CANON INC [CAJ] Filings

20-F 1 d101450d20f.htm FORM 20-F FORM 20-F

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

☑	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2020

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

☐	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

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, 2020, 1,045,773,645 shares of common stock, including 16,536,936 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 ☑

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TABLE OF CONTENTS


		Page number
CERTAIN DEFINED TERMS, CONVENTIONS AND PRESENTATION OF FINANCIAL INFORMATION			1




FORWARD-LOOKING INFORMATION			1

	PART I

Item 1.	Identity of Directors, Senior Management and Advisers		2

Item 2.	Offer Statistics and Expected Timetable		2

Item 3.	Key Information		2

A.	Selected financial data		2
B.	Capitalization and indebtedness		3
C.	Reasons for the offer and use of proceeds		3
D.	Risk factors		3

Item 4.	Information on the Company		12

A.	History and development of the Company		12
B.	Business overview		12
	Products		13
	Net sales by segment		17
	Net sales by geographic area		18
	Seasonality		18
	Sources of supply		18
	Marketing and distribution		18
	Service		19
	Patents and licenses		19
	Competition		20
	Environmental regulations		21
	Other regulations		24
C.	Organizational structure		25
D.	Property, plants and equipment		25

Item 4A.	Unresolved Staff Comments		28

Item 5.	Operating and Financial Review and Prospects		28

A.	Operating results		28
	Overview		28
	Key performance indicators		30
	Critical accounting policies and estimates		31
	Consolidated results of operations		36
	2020 compared with 2019		36
	2019 compared with 2018		40
	Foreign operations and foreign currency transactions		44
B.	Liquidity and capital resources		44
	Non-GAAP financial measures		46
C.	Research and development, patents and licenses		47

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		Page number
D.	Trend information		47
E.	Off-balance sheet arrangements		49
F.	Contractual obligations		49

Item 6.	Directors, Senior Management and Employees		51

A.	Directors and senior management		51
B.	Compensation		59
C.	Board practices		72
D.	Employees		72
E.	Share ownership		73

Item 7.	Major Shareholders and Related Party Transactions		74

A.	Major shareholders		74
B.	Related party transactions		74
C.	Interests of experts and counsel		75

Item 8.	Financial Information		75

A.	Consolidated financial statements and other financial information		75
	Consolidated financial statements		75
	Legal proceedings		75
	Dividend policy		75
B.	Significant changes		76

Item 9.	The Offer and Listing		76

A.	Offer and listing details		76
	Trading in domestic markets		76
	Trading in foreign markets		76
B.	Plan of distribution		76
C.	Markets		76
D.	Selling shareholders		76
E.	Dilution		76
F.	Expenses of the issue		76

Item 10.	Additional Information		77

A.	Share capital		77
B.	Memorandum and articles of association		77
C.	Material contracts		84
D.	Exchange controls		84
E.	Taxation		88
F.	Dividends and paying agents		92
G.	Statement by experts		92
H.	Documents on display		92
I.	Subsidiary information		92

Item 11.	Quantitative and Qualitative Disclosures about Market Risk		92

	Market risk exposures		92
	Equity price risk		92
	Foreign currency exchange rate and interest rate risk		93

Item 12.	Description of Securities Other than Equity Securities		94

A.	Debt securities		94

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		Page number
B.	Warrants and rights		94
C.	Other securities		94
D.	American Depositary Shares		94
	PART II

Item 13.	Defaults, Dividend Arrearages and Delinquencies		95

Item 14.	Material Modifications to the Rights of Security Holders and Use of Proceeds		95

Item 15.	Controls and Procedures		95

Item 16A.	Audit Committee Financial Expert		96

Item 16B.	Code of Ethics		96

Item 16C.	Principal Accountant Fees and Services		97

Item 16D.	Exemptions from the Listing Standards for Audit Committees		98

Item 16E.	Purchases of Equity Securities by the Issuer and Affiliated Purchasers		99

Item 16F.	Change in Registrant’s Certifying Accountant		99

Item 16G.	Corporate Governance		99

	PART III

Item 17.	Financial Statements		102

Item 18.	Financial Statements		102

	Reports of Independent Registered Public Accounting Firm		103
	Consolidated Balance Sheets		109
	Consolidated Statements of Income		110
	Consolidated Statements of Comprehensive Income		111
	Consolidated Statements of Equity		112
	Consolidated Statements of Cash Flows		114
	Notes to Consolidated Financial Statements		115
	Schedule II—Valuation and Qualifying Accounts		162

Item 19.	Exhibits		163

SIGNATURES			164

iii

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CERTAIN DEFINED TERMS, CONVENTIONS AND PRESENTATION OF FINANCIAL INFORMATION

All information contained in this Annual Report is as of December 31, 2020 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 5, 2021, the noon buying rate for yen in New York City as reported by the Federal Reserve Bank of New York was ¥ 108.24= U.S.$1.

The Company’s fiscal year end is December 31. In this Annual Report “2020” refers to the Company’s fiscal year ended December 31, 2020, 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.

