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falseFY0000016988M0http://fasb.org/us-gaap/2021-01-31#PropertyPlantAndEquipmentNetCanon prepaid ¥170,000 million of the outstanding loan under the unsecured revolving credit facility contracts on December 28, 2021 before its due date. The remaining balance of ¥174,000 was refinanced with a new expiration date in December 2023 under the credit facilities. The outstanding loans under the credit facilities are ¥174,000 million at a floating interest of 0.21% and Canon has no unused credit facilities as of December 31, 2021.The unrecognized tax benefits were offset by deferred tax assets in the amount of ¥1,695 million, ¥1,412 million and ¥933 million as of December 31, 2021, 2020 and 2019, respectively, and reported under “other noncurrent liabilities” on the consolidated balance sheets. During 2019, the Company implemented a restructuring plan centered in Europe with the goal of reorganizing sales structure and improving profitability mainly in the Printing Business Unit. The employee severance charges in the Printing Business Unit under the plan for the year ended December 31, 2019 were ¥15,656 million and most of the charges are included in selling, general and administrative expenses in the consolidated statements of income. 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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
 
FORM
20-F
 
     
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
 
     
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2021
OR
 
     
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
 
     
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report
    
    
    
        
For the transition period from
    
    
    
        
to
    
        
    
    
Commission file number
001-15122
 
 
CANON KABUSHIKI KAISHA
(Exact name of Registrant in Japanese as specified in its charter)
CANON INC.
(Exact name of Registrant in English as specified in its charter)
JAPAN
(Jurisdiction of incorporation or organization)
30-2,
Shimomaruko
3-chome
,
Ohta-ku,
Tokyo
146-8501,
Japan
(Address of principal executive offices)
Sachiho Tanino,
+81-3-3758-2111,
+81-3-5482-9680,
30-2,
Shimomaruko
3-chome
,
Ohta-ku,
Tokyo
146-8501,
Japan
(Name, Telephone, Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
 
Title of each class
 
        
 
Trading Symbol(s)
 
        
    
Name of each exchange on which
registered
(1)  American Depositary Shares (“ADSs”), each of which represents one share
      CAJ            New York Stock Exchange
(2)  Common Stock (the “shares”)*
                    
Securities registered or to be registered pursuant to Section 12(g) of the Act.
None
(Title of Class)
 
 
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
None
(Title of Class)
 
*
Not for trading, but only for technical purposes in connection with the registration of ADSs.
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
As of December 31, 2021, 1,045,771,759 shares of common stock, including 19,101,237 ADSs, were outstanding.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ☑    No  ☐
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    Yes  ☐    No  ☑
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☑    No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T
(232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files)    Yes  ☑    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule
12b-2
of the Exchange Act. (Check one):
 
Large accelerated filer  ☑    Accelerated filer  ☐   
Non-accelerated
filer  ☐
   Emerging growth company  
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.  ☐
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
 
☑  U.S. GAAP
    
☐  International Financial Reporting Standards as issued
by the International Accounting Standards Board
   ☐  Other
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.    Item 17  ☐    Item 18  ☐
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2
of the Exchange Act).
    Yes  ☐     No  
 
 
 

TABLE OF CONTENTS
 
 
  
Page number
  
1
  
  
  
  
1
  
  
Item 1.
  
  
2
Item 2.
  
  
2
Item 3.
  
  
2
A.
  
  
2
B.
  
  
3
C.
  
  
3
D.
  
  
3
Item 4.
  
  
12
A.
  
  
12
B.
  
  
13
  
  
13
  
  
18
  
  
19
  
  
19
  
  
19
  
  
19
  
  
20
  
  
20
  
  
21
  
  
22
  
  
24
C.
  
  
25
D.
  
  
25
Item 4A.
  
  
29
Item 5.
  
  
29
A.
  
  
29
  
  
29
  
  
32
  
  
33
  
  
38
  
  
38
  
  
43
  
  
48
B.
  
  
48
  
  
53
 
i

 
  
Page number
C.
  
  
53
D.
  
  
54
Item 6.
  
  
57
A.
  
  
57
B.
  
  
65
C.
  
  
81
D.
  
  
81
E.
  
  
82
Item 7.
  
  
83
A.
  
  
83
B.
  
  
83
C.
  
  
84
Item 8.
  
  
84
A.
  
  
84
  
  
84
  
  
84
  
  
84
B.
  
  
85
Item 9.
  
  
85
A.
  
  
85
  
  
85
  
  
85
B.
  
  
85
C.
  
  
85
D.
  
  
86
E.
  
  
86
F.
  
  
86
Item 10.
  
  
86
A.
  
  
86
B.
  
  
86
C.
  
  
94
D.
  
  
94
E.
  
  
97
F.
  
  
101
G.
  
  
101
H.
  
  
101
I.
  
  
101
Item 11.
  
  
102
  
  
102
  
  
102
  
  
102
Item 12.
  
  
103
A.
  
  
103
B.
  
  
103
 
ii

 
  
Page number
C.
  
  
103
D.
  
  
103
  
  
Item 13.
  
  
105
Item 14.
  
  
105
Item 15.
  
  
105
Item 16A.
  
  
106
Item 16B.
  
  
106
Item 16C.
  
  
107
Item 16D.
  
  
108
Item 16E.
  
  
109
Item 16F.
  
  
109
Item 16G.
  
  
109
Item 16H.
   Mine Safety Disclosure    111
Item 16I.
   Disclosure Regarding Foreign Jurisdictions that Prevent Inspections    111
  
  
Item 17.
  
  
112
Item 18.
  
  
112
  
  
113
  
  
118
  
  
119
  
  
120
  
  
121
  
  
123
  
  
124
  
  
171
Item 19.
  
  
172
  
173
 
iii

CERTAIN DEFINED TERMS, CONVENTIONS AND PRESENTATION OF FINANCIAL INFORMATION
All information contained in this Annual Report is as of December 31, 2021 unless otherwise specified.
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.
On March 4, 2022, the noon buying rate for yen in New York City as reported by the Federal Reserve Bank of New York was ¥ 114.65 = U.S.$1.
The Company’s fiscal year end is December 31. In this Annual Report “2021” refers to the Company’s fiscal year ended December 31, 2021, and other fiscal years of the Company are referred to in a corresponding manner.
FORWARD-LOOKING INFORMATION
This Annual Report contains forward-looking statements and information relating to Canon that are based on beliefs of its management as well as assumptions made by and information currently available to Canon. When used in this Annual Report, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “should” and similar expressions, as they relate to Canon or its management, are intended to identify forward-looking statements. Such statements, which include, but are not limited to, statements contained in “Item 3. Key Information-Risk Factors,” “Item 4. Information on the Company,” “Item 5. Operating and Financial Review and Prospects” and “Item 11. Quantitative and Qualitative Disclosures about Market Risk” reflect the current views and assumptions of the Company with respect to future events and are subject to risks and uncertainties. Many factors could cause the actual results, performance or achievements of Canon to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements, including, among others, changes in general economic and business conditions, changes in currency exchange rates and interest rates, introduction of competing products by other companies, lack of acceptance of new products or services by Canon’s targeted customers, inability to meet efficiency and cost reduction objectives, changes in business strategy and various other factors, both referenced and not referenced in this Annual Report. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected, intended, planned or projected. Canon Inc. does not intend or assume any obligation to update these forward-looking statements.
 
1

PART I
Item 1. Identity of Directors, Senior Management and Advisers
Not applicable.
Item 2. Offer Statistics and Expected Timetable
Not applicable.
Item 3. Key Information
A. Selected financial data
The following information should be read in conjunction with and qualified in its entirety by reference to the Consolidated Financial Statements of Canon Inc. and subsidiaries, including the notes thereto, included in this Annual Report.
 
Selected financial data *1*3*4:
  
2021
    
2020
    
2019
    
2018
    
2017
 
                                    
    
(Millions of yen, except average number of shares and per share data)
 
Net sales
   ¥ 3,513,357      ¥ 3,160,243      ¥ 3,593,299      ¥ 3,951,937      ¥ 4,080,015  
Operating profit
     281,918        110,547        174,420        342,452        322,211  
Income before income taxes
     302,706        130,280        195,493        362,392        354,490  
Net income attributable to Canon Inc.
     214,718        83,318        124,964        252,441        242,081  
Advertising expenses
     36,812        31,273        46,665        58,729        61,207  
Research and development expenses
     287,338        272,312        298,503        315,842        333,371  
Depreciation of property, plant and equipment
     156,333        162,733        170,418        175,771        189,712  
Increase in property, plant and equipment
     151,914        132,302        178,088        159,316        147,542  
Long-term debt, excluding current installments
     179,750        4,834        357,340        361,962        493,238  
Common stock
     174,762        174,762        174,762        174,762        174,762  
Canon Inc. shareholders’ equity
     2,873,773        2,575,031        2,685,496        2,820,644        2,863,986  
Total assets
     4,750,888        4,625,614        4,771,918        4,902,955        5,201,626  
Average number of common shares in thousands
     1,045,633        1,049,802        1,069,957        1,079,753        1,085,439  
Per share data:
              
Net income attributable to Canon Inc. shareholders per share:
              
Basic
   ¥ 205.35      ¥ 79.37      ¥ 116.79      ¥ 233.80      ¥ 223.03  
Diluted
     205.29        79.35        116.77        233.78        223.03  
Cash dividends declared
     100.00        80.00        160.00        160.00        160.00  
Cash dividends declared (U.S.$)*2
   $ 0.889      $ 0.745      $ 1.514      $ 1.440      $ 1.483  
Notes:
 
  1.
The above financial data is prepared in accordance with U.S. generally accepted accounting principles.
  2.
Annual cash dividends declared (U.S.$) are translated from yen based on a weighted average of the noon buying rates for yen in New York City as reported by the Federal Reserve Bank of New York in effect on the date of each semiannual dividend payment or on the latest practicable date.
  3.
Canon adopted Accounting Standards Update (“ASU”)
No. 2017-07
from the quarter beginning January 1, 2018. The adoption of the new presentation requirement of the service cost component and the other components of net benefit cost resulted in reclassification from cost of sales, and selling, general and administrative expenses, and research and development expenses into other income (deductions) for the year ended December 31, 2017.
 
2

  4.
Certain figures for the fiscal years ended December 31, 2019, 2018 and 2017 presented in the table above have been revised from the versions previously disclosed. During the year ended December 31, 2020, Canon corrected an immaterial error in its previously issued consolidated financial statements related to accounting for the Company’s and domestic subsidiaries’ compensated absence carryforward as disclosed in the previous fiscal year. For further details, please refer to Note 1 (y) of the Notes to Consolidated Financial Statements.
B. Capitalization and indebtedness
Not applicable.
C. Reasons for the offer and use of proceeds
Not applicable.
D. Risk factors
Canon is one of the world’s leading manufacturers of office multifunction devices (“MFDs”), laser printers, inkjet printers, cameras, medical equipment and lithography equipment.
Primarily due to the nature of the business and geographic areas in which Canon operates and the highly competitive nature of the industries to which it belongs, Canon is subject to a variety of risks and uncertainties, including, but not limited to, the following:
Risks Specific to Canon’s Industries and Business Operations
Changes in the print environment may affect Canon’s business.
In the business machines market for such products as office MFDs and printers, customers are increasingly looking for ways to cut costs while protecting the environment. In addition, the digitalization of workflow in office and the increasing popularity of remote work could also lead to a decrease in customer print opportunities.
In line with these trends, Canon believes that products and services with enhanced cloud connectivity and security, as well as advanced functions that contribute to the efficiency of office operations, will attract strong demand. In the field of commercial printing, Canon anticipates growth in the medium to long term due to a changeover from analog printing to digital printing and growing needs for
high-mix,
low-volume
printing, and is striving to capture demand by focusing on the graphic arts and packaging fields. While Canon has been taking initiatives to analyze market information and respond to these market changes in the print environment by tailoring its new product and service offerings, if Canon is unable to develop and provide products and services that are responsive to the evolving needs of consumers, its operating results may be adversely affected.
Canon’s digital camera, network camera, and video analytics business operates in a highly competitive environment.
As the photographic capabilities of other digital devices, including smartphones, have improved significantly, consumer preferences for taking photographs have also changed and diversified. As a result, the digital camera market is shrinking, with competition intensifying in price and performance. Under these circumstances, one of Canon’s strategies is developing higher performance digital cameras with further differentiation from smartphones, and further strengthening its product capabilities focusing on models for professional and advanced amateur users. Canon is also developing new categories of cameras in order to attract new users who demand ease of use and taking photographs in specific situations. On the other hand, the market for network cameras is growing because of high demand in the security and video analytics solution sectors. As a result, the competition within those sectors intensifies.
 
