ — $ 35,536,952 17,668,390 112,133 507,438 8,397,763 (26,685,724) — 25,263,638 10,170,190 11,217,943 15,570,905 (26,685,724) 35,536,952 Operating cost and expenses 22,155,724 9,937,971 11,155,781 14,991,667 (25,916,353) 32,324,790 Operating profit Total assets $ 3,107,914 $ 232,219 $ 62,162 $ 579,238 $ (769,371) $ 3,212,162 $ 10,975,219 $ 4,257,514 $ 4,729,038 $ 6,017,400 $ 14,427,591 $ 40,406,762 22. SUBSEQUENT EVENT On February 18, 2014, the Board of Directors of the Company approved and implemented a plan to repurchase up to 18 mil- lion shares of the Company’s common stock at a cost of up to ¥50,000 million ($476,190 thousand) for the period from February 19, 2014 to April 4, 2014. Such repurchases are intended to improve capital efficiency and ensure flexible capital strategy. Common stock repurchased in the Tokyo Stock Exchange between February 19, 2014 and March 4, 2014 under the aforementioned plan was 15,957,600 shares at a cost of ¥50,000 million ($476,190 thousand). NOTES TO CONSOLIDATED FINANCIAL STATEMENTS / MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING 93 MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING 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, 2013. 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 (1992 framework) (the “COSO criteria”). Based on its assessment, management concluded that, as of December 31, 2013, 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 Segment Corporate Structure FINANCIAL SECTION Corporate Data REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders of Canon Inc. We have audited the accompanying consolidated balance sheets of Canon Inc. and subsidiaries as of December 31, 2013 and 2012, 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, 2013, 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 supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by man- agement, 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, 2013 and 2012, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2013, 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, 2013, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 frame- work) and our report dated March 28, 2014 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, 2013 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, 2014 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 95 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 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, 2013, based on criteria estab- lished in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 framework) (the COSO criteria). Canon Inc. and subsidiaries’ management is responsible for maintaining effective internal con- trol over financial reporting, and for its assessment of the effectiveness of internal control over financial 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 effective 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 effective- ness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circum- stances. 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 reliabil- ity 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 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) provide reasonable assur- ance 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, pro- jections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, Canon Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consoli- dated balance sheets of Canon Inc. and subsidiaries as of December 31, 2013 and 2012, 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, 2013, all expressed in Japanese yen, and our report dated March 28, 2014 expressed an unqualified opinion thereon. March 28, 2014 96 Strategy Business Segment Corporate Structure Financial Section CORPORATE DATA TRANSFER AND REGISTRAR’S OFFICE STOCKHOLDER INFORMATION Canon Inc. 30-2, Shimomaruko 3-chome, Ohta-ku, Tokyo 146-8501, Japan Stock Exchange Listings: Tokyo, Nagoya, Fukuoka, Sapporo and New York stock exchanges Manager of the Register of Stockholders Mizuho Trust & Banking Co., Ltd. 2-1, Yaesu 1-chome, Chuo-ku, Tokyo 103-8670, Japan Depositary and Agent with Respect to American Depositary Receipts for Common Shares JPMorgan Chase Bank, N.A. 1 Chase Manhattan Plaza, Floor 58, New York, N.Y. 10005-1401, U.S.A. American Depositary Receipts are traded on the New York Stock Exchange (CAJ). Ordinary General Meeting of Shareholders: March 28, 2014, 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 MAJOR CONSOLIDATED SUBSIDIARIES (As of December 31, 2013) 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 Solutions America, 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. 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 Sp. z o.o. 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. 2014 PUB.BEP023-01 0414 

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