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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 13*4:	2020		2019		2018		2017		2016
	(Millions of yen, except average number of shares and per share data)
Net sales	¥	3,160,243	¥	3,593,299	¥	3,951,937	¥	4,080,015	¥	3,401,487
Operating profit		110,547		174,420		342,452		322,211		216,338
Income before income taxes		130,280		195,493		362,392		354,490		244,564
Net income attributable to Canon Inc.		83,318		124,964		252,441		242,081		150,334
Advertising expenses		31,273		46,665		58,729		61,207		58,707
Research and development expenses		272,312		298,503		315,842		333,371		306,537
Depreciation of property, plant and equipment		162,733		170,418		175,771		189,712		199,133
Increase in property, plant and equipment		132,302		178,088		159,316		147,542		171,597
Long-term debt, excluding current installments		4,834		357,340		361,962		493,238		611,289
Common stock		174,762		174,762		174,762		174,762		174,762
Canon Inc. shareholders’ equity		2,575,031		2,685,496		2,820,644		2,863,986		2,776,327
Total assets		4,625,614		4,771,918		4,902,955		5,201,626		5,142,279

Average number of common shares in thousands		1,049,802		1,069,957		1,079,753		1,085,439		1,092,071

Per share data:
Net income attributable to Canon Inc. shareholders per share:
Basic	¥	79.37	¥	116.79	¥	233.80	¥	223.03	¥	137.66
Diluted		79.35		116.77		233.78		223.03		137.66
Cash dividends declared		80.00		160.00		160.00		160.00		150.00
Cash dividends declared (U.S.$)*2	$	0.745	$	1.514	$	1.440	$	1.483	$	1.393

Notes:

The above financial data is prepared in accordance with U.S. generally accepted accounting principles.

Canon acquired Toshiba Medical Systems Corporation on December 19, 2016, which was subsequently renamed as Canon Medical Systems Corporation (“CMSC”) on January 4, 2018. CMSC’s consolidated balance sheet and operating result since the acquisition date are reflected in Canon’s consolidated financial statements.

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.

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Canon adopted 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 years ended December 31, 2017 and 2016 respectively.

Certain figures for the fiscal years ended December 31, 2019, 2018, 2017 and 2016 presented in the table above have been revised from the versions previously disclosed. The effect on the consolidated financial statements was immaterial, respectively. For further details regarding the circumstances of the revision, 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”), plain paper copying machines, laser printers, cameras, inkjet printers, diagnostic 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 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

high-end

users. Canon is also developing new categories of cameras in order to attract new users who demand ease of use and taking photographs in a variety of occasions.

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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. The global market for medical devices is expanding due to developing medical infrastructure in emerging countries and regions, but in developed countries and regions issues such as aging populations, rising health insurance costs and pressure to cut medical device costs may adversely affect Canon’s medical device business.

Canon invests in research and development 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 and 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 research and development 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 research and development 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 flow from sales to fall below the level necessary to offset Canon’s expenditures, including those arising from research and development, 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.

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.

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Canon’s business is subject to changes in the sales environment.

Situations such as disruptions of relationships between Canon and its original equipment manufacturing (“OEM”) partner, HP Inc., or between Canon and the major distributors of Canon products or acquisitions of those distributors by competitors could adversely affect Canon’s ability to meet its sales targets. In addition, the rapid proliferation of Internet-based businesses may render conventional distribution channels obsolete. These, and other changes in Canon’s sales environment, could adversely affect Canon’s operating results.

In addition, Canon depends on HP Inc. for a significant part of its business and has had a strong relationship with HP Inc. as an 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 major distributors 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.

In addition to the traditional approach of selling its goods, Canon has been focusing on online sales of its products by making use of a variety of its sales channels amid the sharp growth of online sales platforms across the world. Nevertheless, Canon’s operating results may be adversely affected should the business conditions change 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. The operating results for

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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, including by 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, 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 hearings to 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 our 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 logistics costs and quickly respond to problems when they arise. Further, Canon enters insurance policies to cover damages incurred by accidents. Nevertheless, despite these efforts, there can be no assurance that Canon

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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.

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.

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 research and development 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 research and development, 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 and floods, as well as terrorist attacks. Such factors may adversely affect Canon’s operations, incur cost related to physical and human damage, and lower the value of 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 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.

In addition, the global infection of the novel coronavirus disease (“COVID

-19”)

has had a negative effect on Canon’s operating results and financial conditions. Initially, the pandemic disrupted supply chains around the world including the production activities of Canon. Canon took measures to temporarily halt operations at some of its plants and cut production. Sales are also greatly affected by the impact of closures of offices and retail outlets, overseas travel restrictions and shortage of international freight transport capacity which have resulted from the restrictions to economic activities such as the emergency declaration in Japan, lockdowns and travel restrictions across the globe. Canon has developed a task force to focus on preventing infection and have implemented such measures to cancel internal and external major events as well as promote staggered commuting and remote work of its employees. Canon has also made the efforts to adapt to the changes of the environment and recover production and sales activities around the world.