3

Although Canon has been taking initiatives to analyze market information and respond to the market changes, if Canon fails to introduce new products that maintain a competitive advantage over competitors, or fails to provide new services that match changes in consumer tastes, Canon’s position will decline in relative terms, and as a result, its operating results may be adversely affected.
Canon may not be able to adequately anticipate developments related to its medical device business, including changes to the market environment and developments related to medical device approvals, certifications and health insurance coverage.
Regarding the market for Canon’s medical equipment sold to medical institutions, mainly in the area of diagnostic imaging, it takes a long time to design, research, develop and commercialize products, because it is necessary to prove the clinical effectiveness of new technologies and new products, and obtain regulatory approvals and certifications prior to sale in individual countries and regions. In addition, the market may be affected by changes in the environment such as trade frictions, the shortage of raw materials and containers, the acceleration of national particularism, and the reduction of medical expense budgets of our customers and changes in the cost-sharing ratio in social security and health insurance systems. Furthermore, as an indirect effect of COVID-19, an increase of cancer and cardiovascular patients precipitated by lower participation in routine medical check-ups may adversely affect medical expense burdens of Canon’s medical institution customers, which could reduce demand for medical equipment.
Canon invests in research and development (“R&D”) of new medical device technologies based on detailed analysis of the potential technical and business prospects for such technologies. Although Canon has been taking initiatives to analyze market information and respond to the market changes despite these investments, Canon may become less competitive if it cannot anticipate whether new technologies will have the expected clinical effects or developments in the market or regulatory environment for such technologies. Canon may need to significantly modify its business plans in response to these challenges and it may not be able to generate the expected returns on its investments in R&D of medical devices.
Because the semiconductor lithography equipment and flat panel display (“FPD”) industry is highly cyclical, Canon may be adversely affected by any downturn in demand for semiconductor devices, FPD panels and organic light emitting diode (“OLED”) panels.
The semiconductor lithography equipment and FPD lithography equipment industry is characterized by fluctuating business cycles, the timing, length and volatility of which are difficult to predict. Recurring periods of oversupply of semiconductor devices and panels have at times led to significantly reduced demand for capital equipment, including the semiconductor lithography equipment, FPD lithography equipment and OLED vapor deposition equipment that Canon produces. Despite this cyclicality, Canon must maintain significant levels of R&D expenditures to remain competitive. A future cyclical downturn in the lithography equipment industry and related fluctuations in the demand for capital equipment could cause cash outflow due to declining sales and excess inventory stocks to fall below the level necessary to offset Canon’s expenditures, including those arising from R&D, and could consequently have a material adverse effect on Canon’s operating results and financial condition.
Under these circumstances, Canon is working to stabilize its earnings base by continuously improving the performance of its equipment and enhancing its ability to respond to customer needs, thereby aiming to capture a broader scope of demand, diversifying customer base and applications, and developing products to improve the balance in sales regions across the globe. In addition, Canon is taking measures to minimize the impact of fluctuations in market demand by transforming existing manufacturing facilities and building a group-wide system of flexible staff reshuffling, and investing in its own production facilities with the assumptions of significant fluctuations in demand.
 
4

Although Canon has been taking initiatives to analyze market information and respond to the market changes, Canon’s operating results and financial position could be adversely affected if Canon fails to meet its customer needs by having different assumptions of the market trend.
Canon’s business is subject to changes in the sales environment.
Canon depends on HP Inc. for a significant part of its business and has had a strong relationship with HP Inc. as an original equipment manufacturing (“OEM”) partner. However, Canon’s business and operating results may be affected by the policies, business and operating results of HP Inc. Any decision by HP Inc. management to limit or reduce the scope of its relationship with Canon would adversely affect Canon’s business and operating results.
Canon has built close relationships with the other major business partners of Canon products but Canon’s business and operating results may be affected by the policies, business and operating results of those partners. Any decision by the senior management team of such partners to limit or reduce the scope of its relationship with Canon would adversely affect Canon’s business and operating results.
Canon seeks to maintain a well-balanced sales channels of direct sales and indirect sales in each region. In addition to existing business partners, Canon continues to develop new business partners as well. Nevertheless, Canon’s operating results may be adversely affected should business conditions change more dramatically than expected.
Other Risks Related to Canon’s Industries and Business Operations
Canon’s cooperation and alliances with, strategic investments in, and acquisitions of, third parties may not produce the anticipated improvements to its financial results.
Canon makes strategic acquisitions of other companies for the purpose of business expansion and Canon is also engaged in alliances, joint ventures, and strategic investments with other companies. Canon targets corporate acquisitions, business alliances and strategic investments in areas where Canon has a strong affinity with, based on the technologies it possesses and the businesses it excels in. In particular, it focuses its investments on blue chip companies with strong management teams. These activities can help Canon to grow its business. However, weak business trends or disappointing performance by partners or acquired companies may adversely affect the success of such activities. The success of such activities may be adversely affected by the inability of Canon and its partners or acquired companies to successfully define and reach common objectives. Even if Canon and its partners or acquired companies succeed in designing a structure that allows for the definition and achievement of common objectives, synergies may not be created between the businesses of Canon and its partners or acquired companies. In addition, integration of operations may take more time than expected. In connection with its acquisitions, Canon recognizes goodwill and other intangible fixed assets on its consolidated balance sheet, and the amounts recognized may be impaired if there is a decline of future cash flow. An unexpected cancellation of a major business alliance may disrupt Canon’s overall business plans and may also result in a delayed return on, or reduced recoverability of, the investment, adversely affecting Canon’s operating results and financial position.
A substantial portion of Canon’s business activity is conducted outside Japan, exposing Canon to unfavorable political, diplomatic or economic conditions, sharp fluctuations in foreign currency exchange rates and unexpected political, legal or regulatory change.
Canon’s business activities are deployed globally so overseas business activities are primarily exposed to the risk of unfavorable political, diplomatic or economic conditions, sharp fluctuations in foreign currency exchange rates and unexpected political, legal or regulatory changes.
Declines in consumption and restrained investment due to an economic downturn in major markets such as Japan, the United States, Europe, Asia and others may affect Canon’s operating results. Political and diplomatic
 
5

issues due to the unfolding situation in Ukraine or trade frictions may also adversely affect Canon’s operating results. The operating results for products such as office, diagnostic equipment and industrial equipment are affected by the financial results of its corporate customers or medical institutions, and deterioration of their financial results has caused and may continue to cause customers to limit capital investments. Demand for Canon’s consumer products, such as cameras and inkjet printers, is discretionary. Rapid price declines owing to intensifying competition and declines in levels of consumer spending and corporate investment could adversely affect Canon’s operating results and financial position.
Canon derives a significant portion of its revenue from its international operations. As a result, Canon’s operating results and financial position have been and may continue to be significantly affected by changes in the value of the yen versus foreign currencies. Sales of Canon’s products denominated in foreign currencies have been and may continue to be adversely affected by the strength of the yen against foreign currencies. Conversely, a strengthening of foreign currencies against the yen will generally be favorable to Canon’s foreign currency sales. Canon’s consolidated financial statements are presented in yen. As such, the yen value of Canon’s assets and liabilities arising from foreign currency transactions have fluctuated and may continue to fluctuate. Unpredictable fluctuations may have certain effects on Canon’s consolidated financial statements. Although Canon strives to mitigate the effects of foreign currency fluctuations arising from its international business activities, such as executing currency hedge transactions through short-term forward exchange contracts, and by reflecting exchange rate movements in its product pricing, Canon’s consolidated financial statements have been and may continue to be affected by currency translations from the financial statements of Canon’s foreign subsidiaries and affiliates, which are denominated in various foreign currencies.
In addition, there are various political, diplomatic or economic issues in countries and regions around the world, including issues related to the unfolding situation in Ukraine and there is a risk that Canon will face unexpected political, legal or regulatory changes.
With regard to the occurrence of unfavorable political, diplomatic or economic conditions, Canon strives to monitor local conditions through daily communication with its subsidiaries and by collecting information through regular business inquiries, which is reflected in its business strategies and forecasts of financial results. If demand is expected to decline in a specific market or globally, Canon adjusts its production in accordance with the production and supply system.
Canon has focused on strengthening its measures for international environmental regulations and changes in international and domestic tax regulations with respect to unexpected political, legal or regulatory changes. Regulations such as fair competition, anti-corruption, protection of personal information, security trade control and others including regulations related to the environment are carefully monitored and complied with based on the control of each department in charge.
Any inability to manage the risks inherent in Canon’s international activities could adversely affect its business and operating results.
Canon’s business could be adversely affected by disruption in the supply chain.
Canon’s main business is to develop products, purchase raw materials and parts, manufacture products, and sell them worldwide. In its business activities, Canon strives to build an optimal supply chain for the entire chain of activities, from the purchase of raw materials to production and sales. In particular, Canon has striven to build optimal production systems and improve the quality of its products, including by building an efficient production system using automation and robotization technology, promoting
in-house
production of key parts, controlling the degree of external dependence, and reducing manufacturing costs to increase its resistance to rising raw material prices and supply shortages. Canon has also established a department dedicated to quality control and has worked with external suppliers to improve quality and ensure stable procurement of raw materials and parts, and established a department to manage the logistics of the entire Group, in order to increase efficiency, reduce
 
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logistics costs and quickly respond to problems when they arise. Further, Canon enters into insurance policies to cover damages incurred by accidents. Nevertheless, despite these efforts, there can be no assurance that Canon will be able to prevent or mitigate adverse effects on its supply chain, and there is a possibility that a shortage of raw materials and parts supply, quality problems, rising production costs, as well as stagnation in distribution, accidents of transportation and damages triggered by other factors in the production and sales of products may have an adverse effect on Canon’s operating results.
Canon relies on specific external suppliers for critical parts and materials to be used in products that meet Canon’s strict quality, efficiency and environmental standards. Canon’s business performance may be adversely affected by suspension of production activities or higher production costs in the event of any unforeseen circumstances affecting suppliers of parts and materials used across Canon’s product lineup, or in the event of a quality problem, insufficient supply, or sharp price increases affecting such parts and materials. In addition, if the global shortage in the supply of semiconductor chips is prolonged or becomes worse, Canon may experience higher materials costs or diminished sales due to delay in delivery of goods to customers. These factors could adversely affect Canon’s operating results.
Canon’s ability to supply products to countries and regions around the world depends on the effectiveness of its logistics services. However, if any trouble occurs in the computerized logistics system, if problems such as regional disputes occur, or if labor disputes such as strikes by port workers occur, or if the losses arising from accidents when transporting expensive products are not compensated by insurance, or if products cannot be replaced and delivered to the customers, there are possibilities that increased logistics costs or delays in deliveries may result in lost sales opportunities and credibility with its customers.
In addition, the unfolding situation in Ukraine may adversely affect Canon’s supply chain such as the sharp price increases, the shortages of parts and materials, and the logistics disruptions.
Furthermore, the social trust and brand value of Canon may be damaged in case that violation of laws and the ethic violation in conjunction with human rights occur in Canon’s supply chain because actions to respect and protect human rights in the supply chain are demanded globally as corporate social responsibility.
Canon’s facilities, information systems and information security systems are subject to damage as a result of natural disasters and infectious diseases.
Canon’s headquarters building, information systems and major facilities of R&D centers are located in the Tokyo region, and earthquakes occur more frequently in Japan than in other parts of the world, making Japan an area that is vulnerable to the damage caused by such natural disasters. Canon’s facilities and offices in the areas of R&D, procurement, production, logistics, sales and services are located throughout the world, and there are risks of disruptions due to the stoppage of infrastructure in the wake of natural disasters such as earthquakes, typhoons and floods, as well as terrorist attacks. In addition, the frequency and intensity of extreme weather conditions and disasters is increasing due to climate change. Although Canon has been taking steps to mitigate such physical risks of climate change on its operations while also seeking to achieve cumulative CO2 emissions reductions across product lifecycles, these measures may turn out to be insufficient if the severity or speed of climate change is greater than anticipated or outpaces expectations. Such factors may adversely affect Canon’s operations, incur cost related to physical and human damage, and lower the value of the Canon brand.
Although Canon has continuously implemented risk management activities led by the relevant departments of the head office, there can be no assurance that Canon will be able to prevent or mitigate the effect of any disruptive events or developments. In preparation for the worst-case scenario, such as plant shutdowns, Canon has established the backup system for concurrent production of similar models at multiple sites which may not be adequate to mitigate the relevant risks. In order to quickly restore operations in the event of a shutdown, Canon has identified the initial actions to be taken, roles and responsibilities of the departments involved, and established the structure to communicate among departments in the event of an emergency. In addition, Canon
 
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has the backup structure for core systems used in R&D, procurement, production, logistics, sales and services in case of information systems failure. Nonetheless, there can be no assurance that Canon will be able to prevent or mitigate the effect of any disruptive events or developments.
Despite the resurgence of
COVID-19
infections due to new variants, economic activities have resumed and continued to recover due to the progress of vaccination programs. However, if the transmission further expands and is prolonged, it could lead to a slowdown of the world economy and the business of Canon, a slowdown in the business of Canon’s customers, suppliers and partners and lower investment sentiment for those parties. Further, requests by governments to restrict Canon’s business amid the pandemic may occur.
COVID-19
may have other effects on Canon’s businesses. For example, print volume of office MFDs may not recover to the expectations of Canon in view of the increasing popularity of remote work since
COVID-19.
Also, installation of industrial equipment by Canon may be slower than expected, due to slower recovery in business investment.
Furthermore, the resurgence of
COVID-19
disrupts the supply chain around the world including the production activities of Canon such as the stagnation of production activities in Southeast Asia. In addition, in case that limitations of economic activity occur in Japan and foreign countries, the closures of offices and retail outlets, overseas travel restrictions and shortage of international freight transport capacity may affect Canon’s sales activities. All of these cases may have an adverse effect on Canon’s financial position and operating results.
Canon must continue to attract and retain highly qualified professionals.
Canon’s future operating results depend in significant part upon the continued contributions of its employees. In addition, Canon’s future operating results depend in part on its ability to attract, train and retain qualified personnel in the area of R&D, production, sales and management. The competition to acquire human resources in the high-tech industries in which Canon operates has intensified in recent years. Moreover, owing to the accelerating pace of technological change, the importance of training new personnel in a timely manner to meet product R&D requirements will increase.
Maintaining a high level of expertise in Canon’s manufacturing technology is critical to Canon’s business. However, it is difficult to secure the requisite expertise for specialized skill areas, such as lens processing, in a short time period. Canon strives to create a work environment in which each and every employee is highly motivated and can fully demonstrate his or her abilities by making the most of his or her individuality and sense of value in order to provide an attractive workplace for capable employees. In particular, when conducting business activities globally, Canon ensures thorough compliance with labor-related laws and regulations in each country and region, respect of human rights, support of the improvement of employees’ abilities through the development of various training systems, and strengthening of the development of human resources who can show leadership internationally. Canon is systematically training successors for certain skills.
However, failure by Canon to recruit and train qualified personnel or the loss of key employees could delay R&D or slow production and could increase the risks of outflow of technologies and skills, and inappropriate knowledge transfers. These factors may adversely affect Canon’s business and operating results.
Canon’s business is subject to environmental laws and regulations.
Canon is subject to certain Japanese and foreign environmental laws and regulations in areas such as mitigation of climate change, resource conservation including product recycling, reduction of hazardous substances, clean air, clean water and waste disposal. Although Canon is making group-wide efforts to respond to climate change through a variety of measures, including energy-saving activities and the development of energy-saving products, advanced resource recycling, strict management of chemical substances through sustainable procurement, reduction of chemical substances used in production processes and emission control, there can be no assurance that such efforts will successfully achieve compliance, particularly as environmental laws and regulations continue to become more stringent globally. Due to the introduction and enforcement of new
 
