Canon
Annual Report 2014

Plain-text annual report

C A N O N A N N U A L R E P O R T 2 0 1 4 C A N O N A N N U A L R E P O R T 2 0 14 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 14 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) 2013 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 2014 ¥ 3,727,252 363,489 383,239 254,797 ¥ 3,731,380 337,277 347,604 230,483 ¥ 229.03 ¥ 200.78 229.03 ¥ 4,460,618 ¥ 2,978,184 200.78 ¥ 4,242,710 ¥ 2,910,262 -0.1 7.8 10.3 10.5 14.1 14.1 5.1 2.3 2014 $ 30,803,736 3,004,041 3,167,264 2,105,760 $ 1.89 1.89 $ 36,864,612 $ 24,613,091 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 JPY121=U.S.$1, the approximate exchange rate on the Tokyo Foreign Exchange Market as of December 30, 2014, solely for the convenience of the reader. Net Sales (Billions of yen) Net Income Attributable to Canon Inc. (Billions of yen) 4,000 3,000 2,000 1,000 0 300 200 100 0 300 200 100 0 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 Net Income Attributable to Canon Inc. Stockholders per Share (Yen) ROE/ROA (%) 10.0 8.0 6.0 4.0 0 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 Basic Diluted ROE ROA 01 CO RPORAT E P R OF ILE TA B L E O F C O N T E N T S Canon develops, manufactures and markets a growing lineup of copying machines, printers, cameras and industrial and other equipment. Through these products, the Company meets grow- ing customer needs that are becoming increasingly diversified and sophisticated. Today, the Canon brand is recognized and trusted throughout the world. STRATEGY 02 TO OUR STOCKHOLDERS BUSINESS SEGMENT 10 AT A GLANCE 12 OFFICE BUSINESS UNIT In 1996, Canon launched its Excellent Global Corporation 14 IMAGING SYSTEM BUSINESS UNIT Plan with the aim of becoming a company worthy of admiration 16 INDUSTRY AND OTHERS BUSINESS UNIT and respect the world over. Currently, the Company is work- ing to achieve the overwhelming No. 1 position in its existing core businesses and expand related and peripheral businesses by strengthening its advanced solutions business, centered on inno- vative products, and through other measures. At the same time, Canon is nurturing its operations in the fields of medical equip- ment and industrial equipment, to establish new core businesses. The Company is working to fulfill its responsibilities to inves- tors and society, emphasizing sound corporate governance and stepping up the implementation of activities that contribute to environmental 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 18 2014 TOPICS 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 together in happiness into the future. Unfortunately, current fac- EQUITY tors related to economies, resources and the environment make realizing kyosei difficult. 53 CONSOLIDATED STATEMENTS OF CASH FLOWS Canon strives to eliminate these factors through corporate activ- 54 NOTES TO CONSOLIDATED FINANCIAL 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. For this reason, Canon’s goal is to contribute to global prosper- ity and the well-being of mankind as we continue our efforts to bring 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 implementa- tion of the plan, Canon aims to join the ranks of the world’s top 100 companies in terms of major management indicators. STATEMENTS 84 SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS 85 MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING 86 REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM CORPORATE DATA 88 TRANSFER AND REGISTRAR’S OFFICE 88 STOCKHOLDER INFORMATION 89 MAJOR CONSOLIDATED SUBSIDIARIES Cover Photo: Tim Rayman, nature photographer Canon’s interchange- able lens digital cameras and interchangeable lenses have served and will be serving professional photogra- phers around the world who use the latest technologies to capture the best moments. 02 T O O U R S T O C K H O L D E R S Fujio Mitarai Chairman & CEO Canon Inc. STRATEGY BUSINESS SEGMENT CORPORATE STRUCTURE FINANCIAL SECTION CORPORATE DATA 03 Canon will bring Phase IV of its Excellent Global Corporation Plan to a close by building a solid foundation for a return to a path of growth. Performance in 2014 Despite expectations of an overall turnaround in the in cost reductions. global economy in 2014, particularly in the United As a result, despite the various challenges we faced States and Japan, the operating environment we faced in 2014, including a decline in unit sales of digital remained very challenging due to unforeseen devel- cameras, we realized an increase in unit sales of office opments, such as the conflict between Russia and color multifunction devices (MFDs), posting consoli- Ukraine. On the other hand, we saw the yen depreci- dated net sales of ¥3,727.3 billion, around the same ate further against both the U.S. dollar and the euro. level as the previous year. Furthermore, the gross profit In light of these circumstances, in accordance with our ratio improved 1.7 points to 49.9%, approaching the basic policy of emphasizing profit over sales, we made record level we reached in 2007. At the time, the yen a concerted Group-wide effort with various initiatives, was even weaker than it is now, which points to the including the creation of powerful hit products within fact that Canon’s manufacturing power, which had suf- current businesses, the thorough reinforcement of our fered immediately after the Lehman crisis, is now back global sales capabilities, and pursuit of a new dimension on track and stronger than ever. Additionally, thanks Cash Dividend (Yen) 150 100 50 0 to ongoing rigorous expense cutting, operating profit increased 7.8% to ¥363.5 billion while net income climbed 10.5% to ¥254.8 billion. These figures are the highest since the collapse of Lehman Brothers and mark our second consecutive year-on-year increases for both operating profit and net income. Free cash flow, as well, increased ¥57.2 billion year on year to ¥314.6 billion, exceeding net income for the second successive year. Taking advantage of this ample cash flow, we carried out three share buybacks in 2014, purchasing some ¥150 billion worth of Company stock. With a stockholders’ equity ratio of 66.8% at the end of 2014, we were able to maintain our sound, essentially debt-free financial structure. Additionally, underscor- ing our stable and proactive shareholder return pol- 2006 2007 2008 2009 2010 2011 2012 2013 2014 icy, we declared an annual cash dividend of ¥150.00 per * The amount of annual cash dividend per share in 2006 has been adjusted to reflect the three-for-two stock split made on July 1, 2006. share, a ¥20.00 increase from 2013. 04 TO OUR STOCKHOLDERS Excellent Global Corporation Plan Canon launched the Excellent Global Corporation Plan while also enabling us to become an essentially debt- in 1996 and, over the nearly 20 years since it was intro- free company. duced, we have reinforced our business foundation During Phase III (2006–2010), we sought to expand through the Plan’s various phases. Canon’s business scope, broadening our businesses During Phase I (1996–2000), we focused on shifting in the printing and medical equipment fields while from nonconsolidated business management to consoli- actively carrying out M&A activities. dated business management while stressing the impor- And in 2011, under the slogan “Aiming for the tance of total optimization over partial optimization, Summit: Speed & Sound Growth,” we embarked on Phase and of profit over sales. By emphasizing the importance IV, spanning the five-year period through 2015. Focusing of cash-flow management and comprehensively elimi- on the six key strategies explained below, Phase IV calls nating waste, we were able to reduce our debt by more for proactive, quick reforms ahead of the dramatically than half while also significantly increasing productiv- changing times, along with the achievement of sound ity through the introduction of the cell production sys- business growth through the further expansion of our tem and other measures. corporate scale while maintaining high profitability. In Phase II (2001–2005), we focused on reinforcing 2015 is the final year of Phase IV. During the year, we Canon’s product competitiveness. We fully digitalized will make a concerted effort to improve our financial our copying machine and camera offerings, laying performance and build a robust foundation toward fur- the groundwork for the successes that we enjoy today ther growth in the future. The Excellent Global Corporation Plan Phase I 1996–2000 Phase II 2001–2005 Phase III 2006–2010 Strengthened our Recognized the need Strove to achieve “Sound financial structure by for digitalization and Growth,” seeking high thoroughly eliminating raised product competi- growth levels by estab- wastefulness, with pro- tiveness by enhancing lishing new businesses duction reforms playing our development infra- while raising the profit- a major role, based on structure and reinforc- ability of existing busi- changing our mindset ing key components. nesses. With the global with a focus on total optimization and profit- ability. economy plunging into the global recession, shifted direction towards “improving the quality of management.” Set up an even stronger financial structure and increased momentum towards a dramatic leap forward from now. Phase IV 2011–2015 Tackle again the chal- lenge of achieving “Sound Growth” through timely change in advance of changes in the times. Slogan: “Aiming for the Summit: Speed & Sound Growth” STRATEGY BUSINESS SEGMENT CORPORATE STRUCTURE FINANCIAL SECTION CORPORATE DATA 05 Strategy 1 Achieving the overwhelming No. 1 position in all core businesses and expanding related and peripheral businesses In 2014, within the office MFD segment, we significantly As for inkjet printers, having made our full-fledged boosted unit sales of color machines through the addition entry into the business inkjet printer market, we are of color A4-model MFDs and color imagePRESS-series mod- focusing on expanding our share within this segment. We els to our product lineups. Moreover, Océ, which produces are also working to increase sales of large-format printers, such products as high-speed continuous feed commercial for which we posted record-high unit sales in 2014. printers, recorded healthy sales growth. In the growing In the industrial equipment segment, we were able market for office solutions, we continued strengthening to boost our market share, buoyed by strong demand for our hardware offerings while improving our ability to pro- our semiconductor lithography systems used in the fab- vide an extensive range of high-quality “one-stop” services. rication of memory devices and image sensors, and con- In the digital camera segment, unit sales of both inter- tinued healthy sales of flat-panel-display lithography changeable lens cameras and compact cameras declined systems for large-sized panels, along with the launch year on year. Nevertheless, we maintained the No. 1 posi- of high-resolution machines used in the production of tion in the global market with a 44% share for inter- small- and medium-sized panels. Moreover, through the changeable lens cameras and a 22% share for compact enhancement of our nanoimprint lithography technol- cameras*. Within this segment, we worked to improve ogy, which makes possible the further miniaturization of profitability, boosting sales of interchangeable lens digi- electronic features, we are targeting the mass production tal cameras with the new EOS 7D Mark II and other mod- of next-generation semiconductor lithography systems. els targeting advanced-amateur users, while reinforcing As for the medical equipment sector, we have been our compact camera lineup through the introduction of increasing sales of new digital radiography systems, high-value-added models that deliver exceptional image including models featuring wireless static-image sensors quality and high zoom magnification. and dynamic-image sensors. *Based on a Canon survey 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 imageRUNNER ADVANCE series machines help make business processes more effi cient through the handling of a range of docu- ment-management tasks from a single device. 06 TO OUR STOCKHOLDERS Strategy 2 Developing new business through globalized diversifi cation and establishing the Three Regional Headquarters management system Seeking to realize innovation beyond the boundaries Molecular Imprints (now Canon Nanotechnologies), of Japan, Canon is looking to Europe and the United a company with expertise in nanoimprint technolo- States to contribute to global growth through the cre- gies that make possible high-resolution nanolithogra- ation of new business in terms of both quality and phy processes. In addition, to secure our No. 1 position quantity within the framework of the Three Regional in the global network video surveillance market, we Headquarters management system. By maintaining a acquired Milestone Systems, a world-leading provider highly profitable structure, we aim to join the ranks of of open platform video management software. In 2015, the world’s top 100 companies in terms of all key mea- we plan to acquire Axis AB, the global leader in network sures of business performance. video solutions. In the United States, Canon Virginia is preparing to We have also been focusing our energies on strength- commence mass production of a DNA diagnostic system ening our MR (mixed reality) system business, enhancing developed by Canon U.S. Life Sciences, while in Europe, these systems that merge the real and virtual worlds in Océ is in the process of establishing its function as our real time. Within the medical equipment segment, we headquarters for commercial printers. are working to swiftly establish our remote image-diag- In the meantime, we will make effective use of our nostic service business while accelerating our develop- healthy cash flows to establish new businesses while pro- ment efforts in such promising areas as photoacoustic moting measures to nurture and expand them. In 2014, tomography devices capable of the three-dimensional with the aim of expediting the development of next-gen- display of blood vessels. eration semiconductor lithography systems, we acquired Canon U.S. Life Sciences, Inc., Maryland, is carrying out research and development for a DNA diagnostic system, using applications of CMOS sensor and inkjet printer technologies. The Network Cameras deliver high image quality, advanced function- ality, and high performance, while being used in various places, such as urban areas, offi ces, and public institutions, to provide new values. STRATEGY BUSINESS SEGMENT CORPORATE STRUCTURE FINANCIAL SECTION CORPORATE DATA 07 Establishing a world-leading globally optimized production system Strategy 3 Based on a comprehensive evaluation of such factors as to bring production back to Japan. foreign exchange fluctuations, wages, taxation systems, With respect to overseas production, in the Americas infrastructure and country risk, Canon is building a and Europe, we will make use of automated production globally optimized production system from the perspec- systems, primarily for consumables, to manufacture tive of total optimization. products locally. By shortening the distance from fac- In the aftermath of the Lehman crisis, the yen’s tory to market, we will be able to deliver products in a appreciation gave rise to disparities in production costs timely manner while reducing transportation costs and between Japan and overseas countries. As manufactur- inventory in transit. In Asia, in order to diffuse risk, we ing in Japan became increasingly challenging, we began are moving quickly to reassess the uneven distribution shifting production overseas. As a result, production of our production operations. Accordingly, we will read- in Japan declined, accounting for 40% of total produc- just production volumes between countries and regions tion in 2014, down from 60% in 2007. But with the value to achieve an optimal production distribution. of the yen expected to remain low over the long term, In addition to expanding the domain covered by auto- we are bringing back manufacturing to Japan, particu- mated production, to further bolster our manufacturing larly for new products. Through the strong promotion capabilities, we will broaden the scope of in-house man- of automated production lines, robots and in-house pro- ufacturing to include not only key parts, but also mass duction, we are building a framework to realize a new production items such as molded components. dimension of cost reductions as we step up our efforts Manufacturing Bases in the Globally Optimized Production Structure Major Production Sites 08 TO OUR STOCKHOLDERS Strategy 4 Comprehensively reinforcing global sales capabilities Strategy 5 Building the foundations of an environmentally advanced corporation In developed countries, within the consumer segment, In addition to fulfilling our social responsibilities to the we will strengthen our response to diversifying sales natural environment, Canon aims to be a company that channels in line with the proliferation of online sales. actively achieves corporate growth while protecting the Additionally, to effectively satisfy the centralized pro- environment. As we strive to raise the performance of our curement needs of global corporations for office prod- products, we develop energy-saving technologies and mate- ucts, we are moving to swiftly train highly skilled sales rials with low environmental burden to minimize our envi- engineers capable of providing comprehensive con- ronmental impact and cut carbon dioxide emissions. sulting services, offering solutions not limited to hard- During 2014, we reduced the use of raw materials by ware, but including software as well. Moreover, for our making products that were smaller and lighter, and accel- global clients, we provide the same high-quality prod- erated the modal shift from air- to ocean-based transport. ucts, solutions and services worldwide. As a result, we successfully achieved a year-on-year reduc- Among emerging countries, we are finding diver- tion in life-cycle CO2 emissions per product that exceeded sity in terms of economic scale, levels of growth, mar- our 3% target. ket characteristics, cultures and customs. To respond In 2015, Canon celebrates the 25th anniversary of the to these differing circumstances in each country, we launch of our pioneering toner cartridge recycling pro- are working to develop diverse sales channels in accor- gram. We now offer toner cartridge collection services in dance with in-depth field investigations, including the 24 countries and carry out the localized recycling of car- strengthening of our distributor sales network. tridges in Japan, the United States, China and France. We will also continue our efforts to be a leader in the areas of waste reduction and efficient resource use. The Volume of Returned Toner Cartridges (Accumulated) (Unit 1,000s of tons) 350 300 250 200 150 100 50 0 We are opening more Canon Image Square retail stores mainly in Asian emerging countries. Visitors at the store can try our products by themselves to see features and performances. (a shop in Vietnam) 1990 1995 2000 2005 2014 (Year) *Data aggregation method changed after 2009. STRATEGY BUSINESS SEGMENT CORPORATE STRUCTURE FINANCIAL SECTION CORPORATE DATA 09 Strategy 6 Imparting a corporate culture, and cultivating human resources befi tting a truly excellent global company In Conclusion The global economic map is changing dramatically in Since the Lehman crisis, Canon has built a rock-solid line with rapid advances in globalization and network- financial base in preparation for the next period of ing. To continue developing as a truly excellent global economic growth and has created many new busi- company worthy of admiration and respect for 100, and nesses with promising futures. In short, we have ful- even 200, years, Canon must secure victory on the global filled all the necessary conditions to make great playing field and, toward this objective, our workforce progress. must continue to deliver innovation. The global economy is expected to gradually regain At Canon sales companies around the world, we moment and head toward stable growth. We aim to already have many locally hired employees in upper ride this wave so that we will again be able to make management positions. Especially in Europe, our largest great strides during Phase V of our Excellent Global regional market, the presidents of all of our sales com- Corporation Plan, which will begin in 2016. To this panies are from the region. Since 1980, moreover, we end, we will accelerate the development of new busi- have held our Tokyo Seminar management training pro- nesses to return to the growth track in 2015, bringing gram for managers of overseas Canon Group companies Phase IV to a successful close by further reinforcing to improve their managerial capabilities. We are work- our business foundation. ing to foster and impart Canon’s corporate culture, con- We look forward to your continued understanding tinuously embracing the challenge of innovation, while and support. nurturing global human resources who can excel on the world stage. 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 AT A G L A N C E Business Units Main Products O FFI CE B USI N ESS U NI T Office Multifunction Devices (MFDs) Digital Production Printing Systems Laser Printers High Speed Continuous Feed Printers I MA GI N G S YSTEM B USI N ESS U NI T I ND U STRY A ND O TH ERS B USI N ESS UNI T Interchangeable Lens Digital Cameras Digital Camcorders Inkjet Printers Multimedia Projectors Semiconductor Lithography Equipment Digital Radiography Systems FPD (Flat Panel Display ) 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 Solutions (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)FPD (Flat Panel Display) Lithography Equipment (cid:129)Digital Radiography Systems (cid:129)Ophthalmic Equipment (cid:129)Vacuum Thin-Film Deposition Equipment (cid:129)Organic LED (OLED) Panel Manufacturing Equipment (cid:129)Die Bonders (cid:129)Micromotors (cid:129)Network Cameras (cid:129)Handy Terminals (cid:129)Document Scanners STRATEGY BUSINESS SEGMENT CORPORATE STRUCTURE FINANCIAL SECTION CORPORATE DATA 11 Outline Composition of Sales (%) Net Sales (Billions of yen) In this segment, Canon offers a comprehensive range of multifunction devices (MFDs), printers, and other equipment featuring high image qual- ity, high resolution, and high speed. Leveraging these products, Canon works in close collabora- tion with various Group companies and alliance partners to deliver optimal solutions tailored to match the customer’s business operations. These include various document solutions, such as office document management and the output of records. At the same time, the Company provides top-quality services and support in a swift and reliable manner. Canon’s offerings in this segment include digital cameras, digital camcorders, digital cinema cam- eras, interchangeable lenses, inkjet printers, and calculators. Canon’s digital cameras, digital cam- corders and digital cinema cameras, designed to deliver unparalleled image quality, have earned particularly high acclaim worldwide, thanks to in-house developed lenses, CMOS image sensors, and image processors. Also widely popular are Canon’s inkjet printers, which are easy to use and produce beautiful pictures at high speeds. Applying optical technologies and image- processing technologies amassed over many years, Canon provides high-value-added products to a wide range of industries. The Company is already prominent globally as a manufacturer of FPD (Flat panel display) 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 pro- moting sales of its cutting-edge digital radiogra- phy systems and ophthalmic equipment, which employ Canon’s highly regarded medical imag- ing technologies. 55.8% 36.0% 10.7% 2,500 2,000 1,500 1,000 500 0 1,500 1,000 500 0 500 400 300 200 100 0 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 Note: The percentage figures for the three business units presented in the pie charts above do not add up to 100% because “Eliminations,” recorded in consolidation accounting, were not included in calculation considerations. 12 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. 