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environmental regulations in Japan and other countries and regions, such as stricter energy-efficiency regulations or economic measures such as carbon taxes, or more active enforcement of existing laws and regulations, Canon may incur higher compliance costs or face liability for additional costs and damages. In addition, disclosure frameworks and standards relating to climate change and sustainability issues have continued to evolve. Although Canon reports in line with certain voluntary frameworks, it may suffer damage to its reputation if its disclosure is viewed as inadequate by investors or other stakeholders. Such costs, damages, and reputational effects could adversely affect Canon’s business and operating results.
Canon is subject to potential liability for the investigation and cleanup of environmental contamination at each of the properties that it owns or operates and at certain properties Canon formerly owned or operated. If Canon is held responsible for such costs in any future litigation or proceedings, such costs may not be covered by insurance and may be material.
Canon is subject to risks related to information security and electronic data.
Canon stores and has access to confidential electronic data relating to manufacturing, R&D, procurement and production, as well as sensitive information obtained from its customers, parties who have connections with Canon and other individuals and parties. Such electronic data is used by Canon and third party managed systems and networks. Electronic data is also used in various products to provide information services.
There are some risks inherent in the use of electronic data, including vulnerability to hacking, computer viruses, and cyber attacks, service failures and leakage of personal information due to infrastructure issues and issues arising from damage caused by natural disasters. Although Canon has implemented the controls of software used in its operations and company-wide employee training for information security and cyber attacks, in addition to data access restrictions and security measures, and continues to make improvements so as to alleviate these risks, such events may occur despite its best efforts. In particular, cyber attacks have become increasingly sophisticated and complex, and are targeted anywhere around the world. Canon’s locations in Japan and overseas are exposed to these risks and if its infrastructure turns out to be technically vulnerable to such attacks, malicious access to Canon’s network by third party, stoppage of websites and online services or other incidents may occur.
The materialization of such risks could result in disruptions of Canon’s material operations, leakage of confidential data composed of both personal and business information and damage to the information service functions in products. The occurrence of any of these events may potentially cause Canon to be subject to claims from affected individuals and parties and may negatively affect Canon’s brand image, the credibility it has developed, and its operating results and financial conditions.
Other Risks
Canon may be adversely affected by fluctuations in the stock and bond markets.
Canon’s assets include investments in publicly traded securities. Canon does not hold shares for the purpose of receiving profits from fluctuations in stock prices or dividends, and holds shares as part of its alliance with companies outside the Group, only with respect to those that are deemed useful for strengthening the Group’s organizational structure because they are difficult to realize as management resources within the Group for medium- to long-term growth. As a result, volatility in financial markets and overall economic uncertainty create the risk that the actual amounts realized in the future on Canon’s investments could differ significantly from the fair values currently assigned to them.
Canon’s operating results and financial position may be negatively affected by price fluctuations in the stock and bond markets.
 
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Canon may be subject to antitrust-related lawsuits, investigations or proceedings, which may adversely affect its operating results or reputation.
A portion of Canon’s net sales consists of sales of supplies and the provision of services after the initial equipment placement. The supplies and services have become more commoditized and there are many competitors in these markets. Canon’s success in maintaining these post-placement sales will depend on its ability to compete successfully with these competitors, some of which may offer lower-priced products or services. Despite the increase in competitors, Canon currently maintains a high market share in the market of supplies for office MFDs and printers. Accordingly, Canon may be subject to lawsuits, investigations or proceedings under relevant antitrust laws and regulations. Although Canon conducts risk management activities such as regular training for employees in the relevant departments under the leadership of the departments responsible at the Head Office, any such lawsuits, investigations or proceedings may lead to substantial costs and have an adverse effect on Canon’s operating results or reputation.
Canon’s success depends in part on the value of its brand name, and if the value of the brand is diminished, Canon’s operating results and prospects will be adversely affected.
Canon’s success depends in part on maintenance and development of the value of its brand name. The main factors which could damage its brand value are defective product quality, circulation of counterfeit and failures of its compliance regime. Although Canon works to minimize risks that may arise from product quality and liability issues, such as those triggered by the individual functionality and also from the combination of hardware and software that make up Canon’s products, there can be no assurance that Canon will be able to eliminate or limit these issues and the resulting damages. If such factors adversely affect Canon’s operating activities, generate additional expenses such as those related to product recalls, service and compensation, or otherwise hurt its brand image, Canon’s operating results or reputation for quality may be adversely affected. Canon has been implementing measures to halt the spread of counterfeit products. However, the continued manufacture and sale of such products could adversely affect Canon’s brand image as well as its operating results.
Canon has established a group-wide compliance system to ensure compliance with laws and regulations. However, if Canon fails to maintain its overall compliance regime, especially legal and regulatory compliance, or if Canon fails to take measures to any problems linked to its supply chain, this also could result in damage to Canon’s credibility and brand value.
If Canon does not effectively manage transitions in its products and services, its operating results may decline.
Many of the business areas in which Canon competes are characterized by rapid technological advances in hardware performance, software functionality and product features; frequent introduction of new products; short product life cycles; and continued qualitative improvements to current products at stable price levels. Canon has sought to invest substantial resources into introducing new products that are attractive, innovative and cost competitive. There are several risks inherent in the introduction of new products and services, such as delays in development or manufacturing, unsuitable product quality during the introductory period, variations in manufacturing costs, cannibalization of existing product sales, uncertainty in predicting customer demand and difficulty in effectively managing inventory levels. Moreover, if Canon is unable to respond quickly to technological innovations with respect to information systems and networks, Canon’s revenue may be significantly affected as a result of delays associated with the incorporation into its products of such new information technologies.
Canon’s revenues and gross margins also may suffer adverse effects because of the timing of product or service introductions by its competitors. In order to respond to the above risks, Canon has a system to promptly supply products that reflect the needs of the market. However, this risk is exacerbated when a competitor introduces a new product immediately prior to Canon’s introduction of a similar product. If any of these risks materialize, future demand for Canon’s products and services could be reduced, and its operating results could decline.
 
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Canon is subject to risks relating to legal proceedings.
Canon is involved in various claims and legal actions arising in the ordinary course of its business. Results of actual and potential litigation are inherently uncertain. An unfavorable result in a legal proceeding could adversely affect Canon’s reputation, financial condition and operating results.
Canon may be subject to intellectual property litigation and infringement claims, which could cause it to incur significant expenses or prevent it from selling its products.
Because of the emphasis on product innovation in the markets for Canon’s products, many of which are subject to frequent technological innovations, patents and other intellectual property are an important competitive factor. In relation to protection of its technologies, Canon faces risks that: competitors will be able to develop similar technology independently; Canon’s pending patent applications may not be issued; the steps Canon takes to prevent misappropriation or infringement of its intellectual property may be unsuccessful; and intellectual property laws may not adequately protect Canon’s intellectual property, particularly in certain emerging markets. Canon has established a department specializing in intellectual property, relies primarily on internally developed technology, and seeks to protect such technology through a combination of patents, trademarks and other intellectual property rights.
In relation to third party intellectual property rights, if any third party is adjudicated to have a valid infringement claim against Canon, Canon could be required to: refrain from selling the relevant product in certain markets; pay monetary damages; pursue development of
non-infringing
technologies, or attempt to acquire licenses to the infringed technology and to make royalty payments, which may not be available on commercially reasonable terms, if at all.
Canon may need to litigate in order to enforce its intellectual property rights or in order to defend against claims of infringement, which can be expensive and time-consuming.
Canon also licenses its patents to third parties in exchange for payment or licensing. The terms and conditions of such licensing or changes in the renewal conditions of such licenses could affect Canon’s business.
With respect to employee inventions, Canon maintains company rules and an evaluation system and has been making adequate payments to employees for the invention rights based on these rules. However, there can be no assurance that disputes will not arise with respect to the amount of these payments to employees.
If counterfeit products that infringe Canon’s trademarks or other intellectual property rights circulate in the market, and the use thereof causes accidents, product failures, quality defects and other damage to customers, Canon’s brand value may be tarnished and its business may be harmed.
Canon’s businesses, brand image and operating results could be adversely affected by any of these developments.
Canon’s financial results may be adversely affected if its deferred tax assets are not recoverable or if it is subject to international double taxation.
Canon currently has deferred tax assets, which are subject to periodic recoverability assessments based on projected future taxable income. The changes of future profitability due to future market conditions and tax reforms including changes in tax rates may require possible recognition of significant valuation allowances to reduce the net carrying value of 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.
 
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In addition, recently, international corporate tax avoidance has developed into a political issue with a focus on aggressive tax planning strategies of certain multinational corporations. The Organisation for Economic
Co-operation
and Development (“OECD”), established the Base Erosion and Profit Shifting (“BEPS”) project for the purpose of increasing cooperation among countries and implementing harmonization of taxation. The BEPS action plan was published in July 2013; the OECD then conducted further study based on that plan and published its final report in October 2015. Most recently, over 130 jurisdictions joined a
two-pillar
plan to reform international taxation rules and ensure that multinational enterprises pay a fair share of tax wherever they operate. Canon has been reviewing the transfer pricing policy taking into consideration the
two-pillar
plan proposed by OECD and the developments of international digital taxation rules.
It is, however, possible that there will be differences in opinion between Canon and tax authorities which may adversely affect Canon’s operating results and financial condition.
Canon’s retirement and severance benefit obligations are subject to certain accounting assumptions.
Canon has significant employee retirement and severance benefit obligations that are recognized based on actuarial valuations. Inherent in these valuations are key assumptions, including discount rates, expected return on plan assets, assumed rate of increase in compensation level and mortality rate. Actual results that differ from the assumptions are accumulated and amortized over future periods and, therefore any such differences would be expected to be linked to increases in actual costs, which may adversely affect net income.
Item 4. Information on the Company
A. History and development of the Company
Canon Inc. is a joint stock corporation (
kabushiki kaisha
) formed under the Companies Act of Japan. Its principal place of business is at
30-2,
Shimomaruko
3-chome,
Ohta-ku,
Tokyo
146-8501,
Japan. The telephone number is
+81-3-3758-2111.
The Company was incorporated under the laws of Japan on August 10, 1937 to produce and sell Japan’s first focal plane shutter 35mm still camera, which was developed by its predecessor company, Precision Optical Research Laboratories, which was organized in 1933.
In the late 1950s, Canon entered the business machines field utilizing technology obtained through the development of photographic and optical products. With the successful introduction of electronic calculators in 1964, Canon continued to expand its operations to include plain paper copying machines, faxes, laser printers, bubble jet printers, computers, video camcorders and digital cameras. In 2016, Canon acquired Toshiba Medical Systems Corporation (Canon Medical Systems Corporation “CMSC” as of January 4, 2018) and has expanded its medical business.
In 2021, 2020, and 2019, Canon’s increases in property, plant and equipment were ¥151,914 million, ¥132,302 million and ¥178,088 million, respectively. In 2021, the increases in property, plant and equipment were mainly used to expand production capabilities in both domestic and overseas regions, and to bolster Canon’s production-technology-related infrastructure. In addition, Canon has been continually investing in tools and dies for business machines, in which the amount invested is generally the same each year.
For 2022, Canon projects to invest in property, plant and equipment of approximately ¥180,000 million. This amount is expected to be spent for investments in new production plants and new facilities of Canon. Canon anticipates that the funds needed for this increase will be generated internally through operations.
The SEC maintains a website at https://www.sec.gov that contains reports and proxy information regarding issuers that file electronically with the SEC. Some of the information may also be found on Canon’s website at https://global.canon/en.
 
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B. Business overview
Canon is one of the world’s leading manufacturers of office MFDs, laser printers, inkjet printers, cameras, medical equipment and lithography equipment.
Canon sells its products principally under the Canon brand name and through sales subsidiaries. Each of these subsidiaries is responsible for marketing and distribution to retail dealers in an assigned territory. In 2021, 76.4% of consolidated net sales were generated outside of Japan, with approximately 27.6%, 25.5% and 23.3% generated in the Americas, Europe and Asia and Oceania, respectively.
Canon’s strategy is to develop innovative, high value-added products incorporating advanced technologies.
Canon’s R&D activities range from basic research to product-oriented research directed at maintaining and increasing Canon’s technological leadership in the marketplace.
Canon will work to realize the optimized global allocation of its production assets based on changes in local conditions in each country and region. Canon has manufacturing subsidiaries in a variety of countries and regions, including the United States, Germany, France, the Netherlands, Taiwan, China, Malaysia, Thailand, Vietnam and the Philippines.
As a concerned member of the world community, Canon emphasizes recycling and has increased its use of clean energy sources and cleaner manufacturing processes. Canon has also launched programs to collect and recycle used Canon cartridges and to refurbish used Canon MFDs. In addition, Canon has removed virtually all environmentally unfriendly chemicals from its manufacturing processes.
Products
Canon operates its business in four segments: the “Printing Business Unit,” the “Imaging Business Unit,” the “Medical Business Unit”, and the “Industrial and Others Business Unit”.
- Printing Business Unit –
Canon manufactures, markets and services a full range of office MFDs, laser printers and inkjet printers for home and office use and production print products for print professionals. Canon also delivers added value to customers through software, services and solutions.
In 2020, Canon expanded its hardware offerings by providing “imageRUNNER ADVANCE DX” with advanced scanning, security and cloud-based features.
Canon released the new product of 3 series 9 models in 2021 and expanded the lineup of the “imageRUNNER ADVANCE DX” series.
Canon is also providing a software named “uniFLOW Online” which enabled the new “imageRUNNER ADVANCE DX” to connect to cloud services. In addition to cloud integration and enhanced security, Canon has redesigned its flagship products to include scanning functions that efficiently digitize paper documents. In order to maintain and improve its competitiveness and respond to increasingly sophisticated customer demand, Canon will continue to strive to further enhance its product lineup in line with market trends, strengthen its ability to respond to solutions, and improve its sales capabilities.
In production printing, demand for quick delivery,
on-demand
printing and variable data printing is increasing.
 
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As the new unit for the “imagePRESS C10010 VP/C9010 VP”, the flagship model in the “imagePRESS” series of production printers, Canon provided the “Inspection Unit A1”, which automates the inspection process, and the “Sensing Unit A1”, which automates image adjustment. This greatly reduces the time and effort required for inspection and recovery such as visual confirmation of printed images and reprinting of pages with poor output, contributing to stable print quality.
Regarding large-format inkjet printers, Canon offers the “imagePROGRAF PRO” series, which features newly developed
12-color
“LUCIA PRO ink” which significantly improves color reproduction and expression in dark areas to meet the high-quality image requirements of art professionals. Canon also offers the “imagePROGRAF TZ/TX/TM/TA” series, which is equipped with “LUCIA TD”, a five-color pigment ink that enables high-quality printing according to a variety of printing applications and paper suitability, for large-format printing needs, ranging from large-volume printing of drawings at design offices to CAD and poster printing at companies and stores. Canon also offers the ”imagePROGRAF GP” series which is equipped with fluorescent ink, the first in the industry, for brighter and softer color reproduction.
For the
high-end
production inkjet market Canon offers industry-leading, continuous feed printers for massive print volumes at highest efficiency with highest-quality results in full color.
The “ColorStream” Series inkjet press provides a modular and customizable offering with highest productivity and flexibility for color and monochrome production of transaction, TransPromo, direct mail, book and manual applications including security inks such as Magnetic ink character recognition (“MICR”) or invisible ink.
The “ProStream” Series is a unique breed of fast, high-productivity continuous feed inkjet presses combining the vibrant colors and productivity of offset with the variable-data versatility of digital printing.
As for cutsheet inkjet printers, Canon provides the “varioPRINT iX” series that has revolutionized the commercial printing business experience. It combines stunning image quality and a wide media range with the high productivity and attractive cost-efficiency of inkjet. The “varioPRINT iX” series press offers high uptime, reliability, and productivity to produce more in less time. It is ideal for printing companies who need predictable and fast production with minimal calibration and setup so that they can handle and fulfill any job based on the agreed turnaround time and price, resulting in more profit and more business for Canon’s customers.
In the large format and graphic arts market, Canon provides unique UV LED solutions under the Colorado and Arizona brands, targeting
best-in-class
productivity combined with lowest cost of ownership to enable professional print providers to deliver a wealth of graphics and industrial applications to their customers.
Regarding inkjet printers, Canon offers a wide range of products to meet the various needs of its customers, based on its core technology Full-photolithography Inkjet Nozzle Engineering (“FINE”), which enables realization of high-speed printing and high-quality image at the same time.
Especially since the spread of
COVID-19
infections, the use of inkjet printers for home use has been rapidly increasing due to the diversification of work styles and learning methods. Canon has responded to these different customer needs with both Ink Cartridge Printers, with replaceable Ink Cartridges and Refillable Ink Tank Printers, with its
built-in
ink tank which offers high productivity and low running costs. With these products, Canon provides powerful printing support for a variety of situations, from home work and study to business use.
As for laser printers, there are concerns over lagging growth of the entire market affected by decrease in demand for printing, which is caused by changes in users printing behavior due to the prevalence of smartphones, cloud computing, etc. Canon has focused on expanding sales of high value-added products from mid to
high-end
class, especially for multifunction printers (“MFPs”). In response, Canon aims to increase sales volume and market share by enhancing competitiveness with even more focus on contractual business which engages with customers for a certain period, accompanied with leveraging technical innovation and so forth.
 
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Since 2020, the market has been affected due to low office print usage driven by
COVID-19.
In contrast,
low-mid
class of printers are in constant demand due to remote work and learn-from-home needs.
The pandemic caused lockdowns in Southeast Asian countries where Canon has production facilities, which caused those facilities to see declines in operating capacity as well as a shortage of raw materials and parts. This has led to a temporary shortage of printer supplies. Canon will strive to ensure a stable supply of products by stable procurement of raw materials and parts and promoting parallel production.
- Imaging Business Unit –
Canon manufactures and markets digital cameras, as well as lenses and various related accessories.
In interchangeable lens digital cameras, Canon launched its most technologically advanced full-frame mirrorless camera, “EOS R3”, which was designed to meet the reliability and durability demands of professionals. The interchangeable lens digital camera market remains strong, driven by strong demand for high-resolution images and videos, by increases in personal consumption, and moreover driven by strong demand for “EOS R5” and “EOS R6” which have been highly acclaimed in the market since 2020. As a result, Canon has maintained a leading market share in digital interchangeable-lens cameras in terms of volume in the major regions/countries, such as the United States, Europe, China and Japan.
Canon aims to expand the imaging domains of interchangeable lens digital cameras, and believes there remains considerable room for future growth through development of new products based on
state-of-the-art
technology such as higher picture quality, small and lightweight body and versatile movie/network functions.
Canon has announced eight new RF lenses for full-frame mirrorless cameras. Sales of RF lenses increased due to the synergistic effect with the EOS R series camera body. In the fourth quarter, Canon launched the “EOS VR SYSTEM” as a new virtual reality (“VR”) imaging production system which started with the “RF5.2mm F2.8 L Dual Fisheye” which is Canon’s optical solution to the many challenges that have troubled VR image makers for years.
As for compact digital cameras, while the overall market has been shrinking, Canon will continue to strengthen its premium lineup and strive to improve its profitability. Moreover, Canon is developing new camera genres, such as “PowerShot ZOOM” and “PowerShot PICK”, in order to discover new needs for ease of use and shooting in specific scenes.
In the compact photo printer market, Canon has endeavored to promote sales by capturing sales demand for printing at home even in the harsh environment of
COVID-19.
With its advantages, such as easy operation, portability,
lab-quality
photo print, and durability, “SELPHY” has gained a strong market position in each region. Canon plans to tap into new customer demand and to maintain its lead in this market.
The solution combining network cameras and video analytics software has expanded as a social infrastructure beyond security applications, and its market is growing steadily together with the cloud business. Sales of network cameras have been growing steadily with minimal impact on sales caused by
COVID-19.
In the midst of this pandemic, the need for monitoring congestion, due to the impact that congestion may have on the potential spread of disease, has become more apparent. Solutions that enable users to grasp the situation remotely and in real time, and combine video analytics software such as people counters,
passer-by
counters with network cameras, have been introduced to medical facilities, educational institutions, resort areas, and large-scale events in various regions to ensure safety and security.
For the advanced surveillance market such as port surveillance, the
“ML-105
EF” and
“ML-100
M58” ultra-high sensitivity multipurpose cameras were launched globally to enhance the
line-up
at the end of 2020 and in 2021. The
ML-series,
despite its compact size, contributes to ensuring the security and research activities in dark places by taking advantage of ultra-high sensitivity, which allows the cameras to capture color video even in the dark, where it is difficult to recognize with the naked eye.
 
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Canon acquired Axis communications in 2015 which is the industry leader in network video. In 2021, Canon presented several new products and innovations, including the
“ARTPEC-8”,
a new generation
system-on-chip
(“SoC”) with an original design that supports image analysis using deep learning with a single camera, contributing to continued growth and strengthened position.
For the industry to promote Digital Transformation (“DX”), Canon offers three new video solutions. (1) Canon has already begun providing Automated Guided Vehicle (“AGV”) manufacturers with “Vision-based Navigation Software”, a video content analytics software that includes “Visual SLAM technology”, which uses cameras to simultaneously estimate three-dimensional information, position and orientation of the surrounding environment. Canon aims to expand the range of applications beyond the logistics field. (2) In order to help automate various field tasks, Canon provides solutions that combine network cameras and the “Vision Edition” series of image processing software. (3) For the inspection of bridges and tunnels using image data, Canon has developed a tool to confirm image quality and provide a service to detect cracks using AI technology.
In the content creation market for films and dramas, OTT * services have expanded the market, and a large amount of high-quality content is required. In the news and broadcasting area, there is a demand for a system that can distribute news contents immediately and efficiently. In addition, with the rise of new types of content creators such as YouTubers, the trend in the market is undergoing a major change; there is a growing demand for “ease of handling” in addition to the image quality in order to cope with diverse shooting environments. To respond to these demands, Canon has introduced the “EOS C70”, a compact and lightweight digital cinema camera that delivers high image quality for filmmaking, the “CINE-SERVO lens” series supports a wide range of focal lengths with three lineups, and the “XF605”, a professional camcorder that supports functions for live streaming and immediate news delivery. Additionally, Canon introduced the
IP-based
remote camera system
“CR-N500”,
“CR-N300”,
and
“RC-IP100”
that enable multicamera control with a single operator.
Most of large-scale sports and music events have been postponed due to
COVID-19,
but events have been resuming since the middle of 2021, including the launch of the Olympic and Paralympic Games Tokyo 2020, and this trend is expected to continue through 2022 especially in Europe and the United States.
While investment in broadcasting equipment is on a recovery trend, Canon has introduced broadcast lenses, including the “UJ 122x”, the 4K long zoom broadcast lens.
Furthermore, in the area of video solutions, Canon will work to create business in “volumetric video”, which is expected to expand in the market, such as new video expression in sports broadcasting, entertainment, and commercials, data utilization in metaverse, and promotion of standardization.
Canon will continue to contribute to the development of image culture by responding to a wide range of professional needs in the field of image production by introducing products and solutions that reflect changes in market conditions.
* OTT stands for over the top. A media service that provides video content directly to viewers via the Internet, which has been provided by terrestrial broadcasting, satellites, cable television, etc.
- Medical Business Unit –
Canon markets diagnostic imaging systems, including Computed tomography (“CT”), Magnetic resonance imaging (“MRI”), ultrasound, and
X-ray
systems, as well as clinical laboratory systems and healthcare IT solutions, and provides them to customers in more than 150 countries and regions around the world, offering technology that enables early detection and fast diagnosis. Canon strives to help customers provide reliable, patient-friendly healthcare and achieve efficiency as well as cost reduction through its medical systems and services.
 
16

Canon continues to support medical professionals and other concerned parties that are striving to control
COVID-19
by offering total solutions for its diagnosis. For example, Canon helped the Diving World Cup secure the safety of the athletes and staff by setting up an on-site
COVID-19
testing facility, and also supported cruise ship companies by installing
COVID-19
RNA detection systems in the inspection cabin so that they can quickly test crews and passengers before boarding and during the voyage.
In the CT systems business, the mainstay of Canon’s medical business units, Canon kept top share in the Japanese market. Canon introduced a new edition of
320-row
area detector CT system with super-resolution deep-learning reconstruction technology in Japan. Canon also acquired Canada’s Redlen Technologies Inc. (“Redlen”) as a wholly owned subsidiary which has a key detector technology for photon-counting CT (“PCCT”) scanner, expected to be the next generation of CT, which will enable Canon to accelerate the development of the next generation scanner and strengthen its systems business centered around CT. Canon is already working on a research project in collaboration with the National Cancer Center Japan Exploratory Oncology Research & Clinical Trial Center and EAST Hospital to create PCCT technology toward its commercialization under the cooperative research agreements signed in July and November, 2020.
Canon previously introduced a suite of Deep Learning and Machine Learning-based Advanced intelligent
Clear-IQ
Engine (“AiCE”) to CT, MRI, and Positron Emission
Tomography-CT
(“PET-CT”),
and incorporated Deep Learning technology to support effective exam into premium ultrasound series in 2021.
In the ophthalmic equipment business, Canon realized the industry’s widest (as of December 2021) field of view imaging with Optical Coherence Tomography (“OCT”) Angiography, which enables depiction of retinal blood vessels without using fluorescein, and stayed competitive in this growing but competitive OCT market segment.
By incorporating various strengths (such as precision mechanical design, processing technology, sensor technology, and image processing technology) and advancing synergy with Canon’s group technology among the development, manufacturing, and servicing of Canon’s medical equipment products, Canon continues to provide products with high added value that further contribute to the healthcare field.
In the medical components business, 2021 saw the restarts of economic activities in many countries with more and more people vaccinated, causing an increase in demand of consumer products which require semiconductor chips and other components, which led to the worldwide shortage of semiconductor and other components. Despite this negative impact, Canon managed to keep up production and supply of Digital Radiography (“DR”) products, an essential component of diagnostic mobile
X-ray
systems, which was still high in demand into 2021 for diagnosis and treatment of
COVID-19
patients, and contributed to the professionals in the medical practice.
- Industrial and Others Business Unit -
In the semiconductor lithography equipment market, although uncertainty in the timing of economic recovery from
COVID-19
and the intensification of trade friction had caused concerns primarily related to capital expenditure, such matters resulted in only minor impact to the market. Capital expenditures for lithography equipment, particularly for memory and logic device, remained strong in all segments. In the
back-end
lithography systems market, demand for higher integration and thinner semiconductor chips increased, leading to increased capital expenditures for higher memory capacity using Through-Silicon Via (“TSV”) technology and wafer-level packaging.
Responding to diversified semiconductor applications, Canon has established
“design-in”
business style, which enables customer needs to be reflected in the early stage of its product development process. As a result of its steady progress in developing value-added products, Canon offers a wide variety of products for Internet of Things (“IoT”) devices and automotive semiconductors, which are rapidly becoming more widespread. As for
 