2014 Review Amid healthy demand for office multifunction devices (MFDs) underpinned by improved corporate results, Canon launched the C350/C250-series models, the first color A4 models in its imageRUNNER ADVANCE series. The new models sold well, especially in Europe and North America. Accordingly, we now have a full lineup that can provide solutions for more precise office doc- ument environments. The imageRUNNER ADVANCE C5200 series of A3 models also performed well. As a result, sales of office MFDs increased year on year. In digital production printing systems, we released the C800/C700 series, the first color models in the imagePRESS series targeting the light production mar- ket. The new models received worldwide acclaim, which Net Sales (Billions of yen) 2,500 2,000 1,500 1,000 500 0 2012 2013 2014 helped generate significant sales growth for color print- ers. Overall sales for digital production printing sys- tems, including monochrome models, surpassed the previous year. STRATEGY BUSINESS SEGMENT CORPORATE STRUCTURE FINANCIAL SECTION CORPORATE DATA 13 The imageRUNNER ADVANCE C350/C250, fi rst A4 color multifunction device in imageRUNNER ADVANCE series. It has the same functions and user convenience as the A3 multifunction device and contributes to higher work effi ciency through system linkage. The imagePRESS C800/C700, color multifunc- tion device that delivers high-quality printing through the use of new technology. Aimed at the light-production market, it offers consis- tently vivid colors even in mass volume print- ing, it supports various paper types, and it is well suited to a wide range of needs from com- mercial printing to in-company printing. The Océ ColorStream 3000 are high-speed, continuous-feed commercial printers for appli- cations requiring high speed and high quality such as the printing of invoices, direct mail, etc. as demanded by the data print services (DPS) market. Canon’s laser multifunction printers (MFPs) and laser administrative processes using IT solutions such as printers for small and mid-sized businesses performed mobile technology, cloud computing, and social net- well, driven by sales growth in Japan and the Americas. working services (SNSs). Against this backdrop, Canon In the area of OEM-brand laser MFPs and laser print- will further strengthen its hardware product offerings ers, difficult economic conditions, especially in Europe, by measures such as releasing new products. Moreover, restricted unit sales to previous-year levels. Sales of high- we will improve the framework for the one-stop deliv- end models increased, however, resulting in an overall ery of comprehensive, high-quality services and solu- sales increase. tions all over the world. Sales of Océ ColorStream 3000 series were solid Océ has already built a strong position in high-volume among high speed, continuous feed printers manufac- document printing, such as direct mail, transaction, tured by Océ. and computer-aided design (CAD) printing. In addi- As a result, consolidated sales for this business unit tion to that, Océ plans to enter profitable new print- amounted to ¥2,078.7 billion, up 3.9% from the previ- ing sectors, including printing of graphic arts as well ous year. 2015 Initiatives The market for office MFDs is expected to expand for as printing for packages and home decoration materi- als. To achieve this smoothly, Océ further collaborates with Canon. In the OEM business, Canon will work for cost reduc- the time being. At the same time, there is increasing tions while making more compact products and provid- need to outsource specific operations and modernize ing highly competitive offerings. 14 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 interchangeable lens digital cameras, which use groundbreaking technology such as proprietary lenses, CMOS sensors, and image processors, lead the world with their high image quality and contribute to sales. 2014 Review In the interchangeable lens digital camera category, unit sales declined year on year, impacted by a generally dif- ficult market environment caused by weak economic trends, particularly in Europe and China. Canon worked actively to boost sales and further enhance our lineup with the release of six new interchangeable lenses and the launch of the EOS 7D Mark II, which boasts exceptional high-speed continuous-shooting capabilities. As a result, we maintained the No. 1*1 share of the world market. As for digital compact cameras, Canon reported lower sales in both volume and value terms amid a shrinking market, but was successful in raising the sales ratio for high-value-added products. Regarding digital cinema cameras, Canon responded Net Sales (Billions of yen) 1,500 1,000 500 0 2012 2013 2014 to changing market conditions, including the spread of 4K models and the trend toward lower prices, and posted healthy sales as a result. Broadcasting equipment also sold well thanks to solid demand from the sports sector and in emerging economies. During the year, we unveiled the CN7x17KAS S zoom lens, which achieved STRATEGY BUSINESS SEGMENT CORPORATE STRUCTURE FINANCIAL SECTION CORPORATE DATA 15 The EOS 7D Mark II is our fl agship model equipped with an APS-C-size CMOS sensor offering further enhancements in continuous shooting and AF functions. The interchangeable lens digital camera offers an excellent tracking capability to capture moving subjects for deci- sive shots. The EF cinema lens CN7x17 KAS S is a high- magnifi cation zoom lens compatible with large-sensor cameras used for the production of broadcasting content and motion pictures. It is the fi rst EF cinema lens to be equipped with a drive unit. The DreamLabo commercial photo printer com- bines high image quality and high speed to provide excellent performance. It meets the demands of the retail photo industry, includ- ing the production of high-quality commercial photo materials such as photobooks. downsizing while maintaining 4K-resolution perfor- make further refinements to its lenses, sensors, and mance throughout the entire 7x zoom range. It received image processors and also step up our responses to quite a well response from the market. trends such as cloud computing and SNSs. In digital In inkjet printers, Canon launched new products that compact cameras, we will enhance features of cameras’ have improved connectivity with mobile equipment and core appeals, such as operability, image quality, and models targeting female customers*2 as well as a new image expression, to further distinguish our products office brand MAXIFY in response to diversified demand from smartphone cameras, while raising affinity with in the market. Unit sales of inkjet printers declined mod- mobile devices. In this way, we aim to achieve coexis- erately amid delayed global economic recovery, but sales tence and co-prosperity of these devices. of consumables increased year on year. With respect to the Cinema EOS System, we will fur- Sales of large-format inkjet printers rose steadily due ther expand sales in emerging countries as well as focus partly to new contracts with large corporate customers, on entering non-cinema-related sectors, such as news which resulted in an increase in the net sales of consumables. reporting and broadcasting. However, the decline in unit sales of digital compact In inkjet printers, we will step up rollouts targeting cameras had a major impact, causing a 7.3% year-on-year the office market, and in large-format inkjet printers we decrease in consolidated sales for this business unit, to will respond meticulously to industry needs in order to ¥1,343.2 billion. *1 Based on a Canon survey. *2 These models are sold only in Japan. 2015 Initiatives In interchangeable lens digital cameras, Canon will expand market share. In DreamLabo commercial photo printers, Canon will diversify sales methods including rental and leasing, while building highly profitable business models such as photobook services of editing and bookbinding. 16 I N D U S T R Y A N D O T H E R S B U S I N E S S U N I T Canon, through its semiconductor lithography equipment, achieves ever higher levels of performance and functionality to meet the strict cutting-edge demands of the industry, while focusing on the development of future technologies. These technologies also serve as a driving force behind Canon’s optical and control technologies. 2014 Review In the business of semiconductor lithography equipment, unit sales of the FPA-5550iZ and FPA-6300ES6a increased significantly year on year. This is because manufacturers of memory devices continued making proactive capital investments to address healthy demand for smartphones and other mobile devices. As for FPD (Flat panel display) lithography equipment, unit sales of the MPAsp-H800 series increased year on year, benefiting from major growth in investment in equipment for manufacturing large-sized panels, such as high-resolution 4K displays. In medical equipment, Canon posted higher sales than the previous year on the back of increased sales of high-value-added products in its core digital radiography systems operation; for example, high-image-quality wire- Net Sales (Billions of yen) 500 400 300 200 100 0 2012 2013 2014 less models featuring automatic X-ray detection mode. Furthermore, Canon augmented its lineup of net- work cameras, adding new models suited to various indoor environments, such as offices and large retail stores, while working hard to boost sales. As a result, the sales of last year significantly increased. In June 2014, Denmark-based Milestone Systems A/S, one of the STRATEGY BUSINESS SEGMENT CORPORATE STRUCTURE FINANCIAL SECTION CORPORATE DATA 17 The FPA-5550iZ i-line stepper employs the FPA-5500 platform with proven high perfor- mance and reliability, which enables high throughput through such means as short exposure times made possible by a high- acceleration wafer stage. The Network Camera lineup delivers high image quality, advanced functionality, and high performance, while reducing the bandwidth burden on networks. It meets various needs in many places such as urban areas, offi ces, pub- lic institutions, factories, and shops. The Wireless Digital Radiography System series enables wireless transmission of imaging data to computers and is suitable for various imag- ing areas. Canon is focusing on this equipment. world’s largest video management software companies, of both i-line steppers and KrF scanners while reducing became a member of the Canon Group, further strength- costs in order to further expand market share in this ening Canon’s network camera business. field. Furthermore, aiming to adapt our next-generation Sales of document scanners manufactured by Canon lithography equipment for the high-volume manufac- Electronics Inc. increased, helped by brisk sales in the turing of leading edge devices, we will also strengthen Middle East, South America, India, and other emerg- our nanoimprint lithography technologies, which we ing economies. acquired through M&A in 2014. In FPD lithography Both sales of semiconductor film deposition equipment equipment sector, where 4K and 8K displays are expected manufactured by Canon ANELVA Corporation and organic to gather momentum, we will take the lead in increasing LED (OLED) panel manufacturing equipment made by resolution also for large-sized panels. Canon Tokki Corporation declined as capital investments In medical equipment, Canon will solidify its business by corporate customers were postponed. However, sales of foundation in preparation for future growth by focusing factory automation (FA) systems and semiconductor man- on high-value-added offerings such as dynamic imaging ufacturing equipment made by Canon Machinery Inc. technology in digital radiography systems and high-end increased steadily on the back of favorable demand. products in ophthalmic equipment. Furthermore, we As a result, sales for this business unit increased 6.4% will continue steadily preparing for the launch of DNA year on year, to ¥398.8 billion. diagnostic systems on the U.S. market. 2015 Initiatives In the optical product field, the semiconductor lithog- Systems in 2014. Moreover, in 2015 we plan to acquire Axis AB, the global leader in network video solutions, to raphy equipment market is expected to grow steadily. In secure our No.1 position in the global network video sur- response, Canon will bolster efforts to raise productivity veillance market. As for network cameras, we acquired Milestone 18 2 0 1 4 T O P I C S OFFICE BUSINESS UNIT IMAGING SYSTEM BUSINESS UNIT imageRUNNER ADVANCE C7270 Offi ce MFD EF lens-series lineup Canon Signed Global Partnership with Volkswagen for Managed Print Services Canon Achieved World First as EF Interchangeable Lens Production Surpasses 100 Million Mark*1 Canon signed a comprehensive agreement with In April 2014, Canon became the first in the world to German automobile manufacturer Volkswagen reach the 100 million mark for production of inter- AG, under which we are delivering Canon multi- changeable EF lenses for EOS-series AF (autofocus) inter- function office systems and laser printers to global changeable lens cameras; the production began in 1987. Volkswagen group offices and factories, while provid- Canon’s EF lenses have continued to evolve over the ing assorted solutions and services. The agreement years, leading the industry through the incorporation reflects Canon’s advanced technological capabilities of a wide range of innovative technologies, including and highly reliable equipment, which make possible the world’s first items*2, such as Image Stabilizer (IS), the same solutions in any region around the world, Ultrasonic Motor (USM) which enables fast auto focusing, as well as the new development of applications tai- and built-in extender super-telephoto zoom lens. Canon lored to meet unique customer needs. Another has expanded the optical technologies incorporated in highly recognized point was Canon’s proactive initia- its EF lenses into new fields, launching EF Cinema Lenses tives aimed at protecting the environment, including for digital cinematography in January 2012, and EF-M efforts to develop products that deliver high environ- lenses for compact-system cameras in September 2012. mental performance. Furthermore, during the 12-year period from 2003 Since 2004, we have operated the Canon Global to 2014, Canon maintained the No. 1 unit share of the Services Division as a dedicated in-house organiza- worldwide interchangeable lens digital camera mar- tion tasked with responding to the business machine ket*3. The Company will continue striving to produce needs of customers with global business operations. exceptional, highly reliable cameras and lenses that The Division uses Canon’s sales channels and ser- cater to the varying needs of photographers, from first- vice networks across more than 220 countries and time users to advanced amateurs and professionals. regions to actively offer our globally unified, high- quality services. *1. Among interchangeable lenses, based on a Canon survey (as of April 22, 2014). *2. Among interchangeable lenses for interchangeable lens cameras, based on a Canon survey. *3. Based on a Canon survey. STRATEGY BUSINESS SEGMENT CORPORATE STRUCTURE FINANCIAL SECTION CORPORATE DATA 19 IMAGING SYSTEM BUSINESS UNIT INDUSTRY AND OTHERS BUSINESS UNIT Business inkjet printer MAXIFY MB5300 series RV1100 3-D Machine Vision System Canon Launched MAXIFY Inkjet Printers for Business Use Canon Entered Machine Vision Market with Launch of RV1100 Canon unveiled MAXIFY, a new series of inkjet all- Canon launched the RV1100 3-D Machine Vision in-ones and printers for small- and medium-sized System. It uses a new three-dimensional rec- businesses. The lineup comprises five models, while ognition technology that Canon has devel- meeting business needs and offering high productiv- oped based on its optical, image-recognition, ity, high image quality, and high economic efficiency. and information-processing technologies, The MAXIFY series delivers significant increases which were cultivated through the Company’s in printing speed thanks to a newly developed research and development of cameras and busi- print head and efficient paper feed system. The ness machines. models contribute to enhanced office efficiency The RV1100 makes possible high-speed, high- through the large-capacity ink tanks and sheet cas- precision, 3-D recognition of various objects settes, which require fewer tank replacements and arranged randomly in a pile on a production minimize the need for paper refills. Furthermore, line, including parts with curved features, parts their dedicated pigment ink system, newly devel- without distinguishing characteristics, and oped by Canon, includes a high-density black ink parts with complex structures. Encompassing for improved legibility, which makes text clear and a 3-D machine vision head, which acts as the easy to read, and inks that do not smudge when sensor, and vision recognition software which overwritten by highlighter while hard to erase. works as the processor, the system transmits rec- Moreover, the color arrangement has been designed ognition data to the controller of the robotic to suit varied business needs, enabling vivid color arm in the production line. Accordingly, the printing of graphs, text, photographs, and web RV1100 plays an important role in automating pages. Reflecting Canon’s deep commitment to busi- and expediting the supply of parts to produc- ness needs, the MAXIFY series keeps ink costs and tion lines, leading to improve productivity at power consumption under control to deliver high factories of each client manufacturer. economy and environmental performance. 20 C O R P O R AT E G O V E R N A N C E At a monthly meeting of all company executives, the CEO provides updates on earnings progress and important matters to implement in the future as a way to share crucial information. Canon maintains sound corporate governance as part of efforts to maximize its stockholders’ value and become a truly excellent global corporation. Basic Policy In order to establish a sound corporate governance struc- ment strategies and policies while managing the overall execution of the operations of the Company. The other Representative Director is the Chief Financial Officer (CFO), who controls financial matters. Under the management of the CEO, each business segment takes responsibilities of its operational man- agement on a consolidated basis in an integrated struc- ture covering everything from product development to production and sales. In addition, the headquarters supports and controls finance and accounting, qual- ture and continuously raise corporate value, Canon ity management, global environment, and global legal believes that it is essential to improve management administration, undertaking administrative functions. transparency and strengthen functions to supervise and The Board of Directors, consisting of 17 Directors as monitor management. In this respect, a sense of eth- of March 27, 2015, makes decisions on items prescribed ics and mission held by each executive director and in the Companies Act, including policies for establish- employee is very important for the Company. ing an internal control system, and other important Representative Directors, Directors, and Board of Directors At Canon, the Chief Executive Officer (CEO), who is a matters on execution of the operations of the Company. Furthermore, the Board receives reports on execution of the Company operations controlled by the CEO on a reg- ular basis, and otherwise as necessary, and oversees such Representative Director, decides the Company’s manage- execution of the operations of the Company. STRATEGY BUSINESS SEGMENT CORPORATE STRUCTURE FINANCIAL SECTION CORPORATE DATA 21 Directors and Audit & Supervisory Board Members (as of March 27, 2015) Chairman & CEO Fujio Mitarai Executive Vice President & CFO Toshizo Tanaka Group Executive of Finance & Accounting Headquarters Group Executive of Facilities Management Headquarters Group Executive of Human Resources Management & Organization Headquarters Senior Managing Directors Yoroku Adachi Chairman & CEO of Canon U.S.A., Inc. Shigeyuki Matsumoto Group Executive of Device Technology Development Headquarters Group Executive of Corporate R&D Toshio Homma Group Executive of Procurement Headquarters Hideki Ozawa President & CEO of Canon (China) Co., Ltd. Masaya Maeda Chief Executive of Image Communication Products Operations Managing Director Yasuhiro Tani Group Executive of Digital System Technology Development Headquarters Directors Kenichi Nagasawa Group Executive of Corporate Intellectual Property & Legal Headquarters Naoji Otsuka Chief Executive of Inkjet Products Operations Masanori Yamada Group Executive of Network Visual Solution Business Promotion Headquarters Aitake Wakiya Deputy Group Executive of Finance & Accounting Headquarters Akiyoshi Kimura Chief Executive of Office Imaging Products Operations Eiji Osanai Group Executive of Production Engineering Headquarters Masaaki Nakamura Deputy Group Executive of Human Resources Management & Organization Headquarters Kunitaro Saida (Outside) Attorney Haruhiko Kato (Outside) President & CEO of Japan Securities Depository Center, Inc. Audit & Supervisory Board Members Makoto Araki Kazuto Ono Tadashi Ohe (Outside) Osami Yoshida (Outside) Kuniyoshi Kitamura (Outside) Note: Although this annual report is on FY2014, the above list of Directors and Audit & Supervisory Board members is as of March 27, 2015. The Company believes that well-developed knowl- edge of conditions on the ground is the key to swift and effective decision-making and appropriate busi- ness monitoring. For this reason, most Directors are Corporate Strategy Committee, Risk Management Committee, and Disclosure Committee The Corporate Strategy Committee, consisting of involved in execution of the operations of the Company Representative Directors, Executive Directors, and some as Group Executives or Chief Executives in charge of the Executive Officers, functions as an advisory body to Company’s main operations. In addition to that, Canon the CEO. Among items to be decided by the CEO, the also has two Outside Directors as independent directors* Committee undertakes prior deliberations on important who bring impartial perspectives to management that matters pertaining to Canon Group strategies. Outside would differ from those of Canon career veterans. directors and outside Audit & Supervisory Board mem- To help directors focus more effectively on manage- bers attend the Corporate Strategy Committee meetings ment and oversight, Canon has appointed Executive and proffer their opinions. Officers who separately undertake execution of the oper- Based on its policy on establishment of an internal con- ations of the Company. As of April 1, 2015, there will be trol system, the Company set up the Risk Management 22 Executive Officers, including one woman. Committee, which formulates policy and action proposals * Independent directors: Stock exchanges in Japan require listed compa- nies to appoint outside directors and/or outside Audit & Supervisory Board members and to report their name. Outside directors and Audit & Supervisory Board members should have no possible conflict of interests with regular stockholders. People related to the parent company or major business partners, consultants who receive large remunerations from the company, and their close relatives cannot be selected as independent directors. for improvement of the risk management system in the Canon Group under decisions of the Board of Directors. The Risk Management Committee consists of three enti- ties: the Financial Risk Management Subcommittee, which improves systems on the credibility of finan- cial reporting; the Compliance Subcommittee, which 22 CORPORATE GOVERNANCE Governance Structure (as of January 1, 2015) Elect/Dismiss Board of Directors 19 Members (Includes 2 Outside Members) Elect/Dismiss Approve/Supervise Report Representative Directors CEO, COO, CFO, CTO Consult General Meeting of Shareholders Audit Audit Elect/Dismiss Elect/Dismiss Audit & Supervisory Board 5 Members (Includes 3 Outside Members) Cooperation Corporate Strategy Committee Representative Directors, Executive Directors, and Executive Officers with direct control of an organizational division Cooperation Accounting Auditors (Audit Firm) Instruct/Order Approve/Supervise Report Report Report Risk Management Committee Financial Risk Management Subcommittee Compliance Subcommittee Business Risk Management Subcommittee Report Cooperation Report Disclosure Committee Cooperation Financial Audit Corporate Audit Center Internal Audit Report Executive Directors, Executive Officers, and each General Manager Execution of the operations of the company ensures thorough implementation of corporate eth- Directors meetings, Corporate Strategy Committee meet- ics and improves legal compliance systems; the Business ings, and other relevant meetings, while receiving ver- Risk Management Subcommittee, which improves sys- bal reports from directors, reviewing important approval tems prepared for overall business risks, including insuf- documents, and examining the business and financial ficient product quality and information leakage. The Risk asset statuses of the Company and its subsidiaries. In Management Committee verifies the risk management these ways, the Audit & Supervisory Board meticulously system and reports the status to the CEO. checks directors’ and others’ execution of the company In addition, the Disclosure Committee undertakes operations, including establishment and operation of the deliberations on information disclosure, including con- internal control system, thus is fulfilling a management tent and timing, to ensure timely and accurate disclo- oversight function. The Board also works in close alliance sure of important company information. with the Internal Audit Division and the accounting audi- tors to improve the efficacy of monitoring. Audit & Supervisory Board Canon is a “Company with an Audit & Supervisory Board.” The Board consists of five members, three of which are Internal Audit Division The Corporate Audit Center, with about 70 members, is independent Outside Audit & Supervisory Board mem- the Company’s internal auditing arm. It conducts audits bers. In accordance with auditing policies and plans and evaluations and provides guidance on all opera- decided at Audit & Supervisory Board meetings, mem- tions and sectors without exception, including those of bers of the Audit & Supervisory Board attend Board of Group companies, from various perspectives, such as STRATEGY BUSINESS SEGMENT CORPORATE STRUCTURE FINANCIAL SECTION CORPORATE DATA 23 The San-Ji (“Three Selfs”) Spirit, passed down from the initiation of the company, is one of Canon’s guiding principles. The three are “take the initiative and be proactive in all things” (Self-motivation), “conduct oneself with responsibility and accountability” (Self-management), and “understand one’s situation and role in all situations” (Self-awareness). (calligraphy by Canon’s fi rst president, Takeshi Mitarai) business efficacy and efficiency, compliance, and infor- understanding one’s situation and role in it. In 2001, mation security. Audits results are reported to the CEO Canon established the Canon Group Code of Conduct, and Audit & Supervisory Board and complement audits inspired by the above Three Selfs. The Code has been conducted by members of that board. translated into 14 languages from Japanese, and each Accounting Auditors The Company has an auditing service contract with its independent auditor, Ernst & Young ShinNihon LLC, to Group company makes efforts to enforce the Code. Countering Antisocial Forces Canon has a basic policy prohibiting relationships of any audit its financial statements. To check the validity of the kind with antisocial forces that represent a threat to social audits, the Company’s Audit & Supervisory Board members order and security. To uphold this basic policy, Canon has receive detailed explanations from the accounting auditors established a department dedicated to activities aimed at about the quality management system regarding audits. countering such parties while reinforcing cooperative ties With the aim of monitoring the independence of the with applicable public authorities. In addition, Canon’s accounting auditors, the Company introduced a prior Employment Regulations include a clause prohibiting approval system by the Audit & Supervisory Board for such relationships, and the Company continues to step up contents of auditing and other service contracts and rel- efforts to ensure strict employee adherence. evant fees. Based on “policies and procedures of the prior approval for both auditing and non-auditing services,” each contract is closely reviewed for prior approval. Risk Management As Canon expands its business on a global scale, busi- ness and other risks to which it may be exposed con- Compliance Shortly after its founding, Canon established the San-Ji tinue to diversify. In accordance with policies of its Risk Management Committee, Canon calculates and investi- (“Three Selfs”) Spirit principles: “self-motivation,” or taking gates conceivable risks across the entire Group. Canon the initiative and being proactive in all things; “self-man- also strives to prevent or minimize the emergence of risk agement,” or conducting oneself responsibly and being by formulating company regulations and other rules accountable for all one’s actions; and “self-awareness,” or and conducting employee education. 24 R E S E A R C H & D E V E L O P M E N T Canon works to improve pathological diagnosis, which determines the presence and spread of cancer by observing shapes and interconnections of human cells. We are conducting R&D on an imaging mass spectrometer with high spatial resolution and high sensitivity that can detect a mass of molecules and reconstruct its spectrum to form an image, allowing users to identify the two-dimensional distribution of substances in tissues. Seeking to create a new Canon, the Company is reinforcing an R&D structure spanning Japan, the United States, and Europe under the Three Regional Headquarters management system. At the same time, we are continuing to tackle challenges to develop products for professionals in unexplored fi elds. Strengthening Our Global R&D Structure Pursuing globalized diversification of its operations, Canon is moving away from its existing structure, in which com- petitive, technologically advanced products have been made mostly in Japan. Today, we have established the foun- dation of the Three Regional Headquarters management system that leads to new businesses emerging from each operation in Japan, the United States, and Europe. In the United States, Canon has set up research insti- 2014 Top Ten U.S. Patent Holders by Company tutes covering from basic research into unexplored fields 7,534 including healthcare to applied research on cutting- 4,952 4,055 edge technologies. In Europe, we will make further use of existing R&D centers to advance R&D in new fields. IBM* Samsung Electronics CANON Sony Microsoft Toshiba QUALCOMM Google LG Electronics Panasonic 3,224 2,829 2,608 2,590 2,566 2,122 2,095 *IBM is an abbreviation for International Business Machines Corporation. Source: Preliminary data released by IFI CLAIMS Patent Services, a U.S. research company specialized in patent information R&D Expenses and Patents Canon is bolstering R&D activities to enable the ongo- ing development of innovative products and services. In the year under review, R&D expenses amounted to ¥309.0 billion, up 0.9%, or ¥2.7 billion, from the pre- vious year. The ratio of R&D expenses to net sales was 8.3%. This focus on R&D activities has cemented Canon’s STRATEGY BUSINESS SEGMENT CORPORATE STRUCTURE FINANCIAL SECTION CORPORATE DATA 25 Canon’s 120-megapixel ultrahigh-resolution CMOS sensor for video recording can output full HD video in real time from any approximately one-sixtieth-sized section of its total surface area. Accordingly, images captured with the sensor maintain high levels of defi nition and clar- ity even when cropped or digitally magnifi ed. high status in the field of intellectual property. In 2014, Canon was granted 4,055 patents in the United Initiatives to Establish New Businesses In the medical equipment field toward the establish- States, ranking it third in the world and the top ranked ment of new pillars of growth, we are conducting Japanese company for a tenth consecutive year. research in Japan into photoacoustic tomography (PAT) Reinforcing Core Technologies Canon is concentrating efforts on pre-competitive technique for displaying blood vessels in three-dimen- sional images, using laser radiation and ultrasonic detec- tors. Canon in Japan is also conducting research into fields areas, involving research that can take more adaptive optics scanning laser ophthalmoscopy (AO-SLO), than ten years. At the same time, the Company is con- which enables examination of the retina at the cellular tinually bolstering activities centered on key parts and level. In the United States, we are complementing our key devices in order to enhance the competitiveness of work in DNA diagnostic systems with research in the its products. fields of biomedical optical imaging and medical robot- For instance, we seek to boost the sensitivity, image ics technologies, with the aim of developing new medi- quality, and noise reduction of CMOS sensors for inter- cal devices and commercializing them. changeable lens digital cameras to realize new types In the industrial equipment field, Canon applies of visual expression for cameras. By raising the per- its optical, capturing and imaging technologies to formance levels of these devices to the full extent, we advanced 3D measurement and recognition technolo- are developing sensors applicable to functions used in gies. The technologies are part of our ongoing research such areas as medical research and surveillance and on Super Machine Vision, which will serve as the eyes of security. We are now promoting businesses of CMOS intelligent robots. sensor components. 26 P R O D U C T I O N Canon works to maintain and expand production, actively introducing our automation technologies and extending them in high-value-added products such as assembly of EF lens units. (the Utsunomiya Plant, Japan) In addition to establishing a globally optimized production system, Canon seeks improved quality and productivity by putting a priority on conducting production operations itself to ensure the progress of its manufacturing expertise. Belief in “Internal Production” In-House Production Automation Man-Machine Cell (cid:115)(cid:0)(cid:35)(cid:79)(cid:83)(cid:84)(cid:0)(cid: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 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 Canon Group. Improving Productivity Canon continues to expedite production in optimal loca- tions. At the same time, by putting a priority on con- ducting 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 system—an approach that fully utilizes the creativity of STRATEGY BUSINESS SEGMENT CORPORATE STRUCTURE FINANCIAL SECTION CORPORATE DATA 27 Canon is participating in a next-generation ultra-large-telescope project aimed at fostering unparalleled and new astronomical research never seen before. Engaged in the project, Canon is press- ing ahead with technological innovations in optical technologies and systems for high-precision measurement and processing. Committed to offer customers products that are safe while also providing trust and satisfaction, Canon adheres stringent quality control measures at every process, refl ecting its basic concept of quality: “no claims, no trouble.” (the Tamagawa Offi ce, Japan) individual workers. Canon continues to improve produc- assembly of EF lens focus units and then basic process- tivity by making efforts to increase production efficien- ing of camera bodies. cies in cell production while rolling out “man-machine cell” production systems that integrate manual and automated processes. In the Americas and Europe, Canon accelerates local- Environmental Friendly Manufacturing; Enhanced Product Quality Canon actively seeks to prioritize purchases of environ- ized production of consumables such as toner cartridges mentally conscious parts and materials as well as shift to by using automated production lines. Our aim is to transportation modes that have minimal environmental deliver products timely while reducing transportation impact. We also focus on manufacturing initiatives that costs and inventory in transit. are friendly to the global environment. As for efforts to improve productivity in each region, Creating top-quality products is a relentless chal- Canon in Japan has introduced prototype-less pro- lenge at Canon. Grinding and processing of lenses is duction adopting simulation technology on super- one of those that require advanced technologies. We computer systems and has used 3D printers to make have been entrusted with the responsibility of process- prototypes. With these technologies, we are pursuing ing the 30-meter-diameter multi-segment primary mir- ideal product designs and significantly shorter develop- ror to be incorporated in the Thirty Meter Telescope ment times. Furthermore, with the aim of further cost (TMT), currently under construction near the summit reductions, we have expanded our in-house produc- of Mauna Kea, Hawaii, and scheduled for completion tion range from key parts including image sensors to in 2021. large-quantity-procured items including molded parts. We have also deployed automated production lines for 28 S A L E S & M A R K E T I N G Canon (China) Co., Ltd. actively joins camera shows including the China International Photograph & Electrical Imaging Machinery and Technology Fair to promote our comprehensive capability as the leading imaging company. Canon reinforces its sales and marketing capabilities by providing innovative products and advanced solutions tailored to meet the characteristics of each region. Japan In the year under review, sales in Japan amounted to ¥724.3 billion, equivalent to 19.4% of consolidated net sales. Due to the prolonged impact of the consumption tax hike, the market for consumer products became more challenging than in the previous year. Nevertheless, Canon secured the top market shares of its main prod- Composition of Sales by Region ucts interchangeable lens digital cameras, compact digital Asia and Oceania 23.5% ¥876.0 billion The Americas 27.8% ¥1,036.5 billion Net Sales ¥3,727.3 billion Japan 19.4% ¥724.3 billion Europe 29.3% ¥1,090.5 billion cameras, and inkjet printers; our proactive sales promo- tion efforts including user-oriented campaigns contrib- uted to this achievement. In the B2B field, we advanced a new business of 3D Solutions for manufacturers, which combines 3D printers with computer graphics (CG) tech- nologies. We also used our data centers to broaden our cloud services. In one highlight, we provided infrastruc- ture enabling observation of patients’ medical examina- tion images from remote locations. The Americas Sales in the Americas came to ¥1,036.5 billion, or 27.8% STRATEGY BUSINESS SEGMENT CORPORATE STRUCTURE FINANCIAL SECTION CORPORATE DATA 29 New Come and See brand identity unveiled at Photokina in Cologne, Germany, September 2014 to inspire and engage the 180,000 visitors and hundreds of journalists. Canon U.S.A. opened the Canon Experience Center in Costa Mesa, California, as a new customer service operation center covering the area of the West Coast. of consolidated net sales. in driving growth in network visual solutions. To appeal Canon Americas has been making steady progress to new consumers, a new brand identity was launched— toward creating a regional headquarters that will han- Come and See. A new cloud-based image management dle product development, manufacturing, and sales service, irista, was also launched in 2014. Canon strength- functions. In 2014, we focused on enhancing customer ened its sales and marketing in the Middle East through services by opening new support service operations: the formation of a new Canon sales company in Qatar. the Canon Experience Center, in Southern California, and our second U.S. call center, in New Mexico. We also launched our new marketing slogan, Canon See Asia and Oceania In Asia and Oceania sales amounted to ¥876.0 billion Impossible, and devised a brand strategy aimed at (23.5% of consolidated net sales). addressing changing markets and conveying new levels Canon has started Asia Traveler Protection Program of added value created by Canon. (ATPP), seeking to offer added values to increasing inter- national tourists in China and Southeast Asia. When our Europe (Europe, Middle East, Africa) In Europe sales amounted to ¥1,090.5 billion (29.3% of customers buy Canon’s products such as cameras and lenses in mainland China and visit overseas countries, consolidated net sales). they can use the repair service for free in eleven coun- In 2014, Canon Europe increased market share in key tries and regions in Asia. segments, while also focusing on developing new oppor- In Australia, Canon acquired a majority stake in tunities for diversification and future growth. Canon’s Harbour IT Pty. Ltd., one of the largest managed services acquisition of Milestone Systems A/S, a world leader in and cloud solutions providers, to enhance our business video management software, was a major strategic step services offering. 30 C O R P O R AT E S O C I A L R E S P O N S I B I L I T Y Canon India Pvt. Ltd. rolls out continuously various community welfare programs in the three areas of eye care, education and environment in villages without adequate educational and healthcare facilities. For example, we improve school facilities by setting up resource centers for children and installing solar panels. We also help villagers by providing eye check-ups with Canon’s retinal cameras. (Ferozepur Namak Village) Guided by its kyosei (“living and working together for the common good”) philosophy, Canon is promoting CSR activities with the aim of becoming a truly excellent corporation that is admired and respected the world over. Canon’s Basic Approach to CSR Canon recognizes that its corporate activities are sup- ported by the development of society as a whole, and contributes to the realization of a better society as a good corporate citizen, effectively leveraging its ad- vanced technological strengths, global business deploy- ment, and diverse, specialized human resources. Environmental Activities Canon Selected by CDP as Leading Company in Climate Change Information Disclosure In 2014, CDP, an international nonprofit organization (NPO) that conducts environmental assessments, selected Canon for the first time as a leading company in climate change information disclosure under its environmental ratings. Canon was recognized for its initiatives such as the effort to ensure transparency by obtaining third par- ty verification of its greenhouse gas emissions data. LEED Certification In February 2014, Canon Americas Headquarters re- ceived the Gold certification of the international stan- dard LEED (Leadership in Energy & Environmental Design) as a highly resource-efficient, green building. In Canon U.S.A. has made various efforts to reduce the environ- mental impact of its headquarters building including incorporat- ing natural light and installing a rainwater capture and storage system that uses greenery. STRATEGY BUSINESS SEGMENT CORPORATE STRUCTURE FINANCIAL SECTION CORPORATE DATA 31 The “Eyes on Yellowstone”, an education and research program in partnership with Yellowstone National Park, releases videos of wildlife in their natural environment online. These videos are used to educate children around the world. Under the Tsuzuri Project, in 2014 Canon made high-resolution reproductions of all 16 fusuma (sliding door) paintings of “Scene of Rice Cultivation.” This work, believed to have been painted by Kano Sanraku, are now in the possession of the Minneapolis Institute of Art. Canon donated the reproductions to the Daikakuji Temple at the former Saga Imperial Palace in Kyoto, Japan. September 2014, the Canon U.S.A. distribution center in Atlanta was the first facility to receive LEED certification in the new “Building Design and Construction – Ware- houses and Distribution Centers” category. of Industrial Infrastructure grant and Pursuit of Ideals grant. In 2014, 17 projects were selected for the fifth re- search grant program. Conservation Activities at National Parks in the United States Canon U.S.A. continues to provide support for environ- mental protection activities in U.S. national parks. The company began supporting Yellowstone National Park in 1995 and Acadia National Park in 2013. Canon imaging equipment is used to observe wildlife, create video librar- ies and support communication activities. Social Contribution Activities Canon conducts wide-ranging social contribution ac- tivities in various parts of the world to help create a better society. Canon Foundation Announces Fifth 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 The Tsuzuri Project Canon and the non-profit organization Kyoto Culture Association jointly promote a project called the “Tsu- zuri Project” (Official title: Cultural Heritage Inheritance Project). The aim of the project is to preserve original cultural assets while maximizing the effective use of high-resolution facsimiles of cultural assets. These fac- similes are created by blending Canon’s latest digital technology and traditional Japanese crafts, such as gold leaf craftwork. As a result of the project, original cultur- al assets can be kept in the more favorable environment of museums while facsimiles can be used for education- al purposes and public exhibits. Since the program be- gan in 2007, the cumulative total of reproduced and donated items has reached 31 (as of March 2015). Partnership with the Red Cross EU Office Canon Europe entered into a partnership agreement with the Red Cross in 2006 after having been a longtime supporter and endorser of the organization’s activities. 32 CORPORATE SOCIAL RESPONSIBILITY Canon Europe supports the German Red Cross’s activities, such as emergency response training for children, in preparation for natu- ral disasters. ©Red Cross With the aim of promoting innovation by incorporating the opinions of our diverse human resources at all levels of decision-making, Canon recognizes the individual aptitudes and skills of employees, positively expanding the scope of activities of female staff. The Company works with 16 Red Cross National Societ- ies across Europe, giving support in a variety of ways, from donating equipment to providing funding for edu- cation and engagement projects for young people. Canon Image Bridge “Canon Image Bridge” is an initiative in which Canon China and other members of the Canon Asia Marketing Group serve as a bridge linking elementary and middle school children in Asia by delivering their photo cards. To date, around 5,600 children from 179 schools have tak- en part in the photo card exchange project. Children take photos and other children in foreign countries write mes- sages on the pictures while exchanging photo cards. Canon helps them make photo cards and send them abroad to foster cross-cultural communication among children. Addressing the Issue of Confl ict Minerals Seeking to ensure that customers can use Canon prod- ucts with peace of mind, the Canon Group works to- gether with its business partners as well as industry organizations to address the issue of conflict minerals. In accordance with the U.S. Dodd-Frank Wall Street Reform and Consumer Protection Act, Canon filed a re- port at the end of May 2014 regarding the Company’s sta- tus on this issue with the U.S. Securities and Exchange Commission. This report is also made available on Canon’s website. Based on data gathered through February 2015 re- garding products manufactured, or contracted to man- ufacture, by the Canon Group, no specific parts or materials have been found to have contributed to fund- ing armed groups in conflict regions as defined by U.S. legislation. Due, however, to the complex nature of the supply chain, inquiries may not have reached a number of smelters or refiners located upstream. In response, Canon will enhance its collaboration efforts across var- ious industries and support activities aimed at encour- aging smelters to avoid using conflict minerals that finance armed groups. Cultivating Diverse Human Resources Canon is committed to diversity of human resources. We welcome people of all types—irrespective of race, gen- der, age, customs, and value perceptions—and deploy such differences to foster our growth as an organization. Since 2012, we have engaged in in-house projects with top priority on helping maximize the potential of wom- en in the workplace. Initiatives in 2014 included internal educational activities and leadership training for select- ed female employees. We also held seminars for employ- ees returning from childcare leave and their superiors. F I N A N C I A L S E C T I O N 33 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 53 CONSOLIDATED STATEMENTS OF CASH FLOWS 54 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 84 SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS 85 MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING 86 REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 34 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 FPD (Flat panel display) 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 2014, although the United States and other developed countries were initial- ly expected to bring about a return to a path of full-fledged growth, such expectations came up short due to the ongo- ing occurrence of such unforeseen circumstances as the con- flict between Russia and Ukraine. In the U.S., despite the negative impact of the major cold wave that struck at the beginning of the year, the economy showed steady signs of recovery, buoyed by the improvement in