17

memory productions, Canon is ready to expand its market share further through sale of the KrF scanner
“FPA-6300ES6a”
which realized the highest level of productivity and overlay, and by continuous upgrades of
i-line
stepper
“FPA-5550iZ2”.
In the
i-line
segment, Canon will add the
“FPA-3030i5a”
to its lineup, which is suitable to the manufacture of devices such as compound semiconductors and reduces the Cost of Ownership (“CoO”), which is an indicator of the total cost required to manufacture semiconductors.
For
back-end
lithography equipment lineup, Canon has introduced the
“FPA-8000iW”,
which offers both high resolution and compatibility with large square substrates. It meets the high productivity needs of Panel Level Packaging (“PLP”) which uses organic substrates to realize low power consumption for data center use Central Processing Units (“CPU”) and Graphics Processing Units (“GPU”). Canon is also preparing for the mass production of Nanoimprint semiconductor lithography equipment.
The FPD lithography equipment market remained buoyant due to a combination of recovery from delays in installation due to the impact of
COVID-19
in 2020 and responses to market needs such as
stay-at-home
demand. Capital investment by manufacturers has been steady, reflecting the tight supply of IT panels for PCs and tablets and TV panels, as well as expansion of applications such as foldable displays.
The TV panel market, which is increasingly demanding thinner panels, is expected to grow in size, increase in 4K/8K resolution, and shift to high-quality displays such as OLED. Canon meets market needs with its “MPAsp-H1003T” compatible with G8 substrates that achieve high productivity by exposing high-quality 65 -inch panel. Also, in order to meet the demand for higher definition, which is indispensable for next generation display manufacturing, Canon will add the “MPAsp-E903T” for small and
medium-size
panels productions to its lineup. Canon will expand market share by continuingly meeting various panel production needs.
In the OLED display manufacturing equipment market, Canon will not only work to maintain its overwhelming competitiveness in the field of small- and
medium-sized
panels, but also continue the development of equipment for large-sized panels.
NET SALES BY SEGMENT
The following table presents Canon’s net sales by segment for each of the periods shown.
 
    
Years ended December 31
 
    
2021
    
change
   
2020
    
change
   
2019
 
                                  
    
(Millions of yen, except percentage data)
 
Printing
     1,938,847        7.4     1,804,427        -13.8     2,092,464  
Imaging
     653,532        20.7       541,314        -18.2       661,706  
Medical
     480,362        10.2       436,074        -0.6       438,525  
Industrial and Others
     545,742        18.2       461,522        -6.5       493,784  
Eliminations
     (105,126            (83,094            (93,180
  
 
 
    
 
 
   
 
 
    
 
 
   
 
 
 
Total
     3,513,357        11.2     3,160,243        -12.1     3,593,299  
  
 
 
    
 
 
   
 
 
    
 
 
   
 
 
 
Notes:
 
  1.
Based on the realignment of Canon’s internal reporting and management structure, from 2021, Canon has changed the name and structure of segments from Office Business Unit, Imaging System Business Unit, Medical System Business Unit and Industry and Others Business Unit to Printing Business Unit, Imaging Business Unit, Medical Business Unit, and Industrial and Others Business Unit. Major changes include moving Inkjet printers from Imaging System Business Unit to the Printing Business Unit, the same business unit as Office MFDs and Laser MFPs, and moving Network cameras from Industry and Others Business Unit to the Imaging Business Unit, the same business unit as Interchangeable-lens digital cameras. Net sales by segment for the fiscal years ended December 31, 2020 and 2019 also have been reclassified.
 
18

NET SALES BY GEOGRAPHIC AREA
The following table presents Canon’s net sales by geographic area for each of the periods shown.
 
    
Years ended December 31
 
    
2021
    
change
   
2020
    
change
   
2019
 
                                  
    
(Millions of yen, except percentage data)
 
Japan
        830,378        3.0        806,305        -7.6     872,534  
Americas
     968,839        13.7       852,451        -17.2       1,029,078  
Europe
     894,898        12.5       795,616        -9.8       882,480  
Asia and Oceania
     819,242         16.1       705,871         -12.8       809,207   
  
 
 
    
 
 
   
 
 
    
 
 
   
 
 
 
Total
     3,513,357        11.2     3,160,243        -12.1     3,593,299  
  
 
 
    
 
 
   
 
 
    
 
 
   
 
 
 
Seasonality
Canon’s sales for the fourth quarter are typically higher than for the other three quarters, mainly due to strong demand for consumer products, such as cameras and inkjet printers, during the
year-end
holiday season.
In Japan, corporate demand for office products peaks in the first quarter, as many Japanese companies end their fiscal year in March. Sales also tend to increase at the start of the new school year in each region.
Sources of supply
Canon purchases materials such as glass, aluminum, plastic, steel and chemicals for use in various product components and in the manufacturing process. Canon procures raw materials from all over the world and selects suppliers based on a number of criteria, including environmental friendliness, quality, cost, supply stability and financial condition.
Prices of some raw materials fluctuate according to market trends. Although Canon is currently focusing on globalizing supplies and improving raw material resource management strategies, and believes that it will be able to continue procuring sufficient quantities of raw materials to meet its needs, there can be no assurance that supply shortages will not occur or that raw materials, such as crude oil, will be available at competitive prices, or at all, in the future.
Marketing and distribution
Canon sells its products primarily through subsidiaries organized under regional marketing subsidiaries: Canon Marketing Japan Inc. in Japan; Canon U.S.A., Inc. in North and South America; Canon Europe Ltd. and Canon Europa N.V. in Europe, Russia, Africa and the Middle East; Canon (China) Co., Ltd. in Asia outside Japan; and Canon Australia Pty. Ltd. in Oceania. Each subsidiary is responsible for its own market research and for determining its sales channels, advertising and promotional activities. Each subsidiary provides tailor-made solutions to a diverse range of unique customers and aims to advance Canon’s reputation as a highly trusted brand.
In Japan, Canon sells its products primarily through Canon Marketing Japan Inc., mainly to dealers and retail outlets.
In the Americas, Canon sells its products primarily through Canon U.S.A., Inc. and Canon Canada Inc., mainly to dealers and retail outlets.
In Europe, Canon sells its products primarily through Canon Europa N.V., which sells mainly through subsidiaries or independent distributors to dealers and retail outlets in each locality. In addition, MFDs are sold directly to
end-users
by several subsidiaries such as Canon (UK) Ltd. in the United Kingdom and Canon France S.A.S. in France.
 
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In Southeast Asia and Oceania, Canon sells its products through subsidiaries located in those areas. In addition, MFDs are sold directly to
end-users
in Australia by Canon Australia Pty. Ltd.
For the medical business, CMSC sells its products directly or through regional marketing subsidiaries and distributors.
Canon also sells laser printers on an OEM basis to HP Inc. HP Inc. resells these printers under the “HP LaserJet Printers” name. During 2021 and 2020, OEM sales to HP Inc. constituted 11.6% and 11.4%, respectively, of Canon’s consolidated net sales.
Canon continues to enhance its distribution system by promoting the continuing education of its sales personnel and by optimizing inventory levels and business planning through weekly analysis of sales data.
Service
In Japan and overseas, product service is provided in part by independent retail outlets and designated service centers that receive technical training assistance from Canon. Canon also services its products directly.
Most of Canon’s business machines carry warranties of varying terms, depending upon the model and country of sale. Cameras and camera accessories carry warranties that vary depending upon the model and country of sale.
Canon services its office MFDs, and printers, and supplies replacement drums, parts, toner and paper. Most customers enter into a contract under which Canon offers consumables and parts as well as break fix activities in return mainly for a fixed amount in the contract plus a per copy charge. MFDs not covered by a service contract may be serviced from time to time by Canon or local dealers for a fee.
For diagnostic imaging systems, including CT, MRI, ultrasound, and
X-ray
systems, Canon provides comprehensive repairs, service, and maintenance to ensure that customers are able to use these products to their full potential at all times. Canon maintains support contracts with customers and has technical call centers. In addition, to help ensure customer satisfaction, Canon offers service training programs for engineers working in overseas medical institutions. For the service contracts of the products of the Medical Business Unit, customers pay stated fixed fees for the stand ready maintenance service.
Patents and licenses
Canon holds a large number of patents, design rights and trademarks in Japan and abroad to protect proprietary technologies stemming from its R&D activities. Canon utilizes these intellectual property rights as important strategic management tools. For example, Canon leverages its intellectual property rights to expand its product lines and business operations and to form alliances and exchange technologies with other companies.
Canon has granted licenses with respect to its patents to various Japanese and foreign companies, most often with respect to electrophotography, laser printers, multifunction printers, facsimile machines and cameras.
Companies to which Canon has granted licenses include:
 
Kyocera Document Solutions Inc.
   Electrophotography
Brother Industries, Ltd.
   Electrophotography and facsimile machines
Canon has also entered into cross-licensing agreements with other major industry participants.
 
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Companies with which Canon has entered into cross-licensing agreements include:
 
HP Inc.
   Bubble jet printers
Xerox Corporation
   Business machines
International Business Machines Corporation
   Information handling systems
Eastman Kodak Company
   Electrophotography and image processing technology
Seiko Epson Corporation
   Information-related instruments
Canon has placed a high priority on the management of its intellectual property. Some products that are material to Canon’s operating results incorporate patented technology. Patented technology is critical to the continued success of Canon’s products, which typically incorporate technology from dozens of different patents. However, Canon does not believe that its business, as a whole, is dependent on, or that its profitability would be materially affected by the revocation, termination, expiration or infringement upon, any particular patent, copyright, license or intellectual property rights or group thereof.
Competition
Canon encounters intense global competition in all areas of its business. Canon’s competitors range from some of the world’s major multinational corporations to smaller, highly specialized companies. Canon competes in a number of different business areas, whereas many of its competitors focus on one or more individual areas. Consequently, Canon may face significant competition from entities that apply greater financial, technological, sales and marketing or other resources than Canon to their activities in a particular market segment.
The principal elements of competition that Canon faces in each of its markets are technology, quality, reliability, performance, price and customer service and support. Canon believes that its ability to compete effectively depends in large part on conducting successful R&D activities that enable it to create new or improved products and release them on a timely basis and at commercially attractive prices. The competitive environments in which each product group operates are described below:
- Printing Business Unit -
The markets for this segment are highly competitive.
Canon’s primary competitors in the production print and business print market are Xerox Corporation ; FUJIFILM Business Innovation Corp. ; Ricoh Company, Ltd.; Konica Minolta Inc.; HP Inc.; and Lexmark International, Inc. Canon is one of the leading global manufacturers of office MFDs and laser printers.
In addition to the general elements of competition described above, Canon’s ability to compete successfully in these markets also depends significantly on whether it can provide effective, broad-based “business solutions” to its customers and respond to interrelated customer needs.
In particular, the ability to provide equipment and software that connect effectively to networks (ranging in scope from local area networks to the Internet and the cloud) is often a key to Canon’s competitive strength.
In the United States, Europe and Japan, Canon is one of the market leaders in all areas of the business machine market.
Canon’s primary competitors in the inkjet printer market are HP Inc., Seiko Epson Corporation and Brother Industries, Ltd.
- Imaging Business Unit –
Canon has continued to invest aggressively in competitive new products and intends to maintain its position in this market.
Canon’s primary competitors in the interchangeable-lens digital camera market are Sony Group Corporation and Nikon Corporation.
 
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The mirrorless camera market is growing, especially the demand for professional and advanced amateur users is strong. Canon will work to further strengthen its lineup of EOS R System cameras and RF lenses to facilitate its aim of expanding its market share. Canon will seek to take advantage of its status as the major brand in the industry, along with its economies of scale, in order to maintain profitability.
As for network cameras, the market is competitive, and competition is driven by higher functional requirements and price pressure from customers. Canon’s primary competitors are Hangzhou Hikvision Digital Technology Co., Ltd. and Panasonic Corporation. Canon is developing the innovative technology to continue to be a global market leader in this industry.
- Medical Business Unit –
Canon’s primary competitors in the diagnostic medical imaging market are General Electric Company, Siemens Healthineers AG, Koninklijke Philips N.V., and FUJIFILM Corporation. Canon has also new competitors such as United Imaging Healthcare Co. Ltd., a Chinese vendor.
The markets for this segment are highly competitive. Canon has been consistently involved in the medical care business, from development to manufacturing, sales, and service. Canon believes that it provides high-resolution images that enable more accurate diagnoses. For example, Canon has developed several
world’s-first
technologies, such as an ultrahigh-resolution CT scanner with twice the spatial resolution in both the
in-plane
direction and the axial direction compared to a conventional CT scanner, and ultrasound technology that can perform imaging of very fine, slow-flowing bloodstreams that previously could not be visualized. Canon will continue to bring the latest diagnostic imaging systems to the market.
- Industrial and Others Business Unit -
Very severe competition continues in the markets for lithography equipment used in the production of semiconductor devices and FPD. In order to produce lithography equipment that can provide ultra-fine processing, an integration of advanced optical, control and system technologies is required, along with continuous investment in technology development. The main competitors in these markets are Nikon Corporation, for semiconductor and FPD lithography equipment, and ASML Holding N.V., for semiconductor lithography equipment.
Canon believes that it has helped its customers improve their productivity by continuously improving the cost performance of semiconductor lithography equipment using the
i-line
and KrF laser light sources. In particular, equipment using the
i-line
has captured a large share of the global market, satisfying needs by quickly providing products which correspond to the diversification of devices associated with the trend of IoT.
Canon believes its FPD lithography equipment with a common platform offers excellent productivity and reliability that has helped it capture market share in the industry-leading South Korean market. Canon’s sales and service support systems have also received high accolades from the customers in these markets. In the trend of demand expansion for 4K/8K displays and OLED panels, Canon believes it has also been meeting the needs of panel makers by continuously offering new products with high productivity and high resolution.
Environmental regulations
Canon is subject to a wide variety of laws, regulations, industry standards and global initiatives relating to energy and resource conservation, recycling, global warming, pollution prevention, pollution remediation and environmental health and safety. Some of the environmental laws, regulations, industry standards and global initiatives that affect Canon’s businesses are summarized below.
In line with the environmental initiatives discussed below, Canon has made, or may make, commitments that require the investment of significant effort, resources and management time. Circumstances may arise, including those beyond Canon’s control that may require Canon to revise these commitments or timelines for the achievement thereof.
 