employment condi- tions and healthy growth in consumer spending. In Europe, the economy remained sluggish due to such factors as the negative impact of Russia’s deteriorating economy on neigh- boring euro area countries. The pace of economic expan- sion in China was modest while other emerging countries in Southeast Asia and South America faced slowdowns in mar- ket growth due to economic stagnation. In Japan, with the economy yet to recover from the decline following the rush in demand leading up to the hike in the country’s consump- tion tax, growth fell short of the rate recorded in the previ- ous year. Market environment Looking at the markets in which Canon operates amid these conditions, demand for MFDs and laser printers main- tained steady growth. Demand for interchangeable-lens digital cameras continued to face harsh conditions due to the economic slowdown. Demand for digital compact cam- eras continued to shrink in both developed countries and emerging markets. Demand for inkjet printers, decreased due to the sluggish economies of Asia and Europe. In the industry and others sector, a rebound in capital investment for both memory devices and image sensors led to a pick- up in demand for semiconductor lithography equipment. Additionally, demand for lithography equipment used in the production of FPDs increased for large-size panels. The average value of the yen during the year was ¥106.18 against the U.S. dollar, a year-on-year depreciation of approxi- mately ¥8, and ¥140.62 against the euro, a year-on-year depre- ciation of approximately ¥11. Summary of operations MFDs and laser printers enjoyed solid demand during the year and industrial equipment sales increased significantly. Within the shrinking market for interchangeable-lens digi- tal cameras and digital compact cameras, less-than-expected demand during the year-end shopping season led to a decline in net sales. As a result, despite the positive effects of favor- able currency exchange rates, net sales for the year decreased by 0.1% year on year to ¥3,727.3 billion. The gross profit ratio, however, rose 1.7 points year on year to 49.9% thanks to the effects of ongoing cost-cutting efforts along with the depre- ciation of the yen. Despite an increase in foreign-currency- denominated operating expenses due to the depreciation of the yen, Group-wide efforts to reduce spending contrib- uted to limiting operating expenses to ¥1,498.0 billion, an increase of just 2.5% year on year. As a result, operating prof- it increased by 7.8% year on year to ¥363.5 billion. Other income increased by ¥9.4 billion due to foreign currency exchange gains while income before income taxes increased by 10.3% to ¥383.2 billion. Net income attributable to Canon Inc. increased by 10.5% to ¥254.8 billion. Accordingly, despite the slight decline in net sales, Canon achieved profit growth. Key performance indicators The following are the key performance indicators (“KPIs”) that Canon uses in managing its business. The changes from year to year in these KPIs are set forth in the table shown on page 35. Revenues As Canon pursues the goal to become a truly excellent glob- al 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. Net sales is one such KPI. Canon derives net sales primari- ly from the sale of products and, to a lesser extent, provision of services associated with its products. Sales vary depend- ing on such factors as product demand, the number and size of transactions within the reporting period, market acceptance for new products, and changes in sales prices. Other factors involved are market share and market envi- ronment. In addition, management considers the evalua- tion of net sales by segment to be important for the purpose of assessing Canon’s sales performance in various segments, STRATEGY BUSINESS SEGMENT CORPORATE STRUCTURE FINANCIAL SECTION CORPORATE DATA 35 taking into account recent market trends. Gross profit ratio (ratio of gross profit to net sales) is another KPI for Canon. Through its reforms of product 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 efficien- cy 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 oth- er 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 val- ue, which may adversely affect Canon’s operating results. To mitigate these risks, management believes that it is crucial to continue reducing work-in-process inventories by decreasing production lead times in order to promptly recover related product expenses, while balancing risks of supply chain 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 2014 2013 2012 2011 2010 ¥3,727,252 ¥3,731,380 48.2% 8.2% 9.0% 52 days 0.1% 68.6% 49.9% 8.3% 9.8% 50 days 0.0% 66.8% ¥3,479,788 47.4% 8.5% 9.3% 57 days 0.1% 65.7% ¥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% Note: Inventory turnover measured in days is determined by: Inventory divided by net sales for the previous six months, multiplied by 182.5. 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. 36 FINANCIAL OVERVIEW 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 specific criteria of the equipment functionality are successfully test- ed and demonstrated by Canon. Service revenue is derived primarily from separately priced product maintenance con- tracts on equipment sold to customers and is measured at the stated amount of the contract and recognized as servic- es are provided. Canon also offers separately priced product maintenance contracts for most office products, for which the custom- er 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 leas- es 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, rev- enue is first allocated considering the relative fair value of the lease and non-lease deliverables based upon the estimated relative fair values of each element. Lease deliverables gener- ally include equipment, financing and executory costs, while non-lease deliverables generally consist of product mainte- nance contracts and supplies. For all other arrangements with multiple elements, Canon allocates revenue to each element based on its relative sell- ing price if such element meets the criteria for treatment as a separate unit of accounting. Otherwise, revenue is deferred until the undelivered elements are fulfilled and accounted for as a single unit of accounting. Canon records estimated reductions to sales at the time of sale for sales incentive programs including product discounts, customer promotions and volume-based rebates. Estimated reductions to sales are based upon historical trends and other known factors at the time of sale. In addition, Canon provides price protection to certain resellers of its products, and records reductions to sales for the estimated impact of price protec- tion obligations when announced. In 2011, the sales incentive program accruals were quite difficult to estimate compared to prior years because of the significant fluctuation in consumer product supplies from our manufacturing facilities, due to the earthquake in Japan and the flooding in Thailand. Although Canon utilized available data to produce its best estimate of promotion payments to be claimed in 2012, actual claims in 2012 were not as high as Canon had estimated. Moreover, in recent years, as a result of the market conditions and custom- er 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 informa- tion became available, Canon reviewed the 2011 accrual bal- ance in order to determine whether the accrual needed to be revised during 2012. By using new additional statistical infor- mation and gathering sales and inventory data from custom- ers, Canon was able to revise its estimates. Estimated product warranty costs are recorded at the time revenue is recognized and are included in selling, general and administrative expenses. Estimates for accrued product war- ranty costs are based on historical experience, and are affected by ongoing product failure rates, specific product class fail- ures outside of the baseline experience, material usage and service delivery costs incurred in correcting a product failure. Allowance for doubtful receivables Allowance for doubtful receivables is determined using a combination of factors to ensure that Canon’s trade and financing receivables are not overstated due to uncollectibil- ity. These factors include the length of time receivables are past due, the credit quality of customers, macroeconomic conditions and historical experience. Also, Canon records spe- cific reserves for individual accounts when Canon becomes aware of a customer’s inability to meet its financial obliga- tions to Canon, due for example to bankruptcy filings or dete- rioration in the customer’s operating results or financial position. If circumstances related to customers change, esti- mates of the recoverability of receivables are further adjusted. Valuation of inventories Inventories are stated at the lower of cost or market value. Cost is determined by the average method for domestic 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 salability 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 STRATEGY BUSINESS SEGMENT CORPORATE STRUCTURE FINANCIAL SECTION CORPORATE DATA 37 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 circumstanc- es 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 impair- ment charge is recognized in the amount by which the car- rying amount of the asset exceeds the fair value of the asset. Determining the fair value of the asset involves the use of estimates and assumptions. Property, plant and equipment Property, plant and equipment are stated at cost. Depreciation is calculated principally by the declining-balance method, except for certain assets which are depreciated by the straight- line method over the estimated useful lives of the assets. 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 frequently if indicators of potential impairment exist. Canon performs its impairment test of goodwill using the two-step approach at the reporting unit level, which is one level below the operating segment level. All goodwill is assigned to the reporting unit or units that benefit from the synergies aris- ing from each business combination. If the carrying amount assigned to the reporting unit exceeds the fair value of the reporting unit, Canon performs the second step to measure an impairment charge in the amount by which the carrying amount of a reporting unit’s goodwill exceeds its implied fair value. Fair value of a reporting unit is determined primari- ly based on the discounted cash flow analysis which involves estimates of projected future cash flows and discount rates. Estimates of projected future cash flows are primarily based on Canon’s forecast of future growth rates. Estimates of dis- count rates are determined based on the weighted average cost of capital, which considers primarily market and indus- try data as well as specific risk factors. Intangible assets with finite useful lives consist primarily of software, license fees, patented technologies and customer relationships. Software and license fees are amortized using the straight-line method over the estimated useful lives, which range primarily from 3 years to 5 years for software and 5 years to 10 years for license fees. Patented technologies are amortized using the straight- line method principally over the estimated useful lives, which range from 8 years to 16 years. Customer relationships are amortized principally using the declining-balance meth- od 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 tax- able income. Canon’s judgments regarding future profitabil- ity may change due to future market conditions, its ability to continue to successfully execute its operating restructur- ing activities and other factors. Any changes in these factors may require possible recognition of significant valuation allowances to reduce the net carrying value of these deferred tax asset balances. When Canon determines that certain deferred tax assets may not be recoverable, the amounts, which may not be realized, are charged to income tax expense and will adversely affect net income. Employee retirement and severance benefit plans Canon has significant employee retirement and severance benefit obligations that are recognized based on actuari- al 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 withdraw- al rate. Changes in assumptions inherent in the valuation are reasonably likely to occur from period to period. Actual results that differ from the assumptions are accumulated and amortized over future periods and, therefore, generally affect future pension expenses. While management believes that the assumptions used are appropriate, the differences may affect employee retirement and severance benefit costs in the future. In preparing its financial statements for 2014, Canon esti- mated a weighted-average discount rate used to determine benefit obligations of 1.1% for Japanese plans and 2.9% for foreign plans and a weighted-average expected long-term rate of return on plan assets of 3.1% for Japanese plans and 4.9% for foreign plans. In estimating the discount rate, Canon uses available information about rates of return on high-quality fixed-income 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 38 FINANCIAL OVERVIEW 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 2014, a decrease of 50 basis points in the discount rate increases the projected benefit obligation by approximately ¥91,609 million. The net effect of changes in the discount rate, as well as the net effect of other changes in actuarial assumptions and experience, is deferred until subse- quent 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 actu- al fair value of those assets could affect pension expense in the following years, and vice versa. For 2014, a change of 50 basis points in the expected long-term rate of return on plan assets would cause a change of approximately ¥4,218 mil- lion in net periodic benefit cost. Canon multiplies manage- ment’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 oth- er 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. Sales The shrinking market for interchangeable-lens digital cameras and digital compact cameras, and less-than-expected demand during the year-end shopping season led to a major decline in net sales in Imaging System Business Unit. However, due to the stable demand for MFDs and laser printers, and indus- trial equipment sales along with the positive effects of favor- able currency exchange rates, Canon’s consolidated net sales in 2014 totaled ¥3,727,252 million, a slight decrease of 0.1% from the previous year. Overseas operations are significant to Canon’s operating results and generated 80.6% of total net sales in 2014. Such sales are denominated in the applicable local currency and are subject to fluctuations in the value of 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 ¥106.18 against the U.S. dollar, a year-on-year depreciation of approx- imately ¥8, and ¥140.62 against the euro, a year-on-year depreciation of approximately ¥11. The effects of foreign exchange rate fluctuations positively affected net sales by Millions of yen 2014 ¥3,727,252 363,489 383,239 254,797 change -0.1% +7.8% +10.3% +10.5% 2013 change 2012 ¥3,731,380 337,277 347,604 230,483 +7.2% +4.1% +1.5% +2.6% ¥3,479,788 323,856 342,557 224,564 approximately ¥186,000 million in 2014. This favorable impact consisted of approximately ¥98,200 million for the U.S. dollar denominated sales, ¥66,800 million for the euro denominated sales and ¥21,000 million for other foreign currency denominated sales. Cost of sales Cost of sales principally reflects the cost of raw materials, parts and labor used by Canon in the manufacture of its products. A portion of the raw materials used by Canon is Return on Sales (%) 9 6 3 0 2010 2011 2012 2013 2014 STRATEGY BUSINESS SEGMENT CORPORATE STRUCTURE FINANCIAL SECTION CORPORATE DATA 39 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 expens- es, light and fuel expenses, and rent expenses. The ratio of cost of sales to net sales for 2014 and 2013 was 50.1% and 51.8%, respectively. Gross profit Canon’s gross profit in 2014 increased by 3.5% to ¥1,861,472 million from 2013. The gross profit ratio also increased by 1.7 points year on year to 49.9%. The increase in the gross profit ratio reflects ongoing cost-cutting efforts along with the posi- tive effects of the depreciation of the yen. Operating expenses The major components of operating expenses are payroll, R&D, advertising expenses and other marketing expens- es. Despite the negative effect of depreciation of the yen, group-wide efforts to thoroughly reduce spending contrib- uted to limit the increase year on year to 2.5% to a total of ¥1,497,983 million. Operating profit Operating profit in 2014 increased 7.8% from 2013 to a total of ¥363,489 million. The ratio of operating profit to net sales increased 0.8% to 9.8% from 2013. Other income (deductions) Other income (deductions) for 2014 increased ¥9,423 mil- lion to ¥19,750 million, mainly due to foreign currency exchange gain. Income before income taxes Income before income taxes in 2014 was ¥383,239 million, an increase of 10.3% from 2013, and constituted 10.3% of net sales. Income taxes Provision for income taxes in 2014 increased by ¥9,912 mil- lion from 2013. The effective tax rate during 2014 remained consistent with 2013. The effective tax rate for 2014 was 30.8%, which was lower than the statutory tax rate in Japan. This was mainly due to the tax credit for R&D expenses. Net income attributable to Canon Inc. As a result, net income attributable to Canon Inc. in 2014 increased by 10.5% to ¥254,797 million, which represents 6.8% of net sales. Segment information Canon divides its businesses into three segments: the Office Business Unit, the Imaging System Business Unit and the Industry and Others Business Unit. (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 / FPD (Flat panel dis- play) lithography equipment / Digital radiography systems / Ophthalmic equipment / Vacuum thin-film deposition equip- ment / Organic LED (“OLED”) panel manufacturing equip- ment / Die bonders / Micromotors / Network cameras / Handy terminals / Document scanners Sales by Segment (Billions of yen) Sales by Geographic Area (Billions of yen) 5,000 4,000 3,000 2,000 1,000 0 5,000 4,000 3,000 2,000 1,000 0 Office Business Unit Imaging System Business Unit Industry and Others Business Unit Eliminations 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 Japan Americas Europe Asia and Oceania 40 FINANCIAL OVERVIEW 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 Millions of yen 2014 ¥2,078,732 1,343,194 398,765 (93,439) ¥3,727,252 change +3.9% -7.3% +6.4% — -0.1% 2013 change 2012 ¥2,000,073 1,448,938 374,870 (92,501) ¥3,731,380 +13.8% +3.1% -8.1% — +7.2% ¥1,757,575 1,405,971 407,840 (91,598) ¥3,479,788 Within the Office Business Unit, office MFDs sales increased steadily from the year-ago period, led by healthy demand for new imageRUNNER ADVANCE C350/C250-series models, Canon’s first color A4 (letter and legal-sized)-model imageRUNNER ADVANCE machines, and the imagePRESS C800/C700, Canon’s first color models targeting the light production market, along with the A3 (12” x 18”)-model imageRUNNER ADVANCE C5200 series, which continues to be well accepted in the market. The Océ ColorStream 3000 series of high-speed continuous-feed printers continued to enjoy solid sales growth from the previous year. Among laser printers, although color models and multifunction models recorded sales growth, total sales volume decreased slightly from the year-ago period owing to the decrease in demand for monochrome models in European and other markets that have suffered prolonged economic stagnation. As a result, coupled with the positive effects of favorable currency exchange rates, sales for the business unit totaled ¥2,078.7 billion, a year-on-year increase of 3.9%, while oper- ating profit totaled ¥292.1 billion, an increase of 9.4%. Within the Imaging System Business Unit, although sales volume of interchangeable-lens digital cameras declined owing to the shrinking market—in Japan as a result of the reaction following the rush in demand prior to the con- sumption tax increase, and in Europe and other markets due to worsening economic conditions—the advanced- amateur-model EOS 7D Mark II achieved healthy growth, enabling Canon to maintain the market’s top share. Despite a decline in total sales volume for digital compact cameras, sales of high-added-value models featuring high image qual- ity and high-magnification zoom capabilities, such as the PowerShot G7 X and PowerShot SX60 HS/SX700 HS, record- ed solid growth, contributing to an improvement in prof- itability. Inkjet printer hardware sales increased for the fourth quarter from the year-ago period thanks to the intro- duction of new products for the year-end shopping season and marketing tailored to geographical characteristics, but sales volume for the year decreased due to economic slug- gishness in Asia and Europe. Sales of consumable supplies increased from the previous year owing to the steady accu- mulation of printer units currently operating in the market. As a result, including the positive effect of favorable cur- rency change rates, sales for the business unit decreased by 7.3% to ¥1,343.2 billion year on year, while operating profit declined 4.5% to ¥194.6 billion. In the Industry and Others Business Unit, ongoing invest- ment following the recovery in the second half of the previ- ous year by memory device manufacturers led to increased unit sales of semiconductor lithography equipment for memory devices and image sensors. Amid increasing mar- ket demand for higher definition tools, lithography systems for the creation of high-definition mid- and small-size pan- els, in addition to a model introduced in the second half of the previous year for large panels, recorded healthy growth, contributing to the boosting of both sales volume and mar- ket share. In medical equipment, sales volume of new dig- ital radiography systems, including wireless static-image models and models capable of capturing dynamic imag- es, grew steadily, fueling sales growth. Consequently, sales for the business unit totaled ¥398.8 billion, an increase of 6.4% year on year, while operating profit, although showing an improvement from the previous year, recorded a loss of ¥21.8 billion owing to investment, including R&D expenses, into next-generation technologies. Intersegment sales of ¥93,439 million, representing 2.5% of total sales, are eliminated from total sales for the three seg- ments, 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 2014 are summarized as follows. In Japan, although sales volume of digital compact cam- eras declined, net sales increased by 1.2% from the previous year due to solid growth in office MFDs. In the Americas, despite the favorable effect from depreci- ation of the yen against U.S. dollar and solid demand for ink- jet printers, net sales decreased by 2.2% from the previous year owing to the decline of compact digital camera market. Despite the favorable effect from depreciation of the STRATEGY BUSINESS SEGMENT CORPORATE STRUCTURE FINANCIAL SECTION CORPORATE DATA 41 yen against euros and solid demand for office MFDs in sluggish economic condition, net sales decreased by 3.1% from the previous year due to the price reduction of inter- changeable-lens digital cameras and shrinking of digital compact camera market in Europe. In Asia and Oceania, although sales volume of interchangeable-lens digital cameras and digital compact cameras declined, net sales increased by 5.4% from the previ- ous year due to solid demand for office MFDs coupled with the positive effects of depreciation of the yen. A summary of net sales by geographic area is provided below. SALES BY REGION Japan Americas Europe Asia and Oceania Total 2014 ¥ 724,317 1,036,500 1,090,484 875,951 ¥ 3,727,252 change +1.2% -2.2% -3.1% +5.4% -0.1% Millions of yen 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% 2012 ¥ 720,286 939,873 1,014,038 805,591 ¥3,479,788 Note: This summary of net sales by geographic area is determined by the location where the product is shipped to the customers. Operating profit by segment Please refer to the table of segment information in Note 21 of the Notes to Consolidated Financial Statements. Company and its domestic subsidiaries. Please refer to the table of geographic information in Note 21 of the Notes to Consolidated Financial Statements. Operating profit for the Office Business Unit in 2014 increased by 9.4% to ¥292,057 million, resulting from the sales increase including the positive effects of favorable cur- rency exchange rates. Despite operating profit for the Imaging System Business Unit in 2014 decreased by 4.5% to ¥194,601 million, in response to the sales decline, operating profit ratio increased from previ- ous year, owing to the improvement in profitability from the sales shift to high-added-value models in camera, along with the positive effects of favorable currency exchange rates. Operating profit for the Industry and Others Business Unit in 2014, despite an improvement from the previous year result- ed from sales increase, recorded a loss of ¥21,801 million owing to investment, including R&D expenses, into next- generation technologies. 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 usual- ly lower than that from domestic operations because for- eign operations consist mainly of marketing activities. Marketing activities are generally less profitable than pro- duction activities, which are mainly conducted by the LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents increased by ¥55,671 million to ¥844,580 million in fiscal 2014 compared to the previous year. Canon’s cash and cash equivalents are typically denomi- nated in Japanese yen and in U.S. dollars, with the remainder denominated in other currencies. Net cash provided by operating activities increased by ¥76,285 million to ¥583,927 million in fiscal 2014 compared to the previous year. The major component of Canon’s cash inflow is cash received from customers, and the major com- ponents of Canon’s cash outflow are payments for parts and materials, selling, general and administrative expenses, R&D expenses and income taxes. For fiscal 2014, cash inflow from operating activities increased, due to the increasing profit as well as an improve- ment in working capital. There were no significant chang- es in Canon’s collection rates. Cash outflow for payments for parts and materials decreased, as a result of decreased inven- tory level. Cash outflow for income taxes increased due to an increase in taxable income. Net cash used in investing activities increased by ¥19,086 million to ¥269,298 million in fiscal 2014. This reflects the acquisition of Milestone Systems, to enhance Canon’s network camera business, and several other companies. Purchases of fixed assets were focused on items relevant to new products. Canon defines “free cash flow” as cash flows from operating activities less cash flows from investing activi- ties. For fiscal 2014, free cash flow totaled ¥314,629 mil- lion as compared with ¥257,430 million for fiscal 2013. Canon’s management recognizes that constant and inten- sive investment in facilities and R&D is required to main- tain and strengthen the competitiveness of its products. 42 FINANCIAL OVERVIEW Canon has also commenced a public tender offer for all of the issued shares of Axis AB on March 3, 2015, in order to further ensure its goal of becoming the world lead- er in network surveillance camera systems for consider- ation of a maximum amount of approximately 23.6 billion Swedish krona (approximately ¥333.7 billion with transla- tion at the rate of ¥14.13 = 1 Swedish krona). Canon’s man- agement seeks to meet its capital requirements, including the acquisition of Axis AB, with generating cash flow prin- cipally from its operating activities. Therefore, its capital resources are primarily sourced from internally generat- ed funds. Accordingly, Canon includes information with regard to free cash flow as management frequently mon- itors this indicator, and believes that such indicator is beneficial to an investor’s understanding. Furthermore, Canon’s management believes that this indicator is signif- icant in understanding Canon’s current liquidity and the alternatives of use in financing activities because it takes into consideration its operating and investing activities. Canon refers to this indicator together with relevant U.S. GAAP financial measures shown in its consolidated state- ments of cash flows and consolidated balance sheets for cash availability analysis. Net cash used in financing activities totaled ¥300,886 mil- lion in fiscal 2014, mainly resulting from repurchase of trea- sury stock of ¥149,813 million, and dividends of ¥145,790 million. The Company paid dividends in fiscal 2014 of ¥130.00 per share. To the extent Canon relies on external funding for its liquidity and capital requirements, it generally has access to various funding sources, including the issuance of addi- tional share capital, long-term debt or short-term loans. While Canon has been able to obtain funding from its tradi- tional financing sources and from the capital markets, and believes it will continue to be able to do so in the future, there can be no assurance that adverse economic or other conditions will not affect Canon’s liquidity or long-term funding in the future. Short-term loans (including the current portion of long- term debt) amounted to ¥1,018 million at December 31, 2014 compared with ¥1,299 million at December 31, 2013. Long- term debt (excluding the current portion) amounted to ¥1,148 million at December 31, 2014 compared with ¥1,448 million at December 31, 2013. Canon’s long-term debt mainly consists of lease obligations. In order to facilitate access to global capital markets, Canon obtains credit ratings from two rating agencies: Moody’s Investors Services, Inc. (“Moody’s”) and Standard and Poor’s Ratings Services (“S&P”). In addition, Canon main- tains a rating from Rating and Investment Information, Inc. (“R&I”), a rating agency in Japan, for access to the Japanese capital market. As of March 13, 2015, Canon’s debt ratings are: Moody’s: Aa1 (long-term); S&P: AA (long-term), A-1+ (short- term); and R&I: AA+ (long-term). Canon does not have any rating downgrade triggers that would accelerate the maturity of a material amount of its debt. A downgrade in Canon’s credit ratings or outlook could, however, increase the cost of its borrowings. Canon’s management policy in recent periods to opti- mize inventory levels is intended to maintain an appro- priate balance among relevant imperatives, including minimizing working capital, avoiding undue exposure to the risk of inventory obsolescence, and maintaining the ability to sustain sales despite the occurrence of unexpect- ed disasters. Reflecting the foregoing circumstances, Canon’s total inventory turnover ratios were 50, 52, and 57 days at the end of the fiscal years 2014, 2013, and 2012, respectively and the improvements over the last three years are in line with Canon’s expectations and its revised inventory man- agement policy. Increase in Property, Plant and Equipment (Billions of yen) Working Capital Ratio Return on Canon Inc. Stockholders’ Equity (%) 300 200 100 0 3.0 2.5 2.0 1.5 1.0 0.5 0 12 9 6 3 0 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 STRATEGY BUSINESS SEGMENT CORPORATE STRUCTURE FINANCIAL SECTION CORPORATE DATA 43 Increase in property, plant and equipment on an accru- al basis in 2014 amounted to ¥182,343 million compared with ¥188,826 million in 2013 and ¥270,457 million in 2012. For 2015, Canon projects its increase in property, plant and equipment will be approximately ¥205,000 million. Employer contributions to Canon’s worldwide defined ben- efit pension plans were ¥22,146 million in 2014, ¥48,515 million in 2013 and ¥30,421 million in 2012. Employer con- tributions to Canon’s worldwide defined contribution pen- sion plans were ¥15,077 million in 2014, ¥14,383 million in 2013, and ¥13,021 million in 2012. In addition, employer contributions to the multiemployer pension plan in which certain subsidiaries in Netherlands participated were ¥2,815 million in 2014. Working capital in 2014 increased by ¥32,919 million to ¥1,470,554 million, compared with ¥1,437,635 million in 2013 and ¥1,237,821 million in 2012. Canon believes its work- ing capital will be sufficient for its requirements for the fore- seeable future. Canon’s capital requirements are primarily dependent on management’s business plans regarding the levels and timing of purchases of fixed assets and invest- ments. The working capital ratio (ratio of current assets to current liabilities) for 2014 was 2.60 compared to 2.69 for 2013 and to 2.47 for 2012. Return on assets (net income attributable to Canon Inc. divided by the average of total assets) was 5.9% in 2014, compared to 5.6% in 2013 and 5.7% in 2012. Return on Canon Inc. stockholders’ equity (net income attributable to Canon Inc. divided by the average of total Canon Inc. stockholders’ equity) was 8.7% in 2014 compared with 8.4% in 2013 and 8.7% in 2012. The debt to total assets ratio was 0.0%, 0.1% and 0.1% as of December 31, 2014, 2013 and 2012, respectively. Canon had short-term loans and long-term debt of ¥2,166 million as of December 31, 2014, ¥2,747 million as of December 31, 2013 and ¥3,983 million as of December 31, 2012. 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 perform under a guarantee if the borrower defaults on a pay- ment within the contract periods of 1 year to 30 years in the case of employees with housing loans, and 1 year to 5 years in the case of affiliates and other companies. The maximum amount of undiscounted payments Canon would have had to make in the event of default by all borrowers was ¥8,951 mil- lion at December 31, 2014. The carrying amounts of the liabil- ities recognized for Canon’s obligations as a guarantor under those guarantees at December 31, 2014 were insignificant. CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS The following summarizes Canon’s contractual obligations at December 31, 2014. Millions of yen Contractual obligations: Long-term debt: Capital lease obligations Other long-term debt Operating lease obligations Purchase commitments for: Property, plant and equipment Parts and raw materials Other long-term liabilities: Contribution to defined benefit pension plans Total Total Less than 1 year 1-3 years 3-5 years More than 5 years Payments due by period ¥ 2,018 145 85,719 52,668 76,984 26,257 ¥ 243,791 ¥ 956 59 26,450 ¥ 808 60 34,508 ¥ 251 24 14,528 ¥ 3 2 10,233 52,668 76,984 — — — — — — 26,257 ¥183,374 — ¥35,376 — ¥14,803 — ¥10,238 Note: The table does not include provisions for uncertain tax positions and related accrued interest and penalties, as the specific timing of future payments related to these obligations cannot be projected with reasonable certainty. See Note 12, Income Taxes in the Notes to Consolidated Financial Statements for further details. Contribution to defined benefit pension plans reflects the expected amount only for the next fiscal year, since contributions beyond the next fiscal year are not currently determinable due to uncertainties related to changes in actuarial assumptions, returns on plan assets and changes to plan membership. 44 FINANCIAL OVERVIEW 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 ongo- ing product failure rates, specific product class failures out- side of the baseline experience, material usage and service delivery costs incurred in correcting a product failure. As of December 31, 2014, accrued product warranty costs amount- ed to ¥11,564 million. At December 31, 2014, commitments outstanding for the purchase of property, plant and equipment were approximately ¥52,668 million, and commitments out- standing for the purchase of parts and raw materials were approximately ¥76,984 million, both for use in the ordi- nary course of its business. Canon anticipates that funds needed to fulfill these commitments will be generated internally through operations. During 2015, Canon expects to contribute ¥14,674 million to its Japanese defined benefit pension plans and ¥11,583 mil- lion to its foreign defined benefit pension plans. Canon’s management believes that current financial resources, cash generated from operations and Canon’s potential capacity for additional debt and/or equity financing will be sufficient to fund current and future capital requirements. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES Year 2014 marks the fourth year of the Excellent Global Corporation Plan, Canon’s 5-year (2011-2015) management plan. The slogan of the fourth phase (“Phase IV”) is “Aiming for the Summit—Speed & Sound Growth” and there are three core strategies related to R&D: (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 diversifica- tion and establish the Three Regional Headquarters management system: Reinforce the businesses of medi- cal imaging sector, industrial equipment sector and network camera sector to develop into Canon’s new pillars. Seek talents in Japan, US, and Europe to foster promising technologies and enhance R&D capabilities in global-scale dimensions by enabling product develop- ment in specialized area of each region, with actively utilizing M&A. (cid:129) Build the foundations of an environmentally advanced corporation: Focus on energy-conserving, resource-saving, and recycling technologies to create products with the highest environmental performance. Canon is pursuing collaboration among government, industry and academia. Canon’s collaboration effort can be seen in various activities such as fundamental research and development of leading-edge technologies with top uni- versities and research institutes around the world, includ- ing Tokyo University, Kyoto University, Tokyo Institute of Technology, Tohoku University, Stanford University, and the University of Arizona, and also participation in the “ImPACT” (Impulsing Paradigm Change through Disruptive Technologies) program led by the Japanese government where Canon’s physically-noninvasive and -nondestructive imaging technology is selected as one of twelve R&D pro- grams. Additionally, Canon is currently working on collabor- ative research with Massachusetts General Hospital (“MGH”) and Brigham and Women’s Hospital (“BWH”) to develop bio- medical optical imaging and medical robotics technologies at the Healthcare Optics Research Laboratory in Cambridge, Massachusetts, founded in 2013. Canon has fully introduced 3D-CAD systems across the Canon Group, boosting R&D efficiency to curtail product development times and costs. Moreover, Canon enhanced and evolved its simulation, measurement, and analysis 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. R&D Expenses (Billions of yen) 400 300 200 100 0 2010 2011 2012 2013 2014 STRATEGY BUSINESS SEGMENT CORPORATE STRUCTURE FINANCIAL SECTION CORPORATE DATA 45 Canon’s consolidated R&D expenses were ¥308,979 mil- lion in 2014, ¥306,324 million in 2013 and ¥296,464 mil- lion in 2012. The ratios of R&D expenses to the consolidated total net sales for 2014, 2013 and 2012 were 8.3%, 8.2% and 8.5%, respectively. Canon believes that new products protected by patents will not easily allow competitors to compete with them, and will give them an advantage in establishing standards in the market and industry. Canon obtained the third greatest number of private sec- tor patents in 2014, according to the United States patent annual list, released by IFI CLAIMS® Patent Services. MARKET RISK EXPOSURES Canon is exposed to market risks, including changes in for- eign currency exchange rates, interest rates and prices of marketable securities and investments. In order to hedge the risks of changes in foreign currency exchange rates, Canon uses derivative financial instruments. Equity price risk Canon holds marketable securities included in current assets, which consist generally of highly-liquid and low-risk instruments. Investments included in noncurrent assets are held as long-term investments. Canon does not hold mar- ketable securities and investments for trading purposes. Maturities and fair values of such marketable securities and investments with original maturities of more than three months, all of which were classified as available-for-sale securities, were as follows at December 31, 2014. Available-for-sale securities Debt securities Due after five years Fund trusts Equity securities Millions of yen Cost Fair value ¥ 843 84 20,905 ¥21,832 ¥ 961 84 40,653 ¥41,698 Foreign currency exchange rate and interest rate risk Canon operates internationally, exposing it to the risk of changes in foreign currency exchange rates. Derivative finan- cial instruments are comprised principally of foreign curren- cy exchange contracts utilized by the Company and certain of its subsidiaries to reduce the risk. Canon assesses foreign cur- rency exchange rate risk by continually monitoring chang- es in the exposures and by evaluating hedging opportunities. Canon does not hold or issue derivative financial instruments for trading purposes. Canon is also exposed to credit-related losses in the event of non-performance by counterparties to derivative financial instruments, but it is not expected that any counterparties will fail to meet their obligations. Most of the counterparties are internationally recognized financial institutions and selected by Canon taking into account their financial condition, and contracts are diversified across a number of major financial institutions. 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 intercompa- ny 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 cur- rency exchange transactions existing at December 31, 2014. All of the foreign exchange contracts described in the following table have a contractual maturity date in 2015. Millions of yen 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 ¥193,195 (8,300) ¥141,815 (2,457) ¥23,852 (423) ¥358,862 (11,180) ¥ 12,018 316 ¥ 9,347 (38) ¥ — — ¥ 21,365 278 46 FINANCIAL OVERVIEW All of Canon’s long-term debt is fixed rate debt. Canon expects that fair value changes and cash flows resulting from reasonable near-term changes in interest rates will be immaterial. Accordingly, Canon believes interest rate risk is insignificant. See also Note 9 of the Notes to Consolidated Financial Statements. Changes in the fair value of derivative financial instru- ments designated as cash flow 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 peri- od 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 materi- al for the years ended December 31, 2014, 2013 and 2012. The amounts of net losses excluded from the assessment of hedge effectiveness (time value component) which was recorded in other income (deductions) was ¥145 million, ¥111 mil- lion and ¥221 million for the years ended December 31, 2014, 2013 and 2012, respectively. Canon has entered into certain foreign currency exchange contracts to manage its foreign currency exposures. These foreign currency exchange contracts have not been designat- ed as hedges. Accordingly, the changes in fair values of these contracts are recorded in earnings immediately. LOOKING FORWARD As for the future of the global economy, although challeng- ing conditions are expected to remain for some time in cer- tain countries and regions, Canon anticipates sustained economic growth in countries such as the U.S. among devel- oped countries, and India and ASEAN countries among emerging markets. Overall, the global economy is expected to gradually move toward stable growth. In the businesses in which Canon operates, demand for MFDs is projected to continue to expand moderately, mainly for color models, while demand in the laser printer market is expected to remain at the same level as the previous year. As for the digital camera market, although projections indi- cate continued market contraction mainly for low-priced compact models, demand for interchangeable-lens digital cameras is expected to recover gradually. Looking at inkjet printers, with Asian markets gradually recovering follow- ing their extended period of stagnation, demand is expected to remain in line with the previous year. As for the industri- al equipment market, with manufacturers expected to con- tinue making capital outlays for semiconductor lithography equipment in response to increasing demand for memory devices and image sensors, demand is expected to remain at the same level as the previous year. And as for FPD lithogra- phy equipment, demand is projected to increase as device manufacturers boost capital investment amid growing pan- el demand projected for 4K televisions and mobile devices. Amid these conditions, 2015 is the final year of Phase IV of the Excellent Global Corporation Plan and the year in which the Canon EXPO will be held as the culmination of the efforts carried out during Phase IV. In addition to returning to a path of growth, Canon aims to bring Phase IV to a successful close, further reinforcing its business foun- dation to enable great strides beginning from next year. Toward this objective, Canon will undertake the following various measures. (cid:129) Reinforcing Existing Businesses Through the Introduction of Innovative Products and Services For MFDs and other office products, in addition to improving hardware performance, efforts will be made to build a framework that will enable the Company to service as a one-stop shop that provides a broad range of high-quality services. For cameras, efforts will be made to comprehensively raise aspects such as image-quality, visual expression, and operability. At the same time, Canon will work to further strengthen the network capabilities of these products. Additionally, to facilitate the Company’s aim of becoming the all around leader in printing, it will leverage its strength, derived from having prepared a broad lineup, spanning consumer printers to industrial printing. In the Industrial equipment area, Canon will devise and execute concrete plans to concen- trate technologies and strengthen the competitiveness of Canon Group companies. STRATEGY BUSINESS SEGMENT CORPORATE STRUCTURE FINANCIAL SECTION CORPORATE DATA 47 In addition to these measures, Canon will promote other initiatives such as product quality reforms to win top custom- er approval, information security improvement, and human resource development. 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 con- tinue to develop products and to market products that incor- porate new technology on a timely basis, are competitively priced, and achieve market acceptance; the possibility 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. (cid:129) Expanding New and Future Businesses and Further Cultivating Technologies that will Pave the Way to the Future Canon aims to produce next-generation lithography equipment in volume by strengthening nanoimprint technology that realizes further reduction in process geometries. In the area of network camera systems, Canon will work to enhance its product lineup and develop solutions that address customer needs. With regard to the MR (Mixed Reality) System, Canon will identify industries that can leverage the strength of this system, and will strive to make the system the de facto standard design tool in those industries. In the medical field, the Company will accelerating develop, focusing on promising themes such as photoacoustic tomography, which facilitates the viewing of vascular conditions in 3D. The Company will work to expand and steadily cultivate new businesses mainly targeting the B2B field, such as Super Machine Vision, a system capable of high-accuracy three-dimensional recognition of objects for potential use in production sites, and 4K reference displays. (cid:129) Strengthening Global Marketing Capabilities Through Unified Effort Between Product Operations and Sales Companies In developed countries, Canon aims to gain share in both consumer and office segments. In the consumer segment, Canon will address the popularity of online shopping and other trends that are contributing to the diversification of sales channels. In the office segment, Canon will strengthen its response towards centralized procurement of office equipment by global corporations. In emerging markets, Canon will promote enhancement of its various sales networks and product lineup, in line with situations in each country and region. (cid:129) Accelerating a New Dimension of Cost-reduction Activities In the area of procurement, Canon aims to reduce total costs, further deploying measures focused on reducing costs from the stage of product development. In the prototyping process, Canon will create next-generation development methodologies, through such means as expanding the application of simulation technologies as well as employing 3D printing. In production, Canon will realize further cost reduction by expanding the applica- tion of automation equipment and through measures aimed at the in-house production of molded parts and production equipment. (cid:129) Building a Globally Optimized Production System To maintain an optimized production system, Canon will take steps to revive domestic production, promoting measures such as automation and in-house production, while building new structural dimensions of cost reduc- tion. At the same time, Canon will promote localized production through the use of automation equipment in the U.S. and Europe. 