22

1.
Measures Addressing Global Climate Change
The United Nations adopted the 2030 Agenda for Sustainable Development Goals (“SDGs”) on September 25, 2015, under the UN Sustainable Development Summit. SDGs cover global issues aimed at transforming the world toward sustainable development, which are composed of 17 goals and 169 targets. The goals and targets cover a wide range of global issues, including the environmental areas such as climate change, sustainable energy, efficient use of natural resources and reduction of waste. Based upon the SDGs, member states will introduce national policies and initiatives to tackle such global environmental issues, and Canon may need to implement further actions to respond to potential national initiatives.
The Paris Agreement on climate change was adopted in 2015 and entered into force in 2016. Subsequently, in order to limit the temperature rise to 1.5 degrees Celsius, EU member states and other major countries such as U.S., China, Japan and India declared to achieve
net-zero
CO2 emissions toward 2050 to 2070. Future governmental carbon neutral policies or regulations may affect Canon’s business operations, products, services, procurements and costs.
Canon aims to achieve
net-zero
CO2 emissions from its business activities by 2050 to realize carbon free society. Canon has established 2022-2025
Mid-Term
Environmental Goals and monitors its progress to be reported to the CEO for review on a yearly basis. Canon is implementing initiatives to achieve these goals, which focus on “Lifecycle CO2 emissions improvement index per product by average 3% improvement”, “Raw materials and usage CO2 emissions improvement index per product by average 3% improvement”, and “Improve energy consumption basic unit at operational sites by 1.2% (compared to the previous year)”. In 2021, Canon has improved to reduce its “Life Cycle CO2 emission” per product, which was an average improvement of 4.3% (2008—2021) and cumulative 42% as compared with 2008. Total volume of lifecycle CO2 emissions in 2021 was 7.6 million tons, which was verified by a third party in February 2022. For contributing to a circular economy, Canon promotes reductions in resource consumption,
product-to-product
recycling, recycling-conscious design, designing smaller and lighter products and other various activities.
Canon has disclosed climate change-related information based on the Task Force on Climate-related Financial Disclosure (“TCFD”) framework set by the Climate Disclosure Standard Board (“CDSB”) and also has disclosed environmental impact information through its Canon Sustainability Report and a platform of the Carbon Disclosure Project (“CDP”).
Canon continues to pursue CO2 emission reductions both locally and globally through energy-efficient product design and improvement of logistics and factory operations.
 
2.
Measures to Address the Circular Economy
The movement toward the realization of the circular economy is also accelerating. In Europe, the new Circular Economy Action Plan was announced in 2020, and a road map of the regulations was presented. Information and Communication Technology (“ICT”) industry is one of the priority targets and new regulations on matters such as durability, reparability, reuse, and remanufacturing are anticipated. In addition, increasing public concern about
single-use
plastics, which are considered one of the causes of marine pollution, has led various countries to legislate to ban the use of
single-use
plastics in packaging materials, and Japan to enact the “Plastic Resource Circulation Act”. Canon’s business activities will be subject to such regulations.
 
3.
European Union Directive on the Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment (“the RoHS Directive”)
Under the RoHS Directive, from July 1, 2006, companies are required to ensure that electrical and electronic equipment (“EEE”) sold in the European Union does not contain lead, cadmium, hexavalent chromium, mercury, polybrominated biphenyls or polybrominated diphenyl ethers. The scope of products covered was expanded to include medical and measurement equipment starting in July 2014. New subsidiary directive of the RoHS
 
23

Directive restricting an additional four substances, Bis
(2-ethylhexyl)
phthalate (“DEHP”), Butyl benzyl phthalate (“BBP”), Dibutyl phthalate (“DBP”) and Diisobutyl phthalate (“DIBP”), was published in June 2015, and these substances were restricted starting in July, 2019. In 2018, study for more additional restricted substances was started, and the preparatory study for the next recast of RoHS was started in 2019. In parallel with these developments, all the RoHS exempted applications for which the restricted substances can be used are now under review. If these exemptions expire and/or additional substances are restricted in the future, additional design changes may be required for Canon products, and cost of changing designs may increase total compliance costs. Similar chemical regulations have been enacted in various countries such as China, South Korea, India, UAE, EAEU and Saudi Arabia.
 
4.
European Framework for the Management of Chemical Substances (“REACH Regulation”)
The REACH Regulation was implemented in 2007. This regulation covers almost all chemicals (products in gaseous, liquid, paste or powder form) and articles (products in solid state) manufactured in or imported into the European Union. All chemicals manufactured in or imported into the European Union that exceed specific content thresholds must be registered. If certain substances of very high concern are contained in an article, the substances must be communicated to the recipient or consumer of the article. In addition, such information has to be registered on the new EU database called the “SCIP database” under Waste Framework Directive from January 2021. Canon has been disclosing necessary information through SCIP database since then. Furthermore, additional restrictions on the use of certain substances can be proposed at any time by the ECHA (European Chemical Agency) or member states, and, some of them have been already adopted and others are now under discussion. Manufacturers such as Canon must take steps to address such new restrictions.
Canon continues to meet these existing and newly-added requirements under the REACH Regulation, and implementation of these requirements could increase Canon’s management costs.
 
5.
The European Framework for the Setting of Requirements for Energy-Related Products (“ErP Directive”)
The ErP Directive applies in Europe to all energy-using products, and implementing measures with respect to
off-mode
and standby mode and external power supplies were adopted in and have been applied since 2010. These measures were expanded in 2013 to include requirements for energy modes with “networked standby”. For imaging equipment, the industry made a public commitment to attain certain targets on environmentally conscious designs from 2012 by an industrial voluntary agreement (“VA”) and began implementation of the VA in 2011. The VA has been in the process of revision since 2019, and commitments may become tighter than ever from 2022, because the European authorities and NGOs are expected to require a stricter VA including resource efficiency-related criteria. In addition, many new or revised implementing measures (expanded both in scope and requirements) are now being considered, and some of them will cover Canon’s products. Canon is continuing to comply with requirement under the ErP Directive. However, the requirements are expected to be challenging, and achieving compliance will likely increase Canon’s costs, especially by required design changes.
 
6.
Other Environmental Regulations
In addition to the laws described above, various environmental laws and regulations may have been promulgated or enacted by European Union member states, states of the United States, emerging markets such as China, India, Russia, Vietnam, and other countries. Compliance with any such additional regulations may increase Canon’s costs and may adversely affect Canon’s operating results and financial condition.
Other regulations
Disclosure under Section 13(r) of the Securities Exchange Act of 1934
Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012 (“ITRA”) added Section 13(r) to the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Section 13(r) requires
 
24

an issuer to disclose in its annual or quarterly reports, as applicable, whether, during the reporting period, it or any of its affiliates knowingly engaged in certain activities, transactions or dealings relating to Iran or with designated natural persons or entities involved in terrorism or the proliferation of weapons of mass destruction.
Disclosure is required even where the activities, transactions or dealings are conducted outside the U.S. by
non-U.S.
affiliates in compliance with applicable law, and whether or not the activities are sanctionable under U.S. law.
During the year ended December 31, 2021, the following Canon affiliate engaged in the transactions described below that are required to be disclosed pursuant to Section 13(r) of the Exchange Act. These transactions were conducted in compliance with applicable law in the respective countries.
 
   
CMSC, a wholly-owned Japanese subsidiary of Canon Inc., had indirect sales transactions through independent distributors in Istanbul, Turkey, Sharjah, United Arab Emirates and Tehran, Iran for computed tomography, diagnostic ultrasound systems and service parts for those products with hospitals in Iran. It is our understanding that Iranian hospitals are owned or controlled by the Government of Iran (central or local government) and that their purchases are controlled through an agency of the Iranian Ministry of Health and Medical Education. Total gross sales under these contracts during the year 2021 were approximately ¥721 million. The net profit was substantially less than that.
As of the date of this report, Canon is not aware of any other activity, transaction or dealing by us or any of our affiliates during the year ended December 31, 2021 that requires disclosure in this report under Section 13(r) of the Exchange Act. Canon maintains policies and procedures designed to ensure that transactions, including transactions with Iranian counterparties, are conducted in accordance with applicable economic sanction laws and regulations.
In addition, CMSC has indirect sales of medical equipment to unaffiliated distributors in Japan, which distribute the equipment to hospitals in Syria through unaffiliated third parties. Canon does not have any direct agreements, commercial arrangements, or other contacts with the governments of Syria, or with entities controlled by those governments. Total net sales to Syria in the year ended December 2021 was
one-tenth
of one percent (0.1%) or less of Canon’s total consolidated net sales for that period. Canon does not believe the transactions with Syria are material, either individually or in the aggregate, in quantitative or in qualitative terms.
C. Organizational structure
Canon Inc. and its subsidiaries and affiliates form a group of which Canon Inc. is the parent company. As of December 31, 2021, Canon Inc. had 329 consolidated subsidiaries and 10 affiliated companies accounted for by the equity method.
The following table lists the significant subsidiaries owned by Canon, all of which are consolidated as of December 31, 2021.
 
Name of company
  
Head office location
  
Proportion of
ownership interest
owned
   
Proportion of
voting power
held
 
Canon Marketing Japan Inc.
   Tokyo, Japan      57.8     58.5
Canon U.S.A., Inc.
   New York, U.S.A.      100.0     100.0
Canon Europa N.V.
   Amstelveen, The Netherlands      100.0     100.0
Canon Medical Systems Corporation
   Tochigi, Japan      100.0     100.0
D. Property, plants and equipment
Canon’s manufacturing is conducted primarily at 29 plants in Japan and 13 plants in other countries and regions. Canon owns all of the buildings and the land on which its plants are located, with the exception of
 
25

certain immaterial leases of land and floor space of certain of its subsidiaries. The names and locations of Canon’s plants and other facilities, their approximate floor space and the principal activities and products manufactured therein as of December 31, 2021 are as follows:
 
Name and location
  
Floor space
(including
leased space)
    
Principal activities and products manufactured
Domestic
  
(Thousands of
square feet)
      
Headquarters, Tokyo
     2,564     
R&D, corporate administration and other functions
Canon Global Management Institute, Tokyo
     166     
Training and administration
Kawasaki Office, Kanagawa
     1,882     
R&D and manufacturing of production equipment and semiconductor devices; R&D of laser printers and toner cartridges
Kosugi Office, Kanagawa
     378     
Development of medical equipment, Human resources development training (except for technical training)
Fuji-Susono Research Park, Shizuoka
     932     
R&D in electrophotographic technologies
Ayase Plant, Kanagawa
     394     
R&D and manufacturing of semiconductor devices
Hiratsuka Plant, Kanagawa
     916     
R&D of display products and manufacturing of semiconductor devices
Tamagawa Office, Kanagawa
     384     
Quality engineering
Oita Plant, Oita
     475     
Manufacturing of semiconductor devices
Yako Office, Kanagawa
     906     
Development of inkjet printers, inkjet chemical products
Utsunomiya Office, Tochigi
     2,764     
Manufacturing of interchangeable lenses and other applications, R&D in optical technologies, development and sales of broadcasting equipment, R&D, manufacturing, sales and servicing of semiconductor lithography equipment
Toride Plant, Ibaraki
     2,857     
R&D in electrophotographic technologies, mass-production trials and supports; manufacturing of office MFDs, chemical products; training of manufacturing
Ami Plant, Ibaraki
     962     
Manufacturing of FPD production-related equipment
Canon Electronics Inc., Tokyo, Saitama and Gunma
     1,310     
Magnetic/business machine components, document scanners and handy terminals
Canon Finetech Nisca Inc., Saitama, Ibaraki and Yamanashi
     1,106     
Development, production and sales of office MFDs peripherals, printers, DC motors
Canon Precision Inc., Aomori
     1,591     
Micromotors, production of toner cartridges and sensors
 
26

Name and location
  
Floor space
(including
leased space)
    
Principal activities and products manufactured
Domestic
  
(Thousands of
square feet)
      