48 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) 2014 2013 2012 2011 ¥ 724,317 3,002,935 3,727,252 99.9% ¥ 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% 254,797 6.8% 79,765 308,979 213,739 182,343 230,483 6.2% 224,564 6.5% 248,630 7.0% 86,398 306,324 223,158 188,826 83,134 296,464 211,973 270,457 81,232 307,800 210,179 226,869 ¥ 1,148 2,978,184 4,460,618 ¥ 1,448 2,910,262 4,242,710 ¥ 2,117 2,598,026 3,955,503 ¥ 3,368 2,551,132 3,930,727 ¥ 229.03 229.03 150.00 ¥ ¥ 200.78 200.78 130.00 4,045 2,889 4,115 2,913 191.34 191.34 130.00 4,015 2,308 ¥ 204.49 204.48 120.00 4,280 3,220 Average number of common shares in thousands Number of employees 1,112,510 191,889 1,147,934 194,151 1,173,648 196,968 1,215,832 198,307 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 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 STRATEGY BUSINESS SEGMENT CORPORATE STRUCTURE FINANCIAL SECTION CORPORATE DATA 49 2010 2009 2008 2007 2006 2005 ¥ 695,749 3,011,152 3,706,901 115.5% ¥ 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% 246,603 6.7% 94,794 315,817 232,327 158,976 131,647 4.1% 309,148 7.6% 488,332 10.9% 455,325 11.0% 384,096 10.2% 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 ¥ 4,131 2,645,782 3,983,820 ¥ 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 ¥ 199.71 199.70 120.00 4,520 3,205 ¥ 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 Thousands of U.S. dollars (except per share amounts) 2014 $ 5,986,091 24,817,645 30,803,736 99.9% 2,105,760 6.8% 659,215 2,553,545 1,766,438 1,506,967 $ 9,488 24,613,091 36,864,612 $ 1.89 1.89 1.24 33.43 23.88 1,234,817 197,386 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 Notes: 1. U.S. dollar amounts are translated from yen at the rate of U.S.$1 = JPY121, the approximate exchange rate on the Tokyo Foreign Exchange Market as of December 30, 2014. 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 CONSOLIDATED BALANCE SHEETS Canon Inc. and Subsidiaries December 31, 2014 and 2013 ASSETS Current assets: Cash and cash equivalents (Note 1) Short-term investments (Note 2) Trade receivables, net (Note 3) Inventories (Note 4) Prepaid expenses and other current assets (Notes 6, 12 and 17) Total current assets Noncurrent receivables (Note 18) Investments (Note 2) Property, plant and equipment, net (Notes 5 and 6) Intangible assets, net (Notes 7 and 8) Other assets (Notes 6, 7, 8, 11 and 12) Total assets LIABILITIES AND EQUITY Current liabilities: Millions of yen 2014 2013 ¥ 844,580 71,863 625,675 528,167 321,648 2,391,933 29,785 65,176 1,269,529 177,288 526,907 ¥ 4,460,618 ¥ 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 Short-term loans and current portion of long-term debt (Note 9) ¥ 1,018 ¥ 1,299 Trade payables (Note 10) Accrued income taxes (Note 12) Accrued expenses (Notes 11 and 18) Other current liabilities (Notes 5, 12 and 17) Total current liabilities Long-term debt, excluding current installments (Note 9) Accrued pension and severance cost (Note 11) Other noncurrent liabilities (Notes 7 and 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 2014 and 2013 Additional paid-in capital Legal reserve (Note 13) Retained earnings (Note 13) Accumulated other comprehensive income (loss) (Note 14) Treasury stock, at cost; 241,931,637 shares in 2014 and 196,764,060 shares in 2013 Total Canon Inc. stockholders’ equity Noncontrolling interests Total equity Total liabilities and equity See accompanying Notes to Consolidated Financial Statements. 310,214 57,212 345,237 207,698 921,379 1,148 280,928 116,405 1,319,860 307,157 53,196 315,536 171,119 848,307 1,448 229,664 96,514 1,175,933 174,762 401,563 64,599 3,320,392 28,286 (1,011,418) 2,978,184 162,574 3,140,758 ¥ 4,460,618 174,762 402,029 63,091 3,212,692 (80,646) (861,666) 2,910,262 156,515 3,066,777 ¥ 4,242,710 CONSOLIDATED STATEMENTS OF INCOME Canon Inc. and Subsidiaries Years ended December 31, 2014, 2013 and 2012 51 Millions of yen Net sales Cost of sales (Notes 5, 8, 11 and 18) Gross profit Operating expenses (Notes 1, 5, 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, 2, 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. 2014 2013 ¥ 3,727,252 ¥ 3,731,380 ¥ 3,479,788 1,829,822 1,649,966 1,865,780 1,861,472 1,932,959 1,798,421 2012 1,189,004 308,979 1,497,983 363,489 1,154,820 306,324 1,461,144 337,277 1,029,646 296,464 1,326,110 323,856 7,906 (500) 12,344 19,750 383,239 118,000 265,239 6,579 (550) 4,298 10,327 347,604 6,792 (1,022) 12,931 18,701 342,557 108,088 239,516 110,112 232,445 10,442 7,881 ¥ 254,797 ¥ 230,483 ¥ 224,564 9,033 Yen ¥ 229.03 ¥ 200.78 ¥ 229.03 150.00 200.78 130.00 191.34 191.34 130.00 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Canon Inc. and Subsidiaries Years ended December 31, 2014, 2013 and 2012 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 2014 ¥ 265,239 2013 2012 ¥ 239,516 ¥ 232,445 143,834 2,524 (195) (37,985) 108,178 373,417 9,666 ¥ 363,751 251,576 6,612 2,056 32,669 292,913 532,429 14,688 ¥ 517,741 133,735 3,265 (4,880) (12,787) 119,333 351,778 10,824 ¥ 340,954 52 CONSOLIDATED STATEMENTS OF EQUITY Canon Inc. and Subsidiaries Years ended December 31, 2014, 2013 and 2012 Millions of yen 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 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 (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, 2014 Accumulated other comprehensive Legal income (loss) reserve ¥ 174,762 ¥ 401,572 ¥ 59,004 ¥ 3,059,298 ¥ (481,773) Additional paid-in capital Common stock Retained earnings Treasury stock ¥ (661,731) Total Canon Inc. stockholders’ equity Noncontrolling interests ¥ 2,551,132 ¥ 162,535 ¥ 2,713,667 Total equity (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) 174,762 401,547 61,663 3,138,976 (367,249) (9) (17) 3,148 117 3,265 (4,882) (14,580) 340,954 (149,968) 2,598,026 2 1,793 10,824 (4,880) (12,787) 351,778 (149,968) 156,276 2,754,302 (149,942) (811,673) 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 29,314 517,741 (50,007) 2,910,262 — 3,355 14,688 2,056 32,669 532,429 (50,007) 156,515 3,066,777 (49,993) (861,666) (420) 216 (22) (226) (658) (145,790) 1,508 (1,508) (145,790) — (2,949) (884) (145,790) (2,949) — 254,797 254,797 10,442 265,239 142,813 142,813 1,021 143,834 2,301 2,301 223 2,524 (195) (37,985) 373,417 (149,813) ¥ 174,762 ¥ 401,563 ¥ 64,599 ¥ 3,320,392 ¥ 28,286 ¥ (1,011,418) ¥ 2,978,184 ¥ 162,574 ¥ 3,140,758 (195) (35,965) 363,751 (149,813) (2,020) 9,666 (195) (35,965) (149,752) — (15) (46) See accompanying Notes to Consolidated Financial Statements. CONSOLIDATED STATEMENTS OF CASH FLOWS Canon Inc. and Subsidiaries Years ended December 31, 2014, 2013 and 2012 53 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 investments Equity in (earnings) losses of affiliated companies Deferred income taxes Decrease in trade receivables (Increase) decrease in inventories 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 5) Proceeds from sale of fixed assets (Note 5) 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 (Note 7) 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 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 2014 2013 2012 ¥ 265,239 ¥ 239,516 ¥ 232,445 263,480 12,429 12 (478) 8,929 9,323 59,004 (24,620) 3,586 11,124 (6,305) (17,796) 583,927 (218,362) 3,994 (311) 2,606 (14,223) (54,772) — 11,770 (269,298) 1,377 (2,152) (54) (145,790) (149,813) (4,454) (300,886) 41,928 55,671 788,909 ¥ 844,580 275,173 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 1,527 (610) 7,487 5,030 (24,805) (102,293) 12,427 (30,089) 5,515 8,068 384,077 (316,211) 4,861 (417) 344 103,137 (704) (796) (2,954) (212,740) 614 (3,732) (5,055) (142,362) (149,968) (19,236) (319,739) 41,853 (106,549) 773,227 ¥ 666,678 462 ¥ 111,819 ¥ 500 108,950 ¥ 1,084 98,096 54 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 (collective- ly “Canon”) is one of the world’s leading manufacturers in such fields as office products, imaging system products and industry and other products. Office products consist mainly of office multifunction devices (“MFDs”), 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 semiconductor lithography equipment, FPD (Flat panel display) lithography equipment, digital radiography systems, ophthalmic equip- ment, vacuum thin-film deposition equipment, organic LED (“OLED”) panel manufacturing equipment, die bonders, micro- motors, network cameras, handy terminals and document scanners. Canon’s consolidated net sales for the years ended December 31, 2014, 2013 and 2012 were distributed as follows: the Office Business Unit 55.8%, 53.6% and 50.5%, the Imaging System Business Unit 36.0%, 38.8% and 40.4%, the Industry and Others Business Unit 10.7%, 10.0% and 11.7%, and elimi- nation between segments 2.5%, 2.4% and 2.6%, respectively. These percentages were computed by dividing segment net sales, including intersegment sales, by consolidated net sales, based on the segment operating results described in Note 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. 80.6%, 80.8% and 79.3% of consolidated net sales for the years end- ed December 31, 2014, 2013 and 2012 were generated outside Japan, with 27.8%, 28.4% and 27.0% in the Americas, 29.3%, 30.1% and 29.1% in Europe, and 23.5%, 22.3% and 23.2% in Asia and Oceania, respectively. Canon sells laser printers on an OEM basis to Hewlett- Packard Company; such sales constituted 17.4%, 17.6% and 17.0% of consolidated net sales for the years ended December 31, 2014, 2013 and 2012, 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 account- ing 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 consolidat- ed statements of income. Foreign currency exchange gains and losses were a net gain of ¥2,628 million for the year end- ed December 31, 2014, a net loss of ¥1,992 million for the year ended December 31, 2013 and a net gain of ¥9,130 million for the year ended December 31, 2012, 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 ¥139,240 million and ¥183,078 million at December 31, 2014 STRATEGY BUSINESS SEGMENT CORPORATE STRUCTURE FINANCIAL SECTION CORPORATE DATA 55 and 2013, respectively, are included in cash and cash equiva- lents 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 equi- ty 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 accumulat- ed 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 regu- larly reviewed for other-than-temporary declines in the car- rying 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 prospects of the issuer and Canon’s intent and ability to retain the invest- ment for a period of time sufficient to allow for any anticipat- ed recovery in market value. For debt securities for which the declines are deemed to be other-than-temporary and there is no intent to sell, impairments are separated into the amount related to credit loss, which is recognized in earnings, and the amount related to all other factors, which is 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 recogniz- es 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 equi- ty 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 custom- er’s inability to meet its financial obligations, such as in the case of bankruptcy filings. If circumstances related to custom- ers 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 val- ue 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 useful lives are not amortized, but are instead tested for impairment annually in the fourth quarter of each year, or more frequent- ly 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 56 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS a reporting unit’s goodwill exceeds its implied fair value. Intangible assets with finite useful lives consist primarily of software, license fees, patented technologies and customer relationships. Software and license fees are amortized using the straight-line method over the estimated useful lives, which range primarily from 3 years to 5 years for software and 5 years to 10 years for license fees. Patented technolo- gies are amortized using the straight-line method principal- ly over the estimated useful lives, which range from 8 years to 16 years. Customer relationships are amortized principally using the declining-balance method over the estimated use- ful life of 5 years. Certain costs incurred in connection with developing or obtaining internal-use software are capitalized. These costs consist primarily of payments made to third par- ties and the salaries of employees working on such software development. Costs incurred in connection with developing internal-use software are capitalized at the application devel- opment 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 informa- tion develops or circumstances change. Costs of future obliga- tions are not discounted to their present values. (n) Income Taxes Deferred tax assets and liabilities are recognized for the esti- mated future tax consequences attributable to differences between the financial statement carrying amounts of exist- ing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Canon records a valuation allowance to reduce the deferred tax assets to the amount that is more likely than not realizable. Canon recognizes the financial statement effects of tax positions when it is more likely than not, based on the techni- cal merits, that the tax positions will be sustained upon exam- ination by the tax authorities. Benefits from tax positions that meet the more-likely-than-not recognition threshold are mea- sured at the largest amount of benefit that is greater than 50% likely of being realized upon settlement. Interest and pen- alties accrued related to unrecognized tax benefits are includ- ed 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 custom- er 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 leas- es 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 leas- es are bundled with product maintenance contracts, revenue is allocated based upon the estimated relative fair value of the lease and non-lease deliverables. Lease deliverables gener- ally include equipment, financing and executory costs, while non-lease deliverables generally consist of product mainte- nance contracts and supplies. Revenue from sales of optical equipment, such as semicon- ductor lithography equipment and FPD lithography equip- 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 STRATEGY BUSINESS SEGMENT CORPORATE STRUCTURE FINANCIAL SECTION CORPORATE DATA 57 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 sell- ing price if such element meets the criteria for treatment as a separate unit of accounting. Otherwise, revenue is deferred until the undelivered elements are fulfilled and accounted for as a single unit of accounting. Canon records estimated reductions to sales at the time of sale for sales incentive programs including product discounts, customer promotions and volume-based rebates. Estimated reductions to sales are based upon historical trends and other known factors at the time of sale. Canon regularly adjusts its estimates each period in the ordinary course of establishing sales incentive program accruals based on current informa- tion. During the year ended December 31, 2012, Canon revised its estimates for sales incentive program accruals based on new information which was not available at the time that the accrual was established due to unique circumstances, 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, 2014 and 2013, such adjustments were not significant. Canon also provides price protection to certain resellers of its prod- ucts, 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 ¥79,765 million, ¥86,398 million and ¥83,134 million for the years ended December 31, 2014, 2013 and 2012, respectively. (t) Shipping and Handling Costs Shipping and handling costs totaled ¥49,576 million, ¥47,460 million and ¥38,499 million for the years ended December 31, 2014, 2013 and 2012, respectively, and are included in sell- ing, general and administrative expenses in the consolidated statements of income. (u) Derivative Financial Instruments All derivatives are recognized at fair value and are included in prepaid expenses and other current assets, or other cur- rent liabilities in the consolidated balance sheets. Canon uses and designates certain derivatives as a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow” hedge). Canon formally documents all 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 comprehen- sive 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 May 2014, the Financial Accounting Standards Board (“FASB”) issued a new accounting standard related to reve- nue from contracts with customers. This standard requires an entity to recognize revenue when promised goods or ser- vices are transferred to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This standard is effective for annual reporting periods beginning after December 15, 2016 and is required to be adopted by Canon from the quarter beginning January 1, 2017. Early adoption is not permitted. This standard may be applied retrospectively to each prior reporting period presented or retrospectively with the cumu- lative effect of initially applying this standard recognized at the date of initial application. Canon has not selected a tran- sition method and is currently evaluating the effect that the adoption of this standard will have on its consolidated results of operations and financial condition. 58 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. INVESTMENTS The cost, gross unrealized holding gains, gross unrealized holding losses and fair value for available-for-sale securities included in investments by major security type at December 31, 2014 and 2013 were as follows: December 31 Millions of yen 2014: Noncurrent: Government bonds Corporate bonds Fund trusts Equity securities Millions of yen 2013: Noncurrent: Government bonds Corporate bonds Fund trusts Equity securities Cost Gross unrealized holding gains Gross unrealized holding losses ¥ 331 ¥ — 153 — 19,765 ¥ 19,918 ¥ 6 29 — 17 ¥ 52 Gross unrealized holding gains Gross unrealized holding losses ¥ — 16 — 16,450 ¥ 16,466 ¥ 31 26 — 26 ¥ 83 512 84 20,905 ¥ 21,832 Cost ¥ 338 491 68 18,112 ¥ 19,009 Fair value ¥ 325 636 84 40,653 ¥ 41,698 Fair value ¥ 307 481 68 34,536 ¥ 35,392 Maturities of available-for-sale debt securities included in investments in the accompanying consolidated balance sheets were as follows at December 31, 2014: December 31 Due after five years Millions of yen Cost ¥ 843 ¥ 843 Fair value ¥ 961 ¥ 961 Gross realized gains were ¥2,540 million, ¥2,360 million and ¥238 million for the years ended December 31, 2014, 2013 and 2012, respectively. Gross realized losses, including write- downs for impairments that were other-than-temporary, were ¥31 million, ¥2 million and ¥1,545 million for the years ended December 31, 2014, 2013 and 2012, respectively. At December 31, 2014, 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 ¥71,863 million and ¥47,914 million at December 31, 2014 and 2013, respectively, and are included in short-term investments in the accompanying consolidat- ed balance sheets. Aggregate cost of non-marketable equity securities accounted for under the cost method totaled ¥1,164 million and ¥14,794 million at December 31, 2014 and 2013, respec- tively. These investments were not evaluated for impair- ment at December 31, 2014 and 2013, respectively, because (a) Canon did not estimate the fair value of those investments as it was not practicable to estimate the fair value of the invest- ments and (b) Canon did not identify any events or chang- es 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 ¥20,863 million and ¥18,937 million at December 31, 2014 and 2013, respectively. Canon’s share of the net earnings (losses) in affiliated companies accounted for by the equity method, included in other income (deductions), were earnings of ¥478 million, losses of ¥664 million and earnings of ¥610 million for the years end- ed December 31, 2014, 2013 and 2012, respectively. STRATEGY BUSINESS SEGMENT CORPORATE STRUCTURE FINANCIAL SECTION CORPORATE DATA 59 3. TRADE RECEIVABLES Trade receivables are summarized as follows: December 31 Notes Accounts Less allowance for doubtful receivables 4. INVENTORIES Inventories are summarized as follows: December 31 Finished goods Work in process Raw materials Millions of yen 2014 ¥ 18,476 619,321 637,797 (12,122) ¥ 625,675 2013 ¥ 15,461 606,010 621,471 (12,730) ¥ 608,741 Millions of yen 2014 ¥ 363,685 144,394 20,088 ¥ 528,167 2013 ¥ 406,443 128,120 19,210 ¥ 553,773 5. 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 2014 ¥ 286,336 1,609,667 1,822,026 70,759 3,788,788 (2,519,259) ¥ 1,269,529 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, 2014, 2013 and 2012 were ¥213,739 million, ¥223,158 mil- lion and ¥211,973 million, respectively. Amounts due for purchases of property, plant and equipment were ¥40,483 million and ¥33,585 million at December 31, 2014 and 2013, respectively, and are included in other current liabilities in the accompanying consolidat- ed balance sheets. Fixed assets presented in the consolidated statements of cash flows include property, plant and equip- ment and intangible assets. 60 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. FINANCE RECEIVABLES AND OPERATING LEASES Finance receivables represent financing leases which consist of sales-type leases and direct-financing leases resulting from the sales of Canon’s and complementary third-party products primarily in foreign countries. These receivables typically have terms ranging from 1 year to 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 Millions of yen 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 2014 ¥ 308,733 13,924 (1,680) (31,919) 289,058 (6,276) 282,782 (102,920) ¥ 179,862 2013 ¥ 278,621 9,566 (2,184) (29,875) 256,128 (7,323) 248,805 (91,025) ¥ 157,780 Millions of yen 2014 ¥ 7,323 (1,171) 154 (30) ¥ 6,276 2013 ¥ 6,908 (1,278) 212 1,481 ¥ 7,323 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 col- lectively 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 financial obligations, such as in the case of bankruptcy fil- ings. Finance receivables which are past due or individual- ly evaluated for impairment at December 31, 2014 and 2013 are not significant. The cost of equipment leased to customers under operat- ing leases included in property, plant and equipment, net at December 31, 2014 and 2013 was ¥113,997 million and ¥103,403 million, respectively. Accumulated depreciation on equipment under operating leases at December 31, 2014 and 2013 was ¥87,338 million and ¥78,821 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, 2014. Year ending December 31: 2015 2016 2017 2018 2019 Thereafter Millions of yen Financing leases Operating leases ¥ 121,619 90,955 56,672 28,688 10,013 786 ¥ 308,733 ¥ 8,541 4,585 3,064 1,450 678 220 ¥ 18,538 STRATEGY BUSINESS SEGMENT CORPORATE STRUCTURE FINANCIAL SECTION CORPORATE DATA 61 7. ACQUISITIONS During the year ended December 31, 2014, Canon acquired several companies for a total cash consideration of ¥70,671 million, of which ¥30,696 million, ¥8,789 million, and ¥4,633 million was attributed to intangible assets, the relat- ed deferred tax liabilities, and other net assets acquired, respectively, and the residual amount of ¥44,131 million was recorded as goodwill. The goodwill recorded is attrib- utable primarily to expected synergies from the combined operations of the acquired companies and Canon. None of the goodwill is expected to be deductible for tax purposes. Total acquisition-related costs were expensed as incurred and were not significant. Intangible assets acquired, which are subject to amor- tization, consist of software of ¥13,290 million, customer relationships of ¥1,628 million and other intangible assets of ¥3,841 million. Canon has estimated the weighted aver- age amortization period for the software and customer relationships to be 7 years and 6 years, respectively. The weighted average amortization period for all intangible assets is approximately 9 years. Intangible assets acquired, which are not subject to amortization, consist of in-process research and development of ¥11,937 million. The results of operations of the acquired companies were included in Canon’s consolidated financial statements from the respective acquisition dates and were not material. Pro forma results of operations have not been disclosed because the effects of these acquisitions were not material, individu- ally and in the aggregate. 8. GOODWILL AND OTHER INTANGIBLE ASSETS Intangible assets subject to amortization acquired during the years ended December 31, 2014 and 2013, including those recorded from businesses acquired, totaled ¥62,189 million and ¥42,630 million, which primarily consist of software of ¥54,686 million and ¥37,419 million, respective- ly. The weighted average amortization periods for intangible assets in total acquired during the years ended December 31, 2014 and 2013 are approximately 5 years and 4 years, respectively. The weighted average amortization periods for software acquired during the years ended December 31, 2014 and 2013 are approximately 4 years. The components of intangible assets subject to amortization at December 31, 2014 and 2013 were as follows: December 31 Millions of yen Software Customer relationships Patented technologies License fees Other 2014 2013 Gross carrying amount ¥ 312,069 53,494 13,059 11,765 36,625 ¥ 427,012 Accumulated amortization ¥ 185,885 46,713 9,052 7,860 18,281 ¥ 267,791 Gross carrying amount ¥ 271,425 50,792 29,067 13,194 32,319 ¥ 396,797 Accumulated amortization ¥ 167,411 39,957 24,027 7,902 16,094 ¥ 255,391 Aggregate amortization expense for the years ended December 31, 2014, 2013 and 2012 was ¥49,741 million, ¥52,015 million and ¥46,160 million, respectively. Estimated amortization expense for intangible assets currently held for the next five years ending December 31 is ¥41,498 mil- lion in 2015, ¥32,853 million in 2016, ¥22,583 million in 2017, ¥14,115 million in 2018, and ¥8,457 million in 2019. Intangible assets not subject to amortization other than goodwill at December 31, 2014 were ¥18,067 million, which primarily consist of in-process research and development recorded from businesses acquired. Intangible assets not subject to amortization other than goodwill at December 31, 2013 were not significant. Goodwill is included in other assets in the consolidated balance sheets. For management reporting purposes, good- will is not allocated to the segments. Goodwill has been allo- cated to its respective segment for impairment testing. 62 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The changes in the carrying amount of goodwill by segment for the years ended December 31, 2014 and 2013 were as follows: Years ended December 31 Millions of yen 2014: Balance at beginning of year Goodwill acquired during the year Translation adjustments and other Balance at end of year Millions of yen 2013: Balance at beginning of year Goodwill acquired during the year Translation adjustments and other Balance at end of year Office ¥ 139,412 3,971 1,952 ¥ 145,335 Office ¥ 111,348 4,083 23,981 ¥ 139,412 Imaging System ¥ 13,877 7,424 479 ¥ 21,780 Imaging System ¥ 12,674 — 1,203 ¥ 13,877 Industry and Others ¥ 8,351 32,736 3,134 ¥ 44,221 Industry and Others ¥ 6,821 — 1,530 ¥ 8,351 Total ¥ 161,640 44,131 5,565 ¥ 211,336 Total ¥ 130,843 4,083 26,714 ¥ 161,640 9. SHORT-TERM LOANS AND LONG-TERM DEBT Short-term loans consisting of bank borrowings at December 31, 2014 and 2013 were ¥3 million and ¥54 million, respectively. Long-term debt consisted of the following: December 31 Millions of yen 2014 2013 Loans, principally from banks, maturing in installments through 2024; bearing weighted average interest of 2.79% and 1.15% at December 31, 2014 and 2013, respectively Capital lease obligations Less current portion ¥ 145 2,018 2,163 (1,015) ¥ 1,148 The aggregate annual maturities of long-term debt outstanding at December 31, 2014 were as follows: Year ending December 31: 2015 2016 2017 2018 2019 Thereafter ¥ 211 2,482 2,693 (1,245) ¥ 1,448 Millions of yen ¥ 1,015 519 349 200 75 5 ¥ 2,163 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 giv- en 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 obli- gations due to the bank. STRATEGY BUSINESS SEGMENT CORPORATE STRUCTURE FINANCIAL SECTION CORPORATE DATA 63 10. TRADE PAYABLES Trade payables are summarized as follows: December 31 Notes Accounts Millions of yen 2014 ¥ 14,112 296,102 ¥ 310,214 2013 ¥ 8,005 299,152 ¥ 307,157 11. EMPLOYEE RETIREMENT AND SEVERANCE BENEFITS The Company and certain of its subsidiaries have contrib- utory and noncontributory defined benefit pension plans covering substantially all of their employees. Benefits pay- able under the plans are based on employee earnings and years of service. The Company and certain of its subsidiaries also have defined contribution pension plans covering sub- stantially all of their employees. Effective January 1, 2014, defined benefit pension plans of certain subsidiaries in the Netherlands were terminated, and the related plan assets and obligations were transferred to a multiemployer pension plan for the industry in which these subsidiaries operate. As a result, the Company record- ed a gain on curtailments and settlements of ¥9,370 million in selling, general and administrative expenses in the con- solidated statement of income for the year ended December 31, 2014. 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 Change in benefit obligations: Benefit obligations at beginning of year Service cost 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 Japanese plans Millions of yen Foreign plans Millions of yen 2014 2013 2014 2013 ¥ 486,572 ¥ 364,609 9,448 ¥ 684,842 ¥ 651,520 26,005 11,655 26,445 10,772 — 59,496 (21,224) — — 760,331 684,842 14,959 (19,297) — 6,801 10,654 1,522 44,580 (7,352) — (191,179) — 13,064 98,901 364,662 486,572 14,299 2,617 8,981 (9,415) (2,868) 19,810 581,996 495,452 84,382 43,714 15,676 — (19,265) — — 622,121 581,996 ¥ (138,210) ¥ (102,846) (17,648) 360,527 249,534 20,640 — 17,851 6,470 1,522 (7,041) — (165,640) — 7,732 28,705 2,617 (9,106) (2,656) 70,793 221,421 360,527 ¥ (143,241) ¥ (126,045) 64 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Amounts recognized in the consolidated balance sheets at December 31, 2014 and 2013 are as follows: December 31 Other assets Accrued expenses Accrued pension and severance cost Japanese plans Millions of yen Foreign plans Millions of yen 2014 2013 2014 ¥ 559 532 ¥ — (138,742) (103,405) ¥ (138,210) ¥ (102,846) ¥ — — ¥ (1,055) 2013 1,106 (892) (142,186) ¥ (143,241) (126,259) ¥ (126,045) Amounts recognized in accumulated other comprehensive income (loss) at December 31, 2014 and 2013 before the effect of income taxes are as follows: December 31 Actuarial loss Prior service credit Japanese plans Millions of yen Foreign plans Millions of yen 2014 2013 ¥ 209,829 ¥ 186,052 (105,327) ¥ 117,302 ¥ 80,725 (92,527) 2014 ¥ 69,287 (57) ¥ 69,230 2013 ¥ 50,344 (118) ¥ 50,226 The accumulated benefit obligation for all defined benefit plans was as follows: December 31 Accumulated benefit obligation Japanese plans Millions of yen Foreign plans Millions of yen 2014 2013 2014 2013 ¥ 720,034 ¥ 631,887 ¥ 343,023 ¥ 464,195 The projected benefit obligations and the fair value of plan assets for the pension plans with projected benefit obliga- tions in excess of plan assets, and the accumulated benefit obligations and the fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets are as follows: December 31 Japanese plans Millions of yen Foreign plans Millions of yen 2014 2013 2014 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 ¥ 756,941 ¥ 676,308 572,903 618,199 ¥ 364,662 ¥ 485,466 358,315 221,421 ¥ 716,940 ¥ 611,602 560,093 618,199 ¥ 339,305 ¥ 463,089 358,315 216,560 STRATEGY BUSINESS SEGMENT CORPORATE STRUCTURE FINANCIAL SECTION CORPORATE DATA 65 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, 2014, 2013 and 2012 consisted of the following components: Years ended December 31 Service cost Interest cost Expected return on plan assets Amortization of prior service credit Amortization of actuarial loss (Gain) loss on curtailments and settlements Japanese plans Millions of yen Foreign plans Millions of yen 2014 2013 2012 2014 2013 2012 ¥ 26,445 ¥ 26,005 ¥ 25,738 ¥ 6,801 ¥ 9,448 ¥ 5,884 13,176 11,655 14,299 10,772 (18,018) (12,800) 10,023 — 11,788 (13,791) (13,079) 16,277 — 10,654 (10,637) (61) 1,698 (9,370) (15,273) (12,306) 13,546 — ¥ 16,422 ¥ 23,627 ¥ 26,933 ¥ (13,949) (11,806) (143) (116) 1,351 2,005 — 146 (915) ¥ 11,806 ¥ 8,489 Other changes in plan assets and benefit obligations recognized in other comprehensive income (loss) for the years ended December 31, 2014, 2013 and 2012 are summarized as follows: Years ended December 31 Current year actuarial (gain) loss Amortization of actuarial loss Amortization of prior service credit Curtailments and settlements Japanese plans Millions of yen Foreign plans Millions of yen 2014 2012 2013 ¥ 33,800 ¥ (54,150) ¥ (21,753) (16,277) 13,079 — (10,023) (13,546) 12,800 12,306 — — ¥ 36,577 ¥ (55,390) ¥ (24,951) 2014 2013 ¥ 37,366 ¥ 2,290 ¥ 31,661 (1,351) (2,005) 2012 (1,698) 61 (16,725) ¥ 19,004 ¥ 143 (358) 116 — 70 ¥ 30,426 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 Assumptions Weighted-average assumptions used to determine benefit obligations are as follows: Japanese plans Foreign plans Millions of yen Millions of yen ¥ (12,591) ¥ (55) 11,031 1,993 December 31 Discount rate Assumed rate of increase in future compensation levels Japanese plans Foreign plans 2014 1.1% 3.0% 2013 1.6% 3.0% 2014 2.9% 2.0% 2013 3.8% 2.3% 66 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 ade- quate plan assets are available to provide future payments of pension benefits to eligible participants. Taking into account the expected long-term rate of return on plan assets, Canon formulates a “model” portfolio comprised of the optimal combination of equity securities and debt secu- rities. Plan assets are invested in individual equity and debt securities using the guidelines of the “model” portfolio in order to produce a total return that will match the expect- ed return on a mid-term to long-term basis. Canon evalu- ates the gap between expected return and actual return of invested plan assets on an annual basis to determine if such differences necessitate a revision in the formulation of 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 invest- ed in equity securities, approximately 55% is invested in debt securities, and approximately 25% is invested in other investment vehicles, primarily consisting of investments in life insurance company general accounts. Japanese plans Foreign plans 2014 1.6% 3.0% 3.1% 2013 1.8% 3.0% 3.1% 2012 1.9% 3.0% 3.1% 2014 3.9% 2.3% 4.9% 2013 3.6% 2.2% 5.2% 2012 4.6% 2.4% 5.4% 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 invest- ed in equity securities, approximately 50% is invested in debt securities, and approximately 20% is invested in other investment vehicles, primarily consisting of investments in real estate assets. The equity securities are selected primarily from stocks that are listed on the securities exchanges. Prior to invest- ing, Canon has investigated the business condition of the investee companies, and appropriately diversified invest- ments by type of industry and other relevant factors. The debt securities are selected primarily from government bonds, public debt instruments, and corporate bonds. Prior to investing, Canon has investigated the quality of the issue, including rating, interest rate, and repayment dates, and has appropriately diversified the investments. Pooled funds are selected using strategies consistent with the equity and debt securities described above. As for investments in life insurance company general accounts, the contracts with the insurance companies include a guaranteed interest rate and return of capital. With respect to investments in foreign investment vehicles, Canon has investigated the stability of the underlying governments and economies, the market characteristics such as settlement systems and the taxation systems. For each such investment, Canon has selected the appropriate investment country and currency. STRATEGY BUSINESS SEGMENT CORPORATE STRUCTURE FINANCIAL SECTION CORPORATE DATA 67 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, 2014 and 2013, by asset category, are as follows: December 31, 2014 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 ¥ 51,805 ¥ 10,233 — — ¥ — ¥ 51,805 10,233 — 124,388 124,388 — — — ¥ ¥ 31,963 — — — 74,744 143,431 — — — — 573 11,775 118,606 — — — — 143,431 573 11,775 118,606 7,899 — — — — 3,221 24,014 23,260 ¥ — — — — — — — ¥ — 31,963 74,744 7,899 3,221 24,014 23,260 — 12,310 — 12,310 — — — — — — 123,575 25,425 ¥ 205,469 ¥ 415,052 ¥ 1,600 ¥ 622,121 123,575 23,825 — 1,600 — — 7,049 49,271 ¥ 39,862 ¥ 181,559 — — ¥ — 7,049 49,271 ¥ 221,421 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 (e) Foreign companies Pooled funds (f) Debt securities: Government bonds (g) Municipal bonds Corporate bonds Pooled funds (h) Mortgage backed securities (and other asset backed securities) Life insurance company general accounts Other assets ¥ 51,159 ¥ 10,347 — — — 145,417 ¥ — ¥ 51,159 ¥ — ¥ — — 10,347 43,681 — 145,417 — — 104,933 124,800 — — — — 1,027 10,543 101,583 — — — — 124,800 44,192 — 1,027 — 10,543 — 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 ¥ 186,306 ¥ 394,872 — 818 15,420 54,518 ¥ 818 ¥ 581,996 ¥ 87,873 ¥ 272,654 109,097 18,454 — — — — ¥ — 15,420 54,518 ¥ 360,527 (a) The plan’s equity securities include common stock of the Company and certain of its subsidiaries in the amounts of ¥197 million. (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 25% Japanese gov- ernment bonds, 50% foreign government bonds, 5% Japanese municipal bonds, and 20% 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 ¥572 million. (f) These funds invest in listed equity securities consisting of approximately 25% Japanese companies and 75% foreign 68 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS companies for Japanese plans, and mainly foreign com- panies for foreign plans. (g) 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. (h) These funds invest in approximately 30% Japanese govern- ment bonds, 50% foreign government bonds, 5% Japanese municipal bonds, and 15% corporate bonds for Japanese plans. These funds invest in approximately 85% foreign gov- ernment bonds and 15% 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 securities and government bonds, which are valued using unadjusted quoted market prices in active markets with sufficient volume and frequency of transactions. Level 2 assets are comprised principally of pooled funds that invest in equity and debt secu- rities, corporate bonds and investments in life insurance com- pany general accounts. Pooled funds are valued at their net asset values that are calculated by the sponsor of the fund and have daily liquidity. Corporate bonds are valued using quot- ed prices for identical assets in markets that are not active. Investments in life insurance company general accounts are valued at conversion value. The fair value of Level 3 assets, consisting of hedge funds, was ¥1,600 million and ¥818 million at December 31, 2014 and 2013, respectively. Amounts of actual returns on, and purchases and sales of, these assets during the years ended December 31, 2014 and 2013 were not significant. Contributions Canon expects to contribute ¥14,674 million to its Japanese defined benefit pension plans and ¥11,583 million to its foreign defined benefit pension plans for the year ending December 31, 2015. Estimated future benefit payments The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid: Year ending December 31: 2015 2016 2017 2018 2019 2020–2024 Japanese plans Millions of yen ¥ 18,521 20,326 21,610 23,826 25,989 163,611 Foreign plans Millions of yen ¥ 7,351 7,704 7,889 8,446 9,035 54,765 Multiemployer pension plans Effective January 1, 2014, certain subsidiaries in the Netherlands participated in a multiemployer pension plan determined in accordance with collective bargaining agree- ments for the industry in which these subsidiaries operate. The collective bargaining agreements have no expiration date. Canon is not liable for other participating employers’ obligations under the terms and conditions of the agreements. The amount of contributions to the multiemployer pension plan which was expensed for the year ended December 31, 2014 was ¥2,815 million. Defined contribution plans The amounts of cost recognized for the defined contribu- tion pension plans of the Company and certain of its sub- sidiaries for the years ended December 31, 2014, 2013 and 2012 were ¥15,077 million, ¥14,383 million and ¥13,021 million, respectively. 12. INCOME TAXES Domestic and foreign components of income before income taxes and the current and deferred income tax expense (benefit) attributable to such income are summarized as follows: Years ended December 31 2014: Income before income taxes Income taxes: Current Deferred Japanese ¥ 277,041 ¥ 83,221 6,796 ¥ 90,017 Millions of yen Foreign ¥ 106,198 ¥ 25,850 2,133 ¥ 27,983 Total ¥ 383,239 ¥ 109,071 8,929 ¥ 118,000 STRATEGY BUSINESS SEGMENT CORPORATE STRUCTURE FINANCIAL SECTION CORPORATE DATA 69 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 The Company and its domestic subsidiaries are subject to a number of income taxes, which, in the aggregate, represent a statutory income tax rate of approximately 38% for the years ended December 31, 2014 and 2013, respectively, and approxi- mately 40% for the year ended December 31, 2012. Amendments to the Japanese tax regulations were enact- ed into law on November 30, 2011. As a result of these amendments, the statutory income tax rate was reduced from approximately 40% to 38% effective from the year ended December 31, 2013, and to approximately 35% effec- tive from the year ending December 31, 2016. On March 20, 2014, further amendments were enacted into law, and the reduction of the statutory income tax rate to approximately 35% became effective one year earlier, from the year ending December 31, 2015. Consequently, the statutory income tax rate utilized for deferred tax assets and liabilities which were expected to be settled or realized in the period from January 1, 2015 is approximately 35%. The adjustments of deferred tax assets and liabilities for this further amendment to tax law, which were reflected in income taxes for the year ended December 31, 2014, were not material. A reconciliation of the Japanese statutory income tax rate and the effective income tax rate as a percentage of income before income taxes is as follows: Years ended December 31 Japanese statutory income tax rate Increase (reduction) in income taxes resulting from: Expenses not deductible for tax purposes Income of foreign subsidiaries taxed at lower than Japanese statutory tax rate Tax credit for research and development expenses Change in valuation allowance Other Effective income tax rate 2014 38.0% 0.7 (3.7) (5.0) (0.5) 1.3 30.8% 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 32.1% Net deferred income tax assets and liabilities are included in the accompanying consolidated balance sheets under the following captions: December 31 Millions of yen Prepaid expenses and other current assets Other assets Other current liabilities Other noncurrent liabilities 2014 ¥ 61,943 117,636 (3,456) (80,459) ¥ 95,664 2013 ¥ 61,902 103,539 (3,621) (63,129) ¥ 98,691 70 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The tax effects of temporary differences that give rise to the deferred tax assets and deferred tax liabilities at December 31, 2014 and 2013 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 2014 2013 ¥ 16,085 3,951 79,392 8,616 29,558 43,706 38,351 34,673 254,332 (37,498) 216,834 (10,368) (6,801) (5,696) (58,958) (1,671) (37,676) (121,170) ¥ 95,664 ¥ 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 The net changes in the total valuation allowance were an increase of ¥2,443 million for the year ended December 31, 2014, and an increase of ¥2,888 million for the year ended December 31, 2013, and a decrease of ¥1,621 million for the year ended December 31, 2012. 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, 2014. At December 31, 2014, Canon had net operating loss- es which can be carried forward for income tax purposes of ¥194,572 million to reduce future taxable 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 ¥ 1,211 31,393 60,913 63,783 37,272 ¥ 194,572 Income taxes have not been accrued on undistributed earnings of domestic subsidiaries as the tax law provides a means by which the dividends from a domestic subsidiary can be received tax free. Canon has not recognized deferred tax liabilities of ¥28,318 million for a portion of undistributed earnings of foreign subsidiaries that arose for the year ended December 31, 2014 and prior years because Canon currently does not expect to have such amounts distributed or paid as divi- dends to the Company in the foreseeable future. Deferred tax liabilities will be recognized when Canon expects that it will realize those undistributed earnings in a taxable manner, such as through receipt of dividends or sale of the investments. At December 31, 2014, such undistributed earnings of these subsidiaries were ¥961,917 million. STRATEGY BUSINESS SEGMENT CORPORATE STRUCTURE FINANCIAL SECTION CORPORATE DATA 71 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 2014 ¥ 6,201 1,649 216 (114) (1,808) 287 ¥ 6,431 Millions of yen 2013 ¥ 7,711 312 388 (3,141) (347) 1,278 ¥ 6,201 2012 ¥ 2,933 869 4,903 (1,546) (41) 593 ¥ 7,711 The total amounts of unrecognized tax benefits that would reduce the effective tax rate, if recognized, are ¥6,431 million and ¥6,201 million at December 31, 2014 and 2013, respectively. Although Canon believes its estimates and assumptions of unrecognized tax benefits are reasonable, uncertainty regard- ing the final determination of tax audit settlements and any related litigation could affect the effective tax rate in a future period. Based on each of the items of which Canon is aware at December 31, 2014, 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, 2014 and 2013, and inter- est and penalties included in income taxes for the years ended December 31, 2014, 2013 and 2012 are not significant. Canon files income tax returns in Japan and various foreign tax jurisdictions. In Japan, Canon is no longer subject to reg- ular income tax examinations by the tax authority for years before 2012. While there has been no specific indication by the tax authority that Canon will be subject to a transfer pricing examination in the near future, the tax authority could con- duct a transfer pricing examination for years after 2007. In oth- er major foreign tax jurisdictions, including the United States and the Netherlands, Canon is no longer subject to income tax examinations by tax authorities for years before 2006 with few exceptions. The tax authorities are currently conducting income tax examinations of Canon’s income tax returns for years after 2005 in major foreign tax jurisdictions. 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 appropriat- ed 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 appropria- tions by resolution of the stockholders. Certain foreign sub- sidiaries are also required to appropriate their earnings to legal reserves under the laws of their respective countries. Cash dividends and appropriations to the legal reserve charged to retained earnings for the years end- ed December 31, 2014, 2013 and 2012 represent dividends paid out during those years and the related appropria- tions to the legal reserve. Retained earnings at December 31, 2014 did not reflect current year-end dividends in the amount of ¥92,806 million which were approved by the stockholders in March 2015. The amount available for dividends under the Corporation Law of Japan is based on the amount record- ed in the Company’s nonconsolidated books of account in accordance with financial accounting standards of Japan. Such amount was ¥935,504 million at December 31, 2014. Retained earnings at December 31, 2014 included Canon’s equity in undistributed earnings of affiliated com- panies accounted for by the equity method in the amount of ¥16,919 million. 