Canon Optron Inc., Ibaraki
     144     
Optical crystals (cameras, telescopes) and vapor deposition materials
Canon Chemicals Inc., Ibaraki
     1,907     
Toner cartridges, advanced-function parts, plastic precision-molded parts and metal molds
Canon Components, Inc., Saitama
     712     
Image sensor units, Printed Circuit Boards (“PCB”), inkjet cartridges and medical equipment
Oita Canon Inc., Oita
     2,095     
Interchangeable-lens digital cameras, interchangeable lenses and digital camcorders
Nagahama Canon Inc., Shiga
     1,095     
Laser printers, toner cartridges,
A-Si
drums and semiconductor production-related equipment
Oita Canon Materials Inc., Oita
     3,074     
Chemical products for MFDs and printers
Ueno Canon Materials Inc., Mie
     654     
Chemical products for MFDs and printers
Fukushima Canon Inc., Fukushima
     1,310     
Inkjet printers, print heads, ink tanks and analysis of software
Canon Semiconductor Equipment Inc., Ibaraki
     241     
Development and production of semiconductor production-related equipment
Canon Ecology Industry Inc., Ibaraki
     1,463     
Recycling of toner cartridges, repair and recycling of office MFDs
Fukui Canon Materials Inc., Fukui
     192     
OPC raw stock, material for optics and high water-repellent material
Miyazaki Canon Inc., Miyazaki
     652     
Interchangeable-lens digital cameras and electronics packaging
Canon Mold Co., Ltd., Ibaraki
     408     
Design and production of precise plastic molds
Canon ANELVA Corporation, Kanagawa and Yamanashi
     745     
Development, production, sales and maintenance of semiconductor, electronic and R&D equipment
Canon Machinery Inc., Shiga
     676     
Semiconductor and precision automation equipment
Canon Tokki Corporation, Niigata and Kanagawa
     375     
OLED display manufacturing equipment,
thin-film
photovoltaic cell manufacturing equipment and vacuum process equipment
Nagasaki Canon Inc., Nagasaki
     477     
Digital cameras
Canon Medical Systems Corporation, Tochigi
     1,424     
Development, manufacturing, sales and technical services of medical equipment
 
27

Name and location
  
Floor space
(including
leased space)
    
Principal activities and products manufactured
Domestic
  
(Thousands of
square feet)
      
Canon Electron Tubes & Devices Corporation, Tochigi
     357     
Development, manufacturing and sales of electron tubes and application products
 
Name and location
  
Floor space
(including
leased space)
    
Principal activities and products manufactured
Overseas
  
(Thousands of
square feet)
      
Europe
     
Canon Giessen GmbH, Giessen, Germany
     348     
Production and remanufacturing of office MFDs, refilling of toner cartridges, refurbishing of semiconductor lithography equipment
Canon Bretagne S.A.S., Liffre, France
     505     
Manufacturing and recycling of toner cartridges, PCB assembly, packaging, after sales service
Canon Production Printing Netherlands B.V., Venlo, the Netherlands
     2,347     
R&D, manufacturing, sales and distribution of large format printing systems, display graphics printing systems,
mid-
and high- volume office MFDs,
sheet-fed
printing systems, ancillary equipment, software, consumables
Americas
     
Canon Virginia, Inc., Virginia, U.S.
     1,546     
Production of toner cartridges , toner for MFDs and printers, molding dies, service and support for Canon sales companies (repair of cameras, remanufacturing and repair office MFDs)
Asia
     
Canon Inc., Taiwan, Taiwan
     1,597     
Interchangeable-lens digital cameras, network cameras, interchangeable lenses, camera accessories, precision-metal molds and others
Canon Opto (Malaysia) Sdn. Bhd., Selangor, Malaysia
     611     
Interchangeable lenses, optical lenses and others
Canon Dalian Business Machines, Inc., Dalian, China
     1,721     
Production and recycling of toner cartridges, production of laser printer units, design and production of precision molds and tools
Canon Prachinburi (Thailand) Ltd., Prachinburi, Thailand
     1,268     
Office MFDs
Canon
Hi-Tech
(Thailand) Ltd., Ayutthaya and Nakohon Ratchasima, Thailand
     3,270     
Inkjet printers and office MFDs
 
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Name and location
  
Floor space
(including
leased space)
    
Principal activities and products manufactured
Overseas
  
(Thousands of
square feet)
      
Canon Zhongshan Business Machines Co., Ltd., Zhongshan, China
     52     
Laser printers
Canon Vietnam Co., Ltd., Hanoi, Vietnam
     3,369     
Inkjet printers, laser printers, office MFDs, image scanners and contact image sensors
Canon (Suzhou) Inc., Suzhou, China
     1,528     
Office MFDs and laser printers
Canon Business Machines (Philippines), Inc., Batangas, Philippines
     898     
Laser printers
Canon considers its manufacturing and other facilities to be well maintained and believes that its plant capacity is adequate for its current requirements. None of the buildings or land are subject to any major encumbrances.
Main facilities under construction for establishment/expansion
 
Name and location
  
Principal activities and products manufactured
Domestic
    
Canon Inc., Hiratsuka Plant, Kanagawa
  
New production base (Manufacturing of semiconductor devices)
Item 4A. Unresolved Staff Comments
None.
Item 5. Operating and Financial Review and Prospects
A. Operating Results
The following discussion and analysis provides information that management believes to be relevant to understanding Canon’s consolidated financial condition and results of operations.
Overview
Canon is one of the world’s leading manufacturers of office MFDs, laser printers, inkjet printers, cameras, medical equipment and lithography equipment. Canon earns revenues primarily from the manufacture and sale of these products domestically and internationally. Canon’s basic management policy is to contribute to the prosperity and well-being of the world while endeavoring to become a truly excellent global corporate group targeting continued growth and development.
Canon divides its businesses into four segments: the Printing Business Unit, the Imaging Business Unit, the Medical Business Unit and the Industrial and Others Business Unit.
Economic environment
Looking back at 2021, the global economy continued to recover as movement restrictions were gradually eased and the rollout of vaccines worldwide encouraged resumption of economic activities. However, production
 
29

activity stagnated due to a resurgence of
COVID-19
infections. In addition, the global shortage of semiconductor chips and the disruption in logistic and distribution channels due to high demand became a serious issue in the second half of the year. In the United States, economic recovery advanced as a result of the increased personal consumption and expansion of capital investment through economic measures. In Europe, restrictions on economic activities were eased in each country, with increasing personal consumption and expansion of capital investment leading to a steady economic recovery. In China, personal consumption and exports continued to grow steadily despite sluggish infrastructure investment. In other emerging countries, economic recovery was modest due to stagnant economic activity caused by the spread of
COVID-19
infections, mainly in India and Southeast Asia. In Japan, economic recovery remained moderate due to the prolonged State of Emergency.
Market environment
Amid these conditions, in the markets in which Canon operates, demand for products remained solid, despite the impact of the shortage of semiconductor chips in the second half of the year. Demand for office MFDs continued to recover. For laser printers, demand remained at the same level as the previous year. For inkjet printers, demand in home use remained solid. For cameras, demand remained solid, mainly in mirrorless cameras. For medical equipment, despite delays in the installation of medical devices in some areas due to the resurgence of
COVID-19
infections, recovery continued thanks to the return of routine examinations at medical institutions compared with the previous year, in which
COVID-19
testing was prioritized. For lithography equipment, demand for semiconductor lithography equipment continued amid favorable market conditions and FPD lithography equipment remained solid.
The average value of the yen for the year was ¥109.93 against the U.S. dollar, a
year-on-year
depreciation of approximately ¥3, and ¥129.94 against the euro, a
year-on-year
depreciation of approximately ¥8.
Summary of operations
Summarized results of Income statement for 2021 and 2020 are as follows:
 
    
2021
    
Change
   
2020
 
                     
    
(Millions of yen, except per share
 
    
amounts and percentage data)
 
Net sales
     3,513,357        +11.2     3,160,243  
Gross profit
     1,627,792        +18.3       1,375,868  
Operating expenses
     1,345,874        +6.4       1,265,321  
Operating profit
     281,918        +155.0       110,547  
Other income (deductions)
     20,788        +5.3       19,733  
Income before income taxes
     302,706        +132.4       130,280  
Net income attributable to Canon Inc.
     214,718        +157.7       83,318  
Net income attributable to Canon Inc. shareholders per share:
       
Basic
     205.35        +158.7       79.37  
Diluted
     205.29        +158.7       79.35  
Note: See notes to Item 3A “Selected Financial Data”.
In 2021, unit sales of office MFDs were above those of the previous year, despite the shortage of semiconductor chips in the second half of the year. Sales of services and consumables moderately recovered due to the gradual increase in employees returning to the office and resulting demand for related services and consumables. As for the Prosumer consisting of laser printers and inkjet printers, unit sales were below those of the previous year due to the stagnation of production activity resulting from a resurgence of
COVID-19
infections in Southeast Asia. However, unit of sales of laser printer consumables increased significantly compared with the previous year, during which demand had decreased. For interchangeable-lens digital cameras,
 
30

unit sales remained at around the same level as the previous year due to the shortage of semiconductor chips, despite continued strong sales of full-frame mirrorless cameras. As for network cameras, which are being used in a growing range of applications, sales increased due to the strengthening of sales activities. For medical equipment, sales increased mainly in Japan and North America due to strong sales of CT systems and diagnostic ultrasound systems as a result of recovering demand in key markets and government’s support for medical institutions. While unit sales for semiconductor lithography equipment remained solid, unit sales for FPD lithography equipment were significantly above those of the previous year, when equipment installation stagnated due to circumstances related to
COVID-19.
Under these conditions, net sales for the year increased by 11.2%
year-on-year
to ¥3,513,357 million. Gross profit to net sales ratio increased by 2.8 points to 46.3%, due to recovery of services and consumables, increase in prices, expansion of highly profitable products and currency exchange rate fluctuations, despite the increase of cost due to higher prices of semiconductor chips and resin materials. Gross profit for the year increased by 18.3%
year-on-year
to ¥1,627,792 million. Operating expenses increased by 6.4%
year-on-year
to ¥1,345,874 million, mainly due to the increase of payroll cost, advertising cost, forwarding cost and R&D cost as a result of a rebound from the previous year, when sales activities were severely restricted due to the spread of
COVID-19
and currency exchange rate fluctuations. However, operating expense percentage improved significantly from 40.0% to 38.3% thanks to the results of structural reform and group-wide improvements in productivity. As a result, operating profit increased by 155.0%
year-on-year
to ¥281,918 million. Other income (deductions) increased by ¥1,055 million
year-on-year
to ¥20,788 million, due to such factors as valuation gain on securities, while income before income taxes increased by 132.4%
year-on-year
to ¥302,706 million and net income attributable to Canon Inc. increased by 157.7%
year-on-year
to ¥214,718 million. Basic net income attributable to Canon Inc. shareholders per share was ¥205.35 for the year, a
year-on-year
increase of ¥125.98.
Summarized results of Balance sheet for 2021 and 2020 are as follows:
 
    
2021
   
Change
   
2020
 
                    
    
(Millions of yen, except per share
amounts and percentage data)
 
Total assets
     4,750,888       125,274       4,625,614  
Total liabilities
     1,652,459       (189,114     1,841,573  
Canon Inc. shareholders’ equity
     2,873,773       298,742       2,575,031  
Noncontrolling interests
     224,656       15,646       209,010  
Total equity
     3,098,429       314,388       2,784,041  
Total liabilities and equity
     4,750,888       125,274       4,625,614  
Canon Inc. shareholders’ equity as a percentage of total assets
     60.5     4.8     55.7
Total assets increased by ¥125,274 million to ¥4,750,888 million at December 31, 2021, compared with the end of previous year, mainly due to an increase of inventories resulting from difficulty in procuring parts and recovery production to supplement product supply due to reduced operating rates at production sites, and an increase of goodwill due to the acquisition of Redlen which play an important role in PCCT development. In addition, under the new five-year management plan, Phase VI, of the “Excellent Global Corporation Plan” which started from 2021, Canon regards thorough cash flow management as one of its priority items, and is reinforcing its financial health. In 2021, under management plan, Canon is comprised of the refinancing and the repayment of loans which was provided for the acquisition of Toshiba Medical Systems Corporation (currently, Canon Medical Systems Corporation) resulting in the decrease of long-term loans by ¥170.0 billion. Under these conditions, total liabilities decreased by ¥189,114 million to ¥1,652,459 million at December 31, 2021, compared with the end of previous year, mainly due to a decrease of short-term loans and current portion of long-term debt. Total equity increased by ¥314,388 million to ¥3,098,429 million at December 31, 2021, compared with the end of previous year, mainly due to an increase in retained earnings resulting from a significant increase in profit and an increase in accumulated other comprehensive income due to the depreciation of the yen. Under these conditions, Canon Inc. shareholders’ equity as a percentage of total assets increased by 4.8 points to 60.5%.
 
31

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 below.
KEY PERFORMANCE INDICATORS
 
   
2021
   
2020
   
2019
   
2018
   
2017
 
Net sales (Millions of yen)
    3,513,357       3,160,243       3,593,299       3,951,937       4,080,015  
Gross profit to net sales ratio
    46.3     43.5     44.8     46.4     48.8
R&D expense to net sales ratio
    8.2     8.6     8.3     8.0     8.2
Operating profit to net sales ratio
    8.0     3.5     4.9     8.7     7.9
Income before income taxes to net sales ratio
    8.6     4.1     5.4     9.2     8.7
Inventory turnover measured in days
    66 days       60 days       59 days       56 days       49 days  
Debt to total assets ratio
    6.8     10.9     10.8     8.2     10.2
Canon Inc. shareholders’ equity to total assets ratio
    60.5     55.7     56.3     57.5     55.1
Notes:
 
  1.
See notes to Item 3A “Selected Financial Data”.
Net sales and profit ratio
As Canon pursues the goal to become a truly excellent global corporation, one indicator upon which Canon’s management places strong emphasis is revenue. The following are some of the KPIs related to revenue that management considers to be important.
Net sales is one such KPI. Canon derives net sales primarily from the sale of products and, to a lesser extent, provision of services associated with its products. Sales vary depending on such factors as product demand, the number and size of transactions within the reporting period, market acceptance for new products, and changes in sales prices. Other factors involved are market share and market environment. In addition, management considers the evaluation of net sales by product to be important for the purpose of assessing Canon’s sales performance in various products, taking into account recent market trends.
Gross profit to net sales ratio is another KPI for Canon. Under the basic policy of Phase VI, Canon has been consistently strengthening business competitiveness and striving to provide highly profitable products with price competitiveness. Furthermore, Canon promotes cost reduction initiatives across the Canon Group through
in-house
production and automation of assembly processes which integrate the three functions of design, production technology and manufacturing. Canon will continue to actively take these measures to improve Canon’s gross profit to net sales ratio.
Operating profit to net sales ratio, income before income taxes to net sales ratio, 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 spending in core technology to sustain Canon’s leading position in its current business areas and to exploit opportunities in other markets. Canon believes such investments will create the basis for future success in its business and operations.
Cash flow management
Canon also places significant emphasis on cash flow management. The following are the KPIs relating to cash flow management that Canon’s management believes to be important.
 