14. OTHER COMPREHENSIVE INCOME (LOSS) Changes in accumulated other comprehensive income (loss) for the year ended December 31, 2012 are as follows: Millions of yen Balance at December 31, 2011 Adjustments for the year Balance at December 31, 2012 Foreign currency translation adjustments Unrealized gains and losses on securities Gains and losses on derivative instruments ¥ (378,863) 131,129 ¥ (247,734) ¥ 1,003 3,143 ¥ 4,146 ¥ 455 (4,917) ¥ (4,462) Pension liability adjustments ¥ (104,368) (14,831) ¥ (119,199) Total ¥ (481,773) 114,524 ¥ (367,249) 72 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Changes in accumulated other comprehensive income (loss) for the years ended December 31, 2014 and 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 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, 2014 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) 10 3 — (35) (22) 142,813 3,933 (2,204) (47,840) 96,702 — 142,823 ¥ 144,557 (1,632) 2,304 ¥ 12,546 2,009 (195) ¥ (2,603) 11,875 (36,000) 12,252 108,932 ¥ (126,214) ¥ 28,286 Reclassifications out of accumulated other comprehensive income (loss) for the years ended December 31, 2014 and 2013 are as follows: Years ended December 31 Amount reclassified from accumulated other comprehensive income (loss)*1 Millions of yen Unrealized gains and losses on securities Gains and losses on derivative instruments Pension liability adjustments 2014 ¥ (2,509) 879 (1,630) (2) (1,632) 3,260 (1,248) 2,012 (3) 2,009 15,585 (3,710) 11,875 2013 Affected line items in consolidated statements of income ¥ (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 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. — 11,875 Total amount reclassified, net of tax and noncontrolling interests ¥ 12,252 ¥ 10,416 *1 Amounts in parentheses indicate gains in consolidated statements of income. STRATEGY BUSINESS SEGMENT CORPORATE STRUCTURE FINANCIAL SECTION CORPORATE DATA 73 Tax effects allocated to each component of other comprehensive income (loss) and reclassification adjustments, includ- ing amounts attributable to noncontrolling interests, are as follows: Years ended December 31 2014: 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) 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) Before-tax amount Millions of yen Tax (expense) or benefit Net-of-tax amount ¥ 144,826 ¥ (992) ¥ 143,834 6,379 (2,509) 3,870 (3,309) 3,260 (49) (71,166) 15,585 (55,581) ¥ 93,066 (2,225) 879 (1,346) 1,102 (1,248) (146) 21,306 (3,710) 17,596 ¥ 15,112 4,154 (1,630) 2,524 (2,207) 2,012 (195) (49,860) 11,875 (37,985) ¥ 108,178 ¥ 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 74 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 exercisable period. The grant-date fair value per share of the stock options granted during the year ended December 31, 2011 was ¥772. On May 1, 2010, based on the approval of the stockholders, the Company granted stock options to its directors, execu- tive officers and certain employees to acquire 890,000 shares of common stock. These option awards vest after two years of continued service beginning on the grant date and have a four year exercisable period. The grant-date fair value per share of the stock options granted during the year ended December 31, 2010 was ¥988. On May 1, 2009, based on the approval of the stockholders, the Company granted stock options to its directors, execu- tive officers and certain employees to acquire 954,000 shares of common stock. These option awards vest after two years of continued service beginning on the grant date and have a four year exercisable period. The grant-date fair value per share of the stock options granted during the year ended December 31, 2009 was ¥699. On May 1, 2008, based on the approval of the stockholders, the Company granted stock options to its directors, execu- tive officers and certain employees to acquire 592,000 shares of common stock. These option awards vest after two years of continued service beginning on the grant date and have a four year exercisable period. 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, 2014, 2013 and 2012 was nil, ¥95 million and ¥364 million, respectively, and is includ- ed in selling, general and administrative expenses in the con- solidated statements of income. A summary of option activity under the stock option plans as of and for the years ended December 31, 2014, 2013 and 2012 is presented below: Outstanding at January 1, 2012 Exercised Forfeited Outstanding at December 31, 2012 Exercised Forfeited Outstanding at December 31, 2013 Exercised Forfeited/Expired Outstanding at December 31, 2014 Exercisable at December 31, 2014 Shares Weighted-average exercise price Yen 3,042,200 ¥ 4,268 Weighted-average remaining contractual term Year 2.0 Aggregate intrinsic value Millions of yen ¥ 88 (10,800) (305,000) 2,726,400 (8,600) (60,400) 2,657,400 (67,200) (728,400) 1,861,800 1,861,800 3,287 4,493 4,247 3,287 4,461 4,245 3,287 4,869 ¥ 4,036 ¥ 4,036 1.6 37 1.0 28 0.7 0.7 ¥ 248 ¥ 248 At December 31, 2014, all outstanding option awards were vested. The total fair value of shares vested during the years ended December 31, 2014, 2013 and 2012 was nil, ¥570 million and ¥848 million, respectively. Cash received from the exercise of stock options for the years ended December 31, 2014, 2013 and 2012 was ¥221 million, ¥28 million and ¥35 million, respectively. STRATEGY BUSINESS SEGMENT CORPORATE STRUCTURE FINANCIAL SECTION CORPORATE DATA 75 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. Average common shares outstanding Effect of dilutive securities: Stock options Diluted common shares outstanding Net income attributable to Canon Inc. stockholders per share: Basic Diluted Millions of yen 2014 ¥ 254,797 2013 2012 ¥ 230,483 ¥ 224,564 Number of shares 1,112,509,931 1,147,933,835 1,173,647,835 4,393 1,112,514,324 8,466 20,574 1,147,942,301 1,173,668,409 Yen ¥ 200.78 200.78 ¥ 229.03 229.03 ¥ 191.34 191.34 The computation of diluted net income attributable to Canon Inc. stockholders per share for the years ended December 31, 2014, 2013 and 2012 excludes certain outstanding stock options because the effect would be anti-dilutive. 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 foreign exchange contracts utilized by the Company and certain of its subsidiaries to reduce the risk. Canon assesses for- eign currency exchange rate risk by continually monitoring changes in the exposures and by evaluating hedging oppor- tunities. Canon does not hold or issue derivative financial instruments for trading purposes. Canon is also exposed to credit-related losses in the event of non-performance by counterparties to derivative financial instruments, but it is not expected that any counterparties will fail to meet their obligations. Most of the counterparties are internationally recognized financial institutions and selected by Canon tak- ing into account their financial condition, and contracts are diversified across a number of major financial institutions. Foreign currency exchange rate risk management Canon’s international operations expose Canon to the risk of changes in foreign currency exchange rates. Canon uses foreign exchange contracts to manage certain foreign cur- rency exchange exposures principally from the exchange of U.S. dollars and euros into Japanese yen. These contracts are primarily used to hedge the foreign currency expo- sure of forecasted intercompany sales and intercompany trade receivables that are denominated in foreign curren- cies. 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 instru- ments designated as cash flow hedges, including foreign exchange contracts associated with forecasted intercom- pany sales, are reported in accumulated other compre- hensive income (loss). These amounts are subsequently reclassified into earnings through other income (deduc- tions) in the same period as the hedged items affect earn- ings. 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 component from the assess- ment of hedge effectiveness. Changes in the fair value of a foreign exchange contract for the period between the date that the forecasted intercompany sales occur and its matu- 76 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS rity date are recognized in earnings and not considered hedge ineffectiveness. Derivatives not designated as hedges Canon has entered into certain foreign exchange con- tracts to primarily offset the earnings impact related to fluctuations in foreign currency exchange rates associat- ed with certain assets denominated in foreign currencies. Although these foreign exchange contracts have not been designated as hedges as required in order to apply hedge accounting, the contracts are effective from an econom- ic perspective. The changes in the fair value of these con- tracts are recorded in earnings immediately. Contract amounts of foreign exchange contracts at December 31, 2014 and 2013 are set forth below: December 31 To sell foreign currencies To buy foreign currencies Millions of yen 2014 ¥ 358,862 21,365 2013 ¥ 374,699 44,726 Fair value of derivative instruments in the consolidated balance sheets The following tables present Canon’s derivative instruments measured at gross fair value as reflected in the consolidated balance sheets at December 31, 2014 and 2013. Derivatives designated as hedging instruments December 31 Assets: Foreign exchange contracts Liabilities: Balance sheet location 2014 Prepaid expenses and other current assets ¥ 8 Foreign exchange contracts Other current liabilities 1,597 Derivatives not designated as hedging instruments December 31 Fair value Millions of yen 2013 ¥ 44 2,267 Fair value Millions of yen Assets: Foreign exchange contracts Liabilities: Balance sheet location 2014 2013 Prepaid expenses and other current assets ¥ 257 ¥ 210 Foreign exchange contracts Other current liabilities 9,570 12,678 STRATEGY BUSINESS SEGMENT CORPORATE STRUCTURE FINANCIAL SECTION CORPORATE DATA 77 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, 2014, 2013 and 2012. 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 2014: Foreign exchange contracts 2013: Foreign exchange contracts 2012: Foreign exchange contracts ¥ (49) Other, net ¥ (3,260) Other, net ¥ (145) 3,242 Other, net (15,387) Other, net (8,207) Other, net (2,440) Other, net (111) (221) Derivatives not designated as hedging instruments Years ended December 31 Foreign exchange contracts Gain (loss) recognized in income on derivative Millions of yen Location Other, net 2014 ¥(21,728) 2013 2012 ¥(61,787) ¥(30,602) 18. COMMITMENTS AND CONTINGENT LIABILITIES Commitments At December 31, 2014, commitments outstanding for the purchase of property, plant and equipment approximat- ed ¥52,668 million, and commitments outstanding for the purchase of parts and raw materials approximated ¥76,984 million. Canon occupies sales offices and other facilities under lease arrangements accounted for as operating leases. Deposits made under such arrangements aggregated ¥13,847 million and ¥13,448 million at December 31, 2014 and 2013, respectively, and are included in noncur- rent receivables in the accompanying consolidated balance sheets. Rental expenses under such operating lease arrange- ments amounted to ¥43,215 million, ¥44,562 million and ¥40,273 million for the years ended December 31, 2014, 2013 and 2012, 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, 2014 are as follows: Year ending December 31: 2015 2016 2017 2018 2019 Thereafter Total future minimum lease payments Millions of yen ¥ 26,450 18,937 15,571 8,753 5,775 10,233 ¥ 85,719 78 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 perform under a guarantee if the borrower defaults on a payment within the contract periods of 1 year to 30 years, in the case of employees with housing loans, and 1 year to 5 years, in the case of affiliates and other companies. The maximum amount of undiscounted payments Canon would have had to make in the event of default is ¥8,951 million at December 31, 2014. The carrying amounts of the liabili- ties recognized for Canon’s obligations as a guarantor under those guarantees at December 31, 2014 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 costs for the years ended December 31, 2014 and 2013 are summarized as follows: Years ended December 31 Millions of yen Balance at beginning of year Additions Utilization Other Balance at end of year 2014 ¥ 10,890 15,699 (12,039) (2,986) ¥ 11,564 2013 ¥ 12,163 13,467 (12,922) (1,818) ¥ 10,890 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 liabili- ties have been incurred and the amount of loss can be rea- sonably estimated. Canon reviews these provisions at least quarterly and adjusts these provisions to reflect the impact of the negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case. Based on its experience, although litiga- tion is inherently unpredictable, Canon believes that any damage amounts claimed in outstanding matters are not a meaningful indicator of Canon’s potential liability. In the opinion of management, any reasonably possible range of losses from outstanding matters would not have a material adverse effect on Canon’s consolidated financial position, results of operations, or cash flows. 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, 2014 and 2013 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 2. December 31 Long-term debt, including current installments Foreign exchange contracts: Assets Liabilities Millions of yen 2014 2013 Carrying amount ¥ (2,163) Estimated fair value ¥ (2,146) Carrying amount Estimated fair value ¥ (2,693) ¥ (2,693) 265 265 (11,167) (11,167) 254 254 (14,945) (14,945) STRATEGY BUSINESS SEGMENT CORPORATE STRUCTURE FINANCIAL SECTION CORPORATE DATA 79 The following methods and assumptions are used to esti- mate the fair value in the above table. Long-term debt Canon’s long-term debt instruments are classified as Level 2 instruments and valued based on the present value of future cash flows associated with each instrument discount- ed 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 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. Limitations of fair value estimates Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instruments. These estimates are sub- jective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Concentrations of credit risk At December 31, 2014 and 2013, one customer account- ed for approximately 16% and 15% of consolidated trade receivables, respectively. Although Canon does not expect that the customer will fail to meet its obligations, Canon is potentially exposed to concentrations of credit risk if the customer failed to perform according to the terms of the contracts. 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: 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 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 which one or more significant inputs or value drivers are unobservable, which reflect the report- ing entity’s own assumptions about the assump- tions that market participants would use in establishing a price. Assets and liabilities measured at fair value on a recurring basis The following tables present Canon’s assets and liabilities that are measured at fair value on a recurring basis consistent with the fair value hierarchy at December 31, 2014 and 2013. December 31 Millions of yen 2014: 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 ¥ — ¥ 139,240 325 — 12 40,653 — ¥ 40,990 ¥ ¥ — — — 162 72 — 265 ¥ 139,739 ¥ 11,167 ¥ 11,167 Level 3 ¥ — — 474 — — — ¥ 474 ¥ — ¥ — Total ¥ 139,240 325 636 84 40,653 265 ¥ 181,203 ¥ 11,167 ¥ 11,167 80 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 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 investments are comprised principally of Japanese equity securities, which are valued using an unadjusted quoted market price in active markets with sufficient vol- ume and frequency of transactions. Level 2 cash and cash equivalents 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 corpo- rate bonds, which are valued based on cost approach, using unobservable inputs as the market for the assets was not active at the measurement 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 observ- able 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 corpo- rate bonds, for the years ended December 31, 2014 and 2013. Years ended December 31 Millions of yen 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 2014 ¥ 340 — (18) 152 ¥ 474 2013 ¥ 444 1 36 (141) ¥ 340 Gains and losses included in earnings are mainly relat- ed to corporate bonds still held at December 31, 2014 and 2013, and are reported in “Other, net” in the consolidated statements of income. Assets and liabilities measured at fair value on a nonrecurring basis During the years ended December 31, 2014 and 2013, there were no circumstances that required any significant assets or liabilities to be measured at fair value on a nonrecurring basis. STRATEGY BUSINESS SEGMENT CORPORATE STRUCTURE FINANCIAL SECTION CORPORATE DATA 81 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 / FPD (Flat pan- el display) 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. Information about operating results and assets for each segment as of and for the years ended December 31, 2014, 2013 and 2012 is as follows: Millions of yen 2014: Net sales: External customers Intersegment Total Operating cost and expenses Operating profit Total assets Depreciation and amortization Capital expenditures Office ¥ 2,075,788 2,944 2,078,732 1,786,675 ¥ 292,057 ¥ 1,025,499 87,058 69,704 2013: Net sales: External customers Intersegment Total Operating cost and expenses Operating profit Total assets Depreciation and amortization Capital expenditures ¥ 1,993,898 6,175 2,000,073 1,733,165 ¥ 266,908 ¥ 954,803 88,344 54,644 2012: Net sales: External customers Intersegment Total Operating cost and expenses Operating profit Total assets Depreciation and amortization Capital expenditures ¥ 1,751,960 5,615 1,757,575 1,553,997 ¥ 203,578 ¥ 927,543 77,660 58,402 Imaging System Industry and Others Corporate and eliminations ¥ 1,342,501 693 1,343,194 1,148,593 ¥ 194,601 ¥ 517,524 53,912 31,124 ¥ 1,448,186 752 1,448,938 1,245,144 ¥ 203,794 ¥ 584,856 56,564 44,112 ¥ 1,404,394 1,577 1,405,971 1,195,653 ¥ 210,318 ¥ 614,328 53,664 58,142 ¥ 308,963 89,802 398,765 420,566 ¥ (21,801) ¥ 342,695 37,544 15,976 ¥ 289,296 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 ¥ — (93,439) (93,439) 7,929 ¥ (101,368) ¥ 2,574,900 84,966 107,956 ¥ — (92,501) (92,501) 15,593 ¥ (108,094) ¥ 2,374,849 93,193 101,682 ¥ — (91,598) (91,598) 4,352 ¥ (95,950) ¥ 2,075,733 92,545 146,031 Consolidated ¥ 3,727,252 — 3,727,252 3,363,763 ¥ 363,489 ¥ 4,460,618 263,480 224,760 ¥ 3,731,380 — 3,731,380 3,394,103 ¥ 337,277 ¥ 4,242,710 275,173 227,478 ¥ 3,479,788 — 3,479,788 3,155,932 ¥ 323,856 ¥ 3,955,503 258,133 306,661 82 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Intersegment sales are recorded at the same prices used in transactions with third parties. Expenses not directly associated with specific segments are allocated based on the most reasonable measures applicable. Corporate expenses include certain corporate research and development expens- es. 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 were transferred from Corporate to the Office Business Unit. Accordingly, corresponding amounts of total assets as of December 31, 2012 were reclassified. Information about product sales to external customers by business unit for the years ended December 31, 2014, 2013 and 2012 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 Millions of yen 2014 2013 2012 ¥ 322,398 401,447 862,000 489,943 2,075,788 861,196 366,946 114,359 1,342,501 90,395 218,568 308,963 ¥ 3,727,252 ¥ 312,973 ¥ 274,021 381,848 841,436 457,641 1,993,898 324,851 766,382 386,706 1,751,960 973,517 990,549 363,070 111,599 312,429 101,416 1,448,186 1,404,394 62,116 227,180 289,296 ¥ 3,731,380 62,892 260,542 323,434 ¥ 3,479,788 Information by major geographic area as of and for the years ended December 31, 2014, 2013 and 2012 is as follows: Net sales: Japan Americas Europe Asia and Oceania Total Long-lived assets: Japan Americas Europe Asia and Oceania Total Millions of yen 2014 2013 2012 ¥ 724,317 1,036,500 1,090,484 875,951 ¥ 3,727,252 ¥ 715,863 1,059,501 1,124,929 831,087 ¥ 720,286 939,873 1,014,038 805,591 ¥ 3,731,380 ¥ 3,479,788 ¥ 950,719 ¥ 984,231 ¥ 1,032,598 157,748 127,700 210,650 131,660 111,609 196,305 112,163 91,904 159,435 ¥ 1,446,817 ¥ 1,423,805 ¥ 1,396,100 STRATEGY BUSINESS SEGMENT CORPORATE STRUCTURE FINANCIAL SECTION CORPORATE DATA 83 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 ¥938,411 million, ¥960,213 mil- lion and ¥763,870 million for the years ended December 31, 2014, 2013 and 2012, respectively. Long-lived assets represent property, plant and equip- ment and intangible assets for each geographic area. The following information is based on the location of the Company and its subsidiaries as of and for the years ended December 31, 2014, 2013 and 2012. 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 2014: Net sales: External customers Intersegment Total Japan Americas Europe Asia and Oceania Corporate and eliminations Consolidated ¥ 836,801 ¥ 1,033,797 ¥ 1,088,293 ¥ 768,361 ¥ — ¥ 3,727,252 1,752,378 8,738 59,493 821,600 (2,642,209) — 2,589,179 1,042,535 1,147,786 1,589,961 (2,642,209) 3,727,252 Operating cost and expenses 2,245,930 1,018,661 1,135,515 1,522,244 (2,558,587) 3,363,763 Operating profit Total assets 2013: Net sales: ¥ 343,249 ¥ 23,874 ¥ 12,271 ¥ 67,717 ¥ (83,622) ¥ 363,489 ¥ 1,134,484 ¥ 531,122 ¥ 484,858 ¥ 674,672 ¥ 1,635,482 ¥ 4,460,618 External customers ¥ 797,501 ¥ 1,056,096 ¥ 1,124,603 ¥ 753,180 ¥ — ¥ 3,731,380 Intersegment Total 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 ¥ 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 2012: Net sales: 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 22. SUBSEQUENT EVENT On March 3, 2015, the Company commenced a public ten- der offer for all of the issued shares of Axis AB (“Axis”), a Sweden-based company listed on Nasdaq Stockholm, a global leader in the network video solutions industry, for a consideration of 340 Swedish krona (¥4,804) in cash per share or a maximum amount of approximately 23.6 billion Swedish krona (approximately ¥333.7 billion). Through the transaction, the Company aims to make Axis a consolidat- ed subsidiary, acquiring 100% of Axis’s issued shares. The Company views its network surveillance camera business as a promising new business area for Canon. Corresponding Japanese yen amounts as noted above are translated at the rate of ¥14.13 = 1 Swedish krona. 84 SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS Years ended December 31 Millions of yen 2014: Allowance for doubtful receivables Trade receivables Finance receivables 2013: Allowance for doubtful receivables Trade receivables Finance receivables 2012: Allowance for doubtful receivables Trade receivables Finance receivables Balance at beginning of period Addition-charged to income Deduction bad debts written off Translation adjustments and other Balance at end of period ¥ 12,730 7,323 ¥ 12,970 6,908 ¥ 11,563 7,039 ¥ 878 154 ¥ 1,235 212 ¥ 2,149 1,922 ¥ (2,236) (1,171) ¥ (4,173) (1,278) ¥ (2,382) (1,304) ¥ 750 (30) ¥ 2,698 1,481 ¥ 1,640 (749) ¥ 12,122 6,276 ¥ 12,730 7,323 ¥ 12,970 6,908 MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING 85 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 purpos- es 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, 2014. In mak- ing this assessment, management used the criteria established in internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the “COSO criteria”). Based on its assessment, management concluded that, as of December 31, 2014, 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. 86 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, 2014 and 2013, 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, 2014. Our audits also included the schedule of valuation and qualifying accounts (the “schedule”). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule 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 state- ments are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclo- sures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Canon Inc. and subsidiaries at December 31, 2014 and 2013, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2014, in conformity with U.S. generally accepted accounting princi- ples. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. 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, 2014, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 frame- work) and our report dated March 27, 2015 expressed an unqualified opinion thereon. March 27, 2015 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 87 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, 2014, based on crite- ria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Canon Inc. and subsidiaries’ management is responsible for maintaining effec- tive internal control 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 effec- tiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the cir- cumstances. 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, 2014, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the con- solidated balance sheets of Canon Inc. and subsidiaries as of December 31, 2014 and 2013, 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, 2014, and our report dated March 27, 2015 expressed an unqualified opinion thereon. March 27, 2015 88 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 Shareholders 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 27, 2015, 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 MAJOR CONSOLIDATED SUBSIDIARIES (As of December 31, 2014) 89 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. * Canon Latin America, Inc. was merged into Canon U.S.A., Inc. on January 1, 2015. 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. Canon Prachinburi (Thailand) Ltd. Canon Business Machines (Philippines), Inc. Research & Development Canon Research Centre France S.A.S. Canon Information Systems Research Australia Pty. Ltd. C A N O N A N N U A L R E P O R T 2 0 1 4 CANON INC. 30-2, Shimomaruko 3-chome, Ohta-ku, Tokyo 146-8501, Japan ©Canon Inc. 2015 PUB.BEP024-01 0415 

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