32

Inventory turnover measured in days is a KPI because it measures the efficiency of supply chain management. Inventories have inherent risks of becoming obsolete, physically damaged or otherwise decreasing significantly in value, 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 disruptions by optimizing finished goods inventories in order to avoid losing potential sales opportunities.
The debt to total assets ratio is also one of the KPIs. For a manufacturing company like Canon, it generally takes considerable time to realize profit from a business due to lead times required for R&D, manufacturing and sales. Therefore, management believes that it is important to have sufficient financial strength. Canon will continue to reduce its dependency on external funds for capital investments in favor of generating the necessary funds from its own operations.
Canon Inc. shareholders’ equity to total assets ratio is another KPI for Canon. Canon believes that its shareholders’ equity to total assets ratio measures its long-term sustainability. Canon also believes that achieving a high or rising shareholders’ 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 shareholders’ equity ratio will enable Canon to maintain a high level of stable investments for its future operations and development. As Canon puts strong emphasis on its R&D activities, management believes that it is important to maintain a stable financial base and, accordingly, a high level of its shareholders’ equity to total assets ratio.
Critical accounting policies and estimates
The consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and based on the selection and application of significant 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. In addition, new waves of
COVID-19
infections are being seen in some regions, and it is still difficult to predict when
COVID-19
will be brought under control. However, each country and region continues to pursue infection control and accelerate economic activities. Actual results and outcomes may differ from management’s estimates and assumptions due to risks and uncertainties, including uncertainty in the current economic environment triggered by
COVID-19.
Canon believes that the following are the more critical judgment areas in the application of its accounting policies that currently affect its financial condition and results of operations.
Revenue recognition
Canon generates revenue through the sale of products of the Printing Business Unit, the Imaging Business Unit, the Medical Business Unit and the Industrial and Others Unit, supplies and related services under separate contractual arrangements. Revenue is recognized when, or as, control of promised goods or services transfers to customers in an amount that reflects the consideration to which Canon expects to be entitled in exchange for transferring these goods or services.
Revenue from sales of products of the Printing Business Unit, such as office MFDs, laser printers and inkjet printers, and the Imaging Business Unit, such as digital cameras, is primarily recognized upon shipment or delivery, depending upon when the customer obtains controls of these products.
Revenue from sales of equipment of the Medical Business Unit and the Industrial and Others Business Unit that are sold with customer acceptance provisions related to their functionality including certain medical equipment such as CT systems and MRI systems, and lithography equipment such as semiconductor and FPD lithography equipment, is recognized when the equipment is installed at the customer site and the agreed-upon specifications are objectively satisfied and confirmed.
 
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Most of Canon’s service revenue is generated from maintenance service in the products of the Printing Business Unit and the Medical Business Unit which is recognized over time. For the service contracts of the products of the Printing Business Unit, the customer typically pays a variable amount based on usage, a stated fixed fee or a stated base fee plus a variable amount which frequently include the provision of consumables as well as break fix activities. The majority portion of service revenue from the products of the Printing Business Unit is recognized as billed since the invoiced amount directly correlates with the value to the customer of the underlying performance obligation to date. For the service contracts of the products of the Medical Business Unit, the customer typically pays a stated fixed fee for the stand ready maintenance service and revenue is recognized ratably over the contract period.
The majority of service arrangements for the products of the Printing Business Unit are executed in combination with related products. Transaction prices for products and services need to be allocated to each performance obligation on a relative standalone selling price basis where judgements are required. Canon estimates the standalone selling price using a range of prices that would meet the allocation objective based on all the information that is reasonably available including market conditions and other observable inputs. If transaction prices of the product or service contracts are not within the acceptable range, then the revenue is subject to allocation based on the estimated standalone selling prices. Canon recognizes the incremental costs of obtaining a contract as an expense when related products of the Printing Business Unit are sold.
Revenue from sales of certain industrial equipment which do not have alternative use and for which Canon has enforceable right to payment to the customers for the performance completed to date is recognized over time with progress towards completion measured using the cost based input method as the basis to recognize revenue and an estimated margin. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses become evident. Changes in job performance, job conditions, estimated margin and final contract settlements may result in revisions to projected costs and revenue and are recognized in the period in which the revisions to estimates are identified and the amounts can be reasonably estimated. Factors that may affect future project costs and margins include, production efficiencies, availability and costs of labor and materials. These factors can impact the accuracy of Canon’s estimates and materially impact future reported revenue and cost of sales.
The transaction prices that Canon is entitled to receive in exchange for transferring goods or services to the customer include certain forms of variable consideration, including product discounts, customer promotions and volume-based rebates mainly for the products of the Imaging Business Unit, which are sold predominantly through distributors and retailers. Canon includes estimated amounts in the transaction price only to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Variable considerations are estimated based upon historical trends and other known factors at the time of sale, and are subsequently adjusted in each period based on current information. In addition, Canon may provide a right of return on its products for a short time period after a sale. These rights are accounted for as variable consideration when determining the transaction price, and accordingly Canon recognizes revenue based on the estimated amount to which Canon expects to be entitled after considering expected returns.
Taxes collected from customers and remitted to governmental authorities are excluded from revenues in the consolidated statements of income.
Allowance for credit losses
Allowance for credit losses for trade and finance receivables is maintained for all customers based on ASC 326 “Financial Instruments—Credit Losses”, considering various factors, including aging analysis, macroeconomic conditions and historical experience. 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 filings. If circumstances related to customers change, estimates of the recoverability of receivables
 
34

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.
Valuation of inventories
Inventories are stated at the lower of cost or net realizable value. Cost is determined by the average method for domestic inventories and principally the
first-in,
first-out
method for overseas inventories. Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make a sale. Canon routinely reviews its inventories for their salability and for indications of obsolescence to determine if inventories should be written down to market value. Judgments and estimates must be made and used in connection with establishing such allowances in any accounting period. In estimating the net realizable value of its inventories, Canon considers the age of the inventories and the likelihood of spoilage or changes in market demand for its inventories.
Impairment of long-lived assets
Long-lived assets, such as property, plant and equipment, and acquired intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the carrying amount of the asset exceeds its estimated sum of undiscounted future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. 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.
Lease
As for lessor accounting, Canon provides leasing arrangement to its customers primarily for the sale of office products. Revenue from the sale of these products under sales-type leases is recognized at the inception of the lease. Interest 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 product leases are bundled with maintenance contracts, revenue is allocated based upon the estimated standalone selling prices of the lease and
non-lease
components. Lease components generally include product and financing while
non-lease
components generally consist of maintenance contracts and supplies. Some of the contracts include options to extend or to terminate the lease. Canon takes such options into account to determine the lease term when it is reasonably certain that the customers will exercise these options. The majority of Canon’s lease contracts do not contain bargain purchase options for their customers.
As for lessee accounting, Canon has operating and finance leases for various assets including office buildings, warehouses, employees’ accommodations, and vehicles. Canon determines if an arrangement is a lease at the inception of each contract. Some of the contracts include options to extend or to terminate the lease. Canon takes such options into accounts to determine the lease term when it is reasonably certain that it will exercise these options. Canon’s lease arrangements do not contain material residual value guarantees or material restrictive covenants. As a rate implicit in most of Canon’s leases cannot be determined, Canon uses incremental borrowing rate based on the information available at commencement to determine the present values of lease payments. Canon has lease contracts with lease and
non-lease
components, which are accounted for separately. Canon allocates the consideration in the lease contract to the lease and
non-lease
components based upon the estimated standalone prices. Costs associated with operating lease assets are recognized on a straight-line basis over the term of the lease.
 
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Business combinations
Acquisitions are accounted for using the acquisition method of accounting. The acquisition method of accounting requires the identification and measurement of all acquired tangible and intangible assets and assumed liabilities at their respective fair values, as of the acquisition date. The determination of the fair value of net assets acquired involves significant judgment and estimates, such as future cash flow projections, appropriate discount and capitalization rates and other estimates based on available market information. Estimates of future cash flows are based on a number of factors including operating results, known and anticipated trends, as well as market and economic conditions.
Goodwill and other intangible assets
Goodwill and other intangible assets with indefinite useful lives are not amortized, but are instead tested for impairment annually in the fourth quarter of each year, or more frequently if indicators of potential impairment exist. All goodwill is assigned to the reporting 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 recognizes an impairment charge in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. Fair value of a reporting unit is determined primarily based on the discounted cash flow analysis which involves estimates of projected future cash flows and discount rates. Estimates of projected future cash flows are primarily based on Canon’s forecast of future growth rates. Estimates of discount rates are determined based on the weighted average cost of capital, which considers primarily market and industry data as well as specific risk factors. Canon has completed its impairment test in the fourth quarter of 2021 and determined that there were no reporting units that were at risk of failing the impairment test as the fair value of each reporting unit substantially exceeded its respective carrying amount. However, with regard to goodwill attributed to the Medical Reporting Unit, fair values in excess of reported carrying values as a percentage is lower than other reporting units. As a result, a future reduction in cash flows of the related business, could trigger an impairment. The goodwill related to this reporting unit as of December 31, 2021 is ¥537,183 million. Future cash flows for the Medical Reporting Unit were based on a
mid-term
management plan that considered the future market growth of medical equipment and growth in geographies where Canon operates its medical business. Intangible assets with finite useful lives consist primarily of software, trademarks, patents and developed technology, license fees and customer relationships, which are amortized using the straight-line method. The estimated useful lives of software are from 3 years to 8 years, trademarks are 15 years, patents and developed technology are from 5 years to 21 years, license fees are 8 years, and customer relationships are from 7 years to 15 years, respectively.
Income tax uncertainties
Canon considers many factors when evaluating and estimating income tax uncertainties. These factors include an evaluation of the technical merits of the tax positions as well as the amounts and probabilities of the outcomes that could be realized upon settlement. The actual resolutions of those uncertainties will inevitably differ from those estimates, and such differences may be material to the financial statements.
Valuation of deferred tax assets
Canon currently has significant deferred tax assets, which are subject to periodic recoverability assessments. Realization of Canon’s deferred tax assets is principally dependent upon its achievement of projected future taxable income. Canon’s judgments regarding future profitability may change due to future market conditions, its ability to continue to successfully execute its operating 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.
 
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Employee retirement and severance benefit plans
Canon has significant employee retirement and severance benefit obligations that are recognized based on actuarial valuations. Inherent in these valuations are key assumptions, including discount rates and expected return on plan assets. Management must consider current market conditions, including changes in interest rates, in selecting these assumptions. Other assumptions include assumed rate of increase in compensation levels, mortality rate, and withdrawal 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 2021, Canon estimated a weighted-average discount rate used to determine benefit obligations of 0.5% for Japanese plans and 1.5% for foreign plans and a weighted-average expected long-term rate of return on plan assets of 3.0% for Japanese plans and 4.4% for foreign plans. In estimating the discount rate, Canon uses available information about rates of return on high-quality fixed-income government and corporate bonds currently available and expected to be available during the period to the maturity of the pension benefits. Canon establishes the expected long-term rate of return on plan assets based on management’s expectations of the long-term return of the various plan asset categories in which it invests. Management develops expectations with respect to each plan asset category based on actual historical returns and its current expectations for future returns.
Decreases in discount rates lead to increases in actuarial pension benefit obligations which, in turn, could lead to an increase in service cost and amortization cost through amortization of actuarial gain or loss, a decrease in interest cost, and vice versa. For 2021, a decrease of 50 basis points in the discount rate increases the projected benefit obligation by approximately ¥96,008 million. The net effect of changes in the discount rate, as well as the net effect of other changes in actuarial assumptions and experience, is deferred until subsequent periods.
Decreases in expected returns on plan assets may increase net periodic benefit cost by decreasing the expected return amounts, while differences between expected value and actual fair value of those assets could affect pension expense in the following years, and vice versa. For 2021, a decrease of 50 basis points in the expected long-term rate of return on plan assets would increase approximately ¥5,758 million in net periodic benefit cost. Canon multiplies management’s expected long-term rate of return on plan assets by the value of its plan assets to arrive at the expected return on plan assets that is included in pension expense. Canon defers recognition of the difference between this expected return on plan assets and the actual return on plan assets. The net deferred amount affects future pension expense.
Canon recognizes the funded status (i.e., the difference between the fair value of plan assets and the projected benefit obligations) of its pension plans in its consolidated balance sheets, with a corresponding adjustment to an accumulated other comprehensive income (loss), net of tax.
Environmental Liabilities
Liabilities for environmental remediation and other environmental costs are accrued when environmental assessments or remedial efforts are probable and the costs can be reasonably estimated, and are included in other noncurrent liabilities in the consolidated balance sheets. Such liabilities are adjusted as further information develops or circumstances change. Costs of future obligations are not discounted to their present values.
Recently Issued Accounting Guidance
Please refer to Note 1 of the Notes to Consolidated Financial Statements.
 
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Consolidated results of operations
2021 compared with 2020
Summarized results of operations for 2021 and 2020 are as follows:
 
    
2021
    
Change
   
2020
 
                     
    
(Millions of yen, except per share
 
    
amounts and percentage data)
 
Net sales