The time frame to contain

COVID-19

remains uncertain. If the transmission further expands and prolongs, 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

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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 may turn out to be slower than expected by Canon, due to slower recovery in business investment. 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 research and development 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 human rights, support the improvement of employees’ abilities through the development of various training systems, and strengthen 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 laws and regulations, including enforcement of new environmental regulations in Japan and other countries and regions or more active enforcement of existing laws and regulations, Canon may face liability for additional costs and damages. Such costs and damages 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 relating to information security and electronic data.

Canon stores and has access to confidential electronic data relating to manufacturing, research and development, 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.

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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.

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

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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.

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.

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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.

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.

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. Each country has been revising or amending its domestic taxation system and tax treaties based on the final report. Canon has been reviewing the transfer pricing policy taking into consideration the details stated in the reports published 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.

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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 Corporation Law 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 (“CMSC” as of January 4, 2018) and has expanded its medical business.

In 2020, 2019, and 2018, Canon’s increases in property, plant and equipment were ¥132,302 million, ¥178,088 million and ¥159,316 million, respectively. In 2019, 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 2021, Canon projects to invest in property, plant and equipment of approximately ¥160,000 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 our website at https://global.canon/en.

B. Business overview

Canon is one of the world’s leading manufacturers of office MFDs, plain paper copying machines, laser printers, cameras, inkjet printers, diagnostic 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 2020, 74.5% of consolidated net sales were generated outside of Japan, with approximately 27.0%, 25.2% and 22.3% 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 research and development 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.

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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 copying machines. In addition, Canon has removed virtually all environmentally unfriendly chemicals from its manufacturing processes.

Products

Canon operates its business in four segments: the “Office Business Unit,” the “Imaging System Business Unit,” the “Medical System Business Unit”, and the “Industry and Others Business Unit”.

- Office Business Unit –

Canon manufactures, markets and services a full range of office MFDs, printers, copying machines for personal and office use and production print products for print professionals. Canon also delivers added value to customers through software, services and solutions. Canon’s offerings cater to a broad market from Small Office Home Office (“SOHO”), and Small and Midsize Business (“SMB”) to large enterprises and professional graphic arts companies.

In the industry, customer preference has been shifting from monochrome to color products and from hardware to services and solutions. Especially in the professional print market, customers are increasingly turning to

short-run,

print-on-demand

and variable data printing. The importance of connectivity, security, mobility, integration, workflow and cloud-based web services is growing, and such added value is increasingly delivered together with hardware. Canon seeks to maintain its position as a market leader in these fast-changing markets.

In 2020, Canon expanded its hardware offerings by providing “image RUNNER ADVANCE DX” with advanced scanning, security and cloud based features. Canon is also providing a software named “uniFLOW” Online which enabled the new “image RUNNER ADVANCE DX” to connect to cloud services. Canon expanded our Multi-Function Printer (“MFP”) capability by using the new software solution technology.

To maintain and enhance its competitive edge and to meet increasingly sophisticated customer demands, Canon is committed to the continued reinforcement of Canon’s hardware and software offerings and solutions capability.

As for laser printers, Canon has focused on expanding sales of high value-added products from mid to

high-end

class, especially for MFP, however, it was affected due to low office print usage driven by COVID-19. Meanwhile, demand for

low-mid

class of printers are recovering with work/learn-from-home needs. Canon is experiencing fierce competition from aggressive competitors in the laser printer market and an eventual decline in sales prices of printers and consumable cartridges is becoming a major threat, in addition to concerns over lagging growth of the entire market affected by decrease in demand for printing, which is caused by change in users’ printing behavior due to the prevalence of smartphones, cloud computing, etc.

In response, Canon aims to accelerate current momentum to increase sales volume and market share by enhancing competitiveness like driving contractual business which engages with customers for a certain period, accompanied with leveraging technical innovation and so forth. Furthermore, Canon aims to maximize business efficiency through continuous efforts to reduce costs and optimize its supply chain.

- Imaging System Business Unit –

Canon manufactures and markets digital cameras, as well as lenses and various related accessories.

In interchangeable lens digital cameras, Canon launched two new

full-size

mirrorless cameras, “EOS R5” and “EOS R6” at the same time in the 3rd quarter. The movie function, AF performance, and image stabilization

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mechanism of these two models have received a great deal of attention, and sales have been strong immediately after the start of sales. In addition, Canon also released the “EOS Kiss M2”, the second-generation model of the entry-level mirrorless camera “EOS Kiss M”, which has been highly acclaimed by the market, in the fourth quarter, and has been working to further strengthen and expand the lineup of mirrorless cameras which is a growth area. As a result, Canon has steadily increased its market share in the field of mirrorless cameras, and 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. The large diameter mount and short back focus has allowed for a great increase in freedom of lens design, resulting in huge leaps in optical performance.

Canon aims to meet customer expectations through continuous introduction of high-quality and high-performance lenses developed with superior optical technology and new elemental technology.

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.

In the compact photo printer market, Canon has endeavored to promote sales by capturing sales for demand for printing at home even in the harsh environment of

COVID-19. With

its advantages, such as easy operation, portability, and

lab-quality

photo print, “SELPHY” has gained a strong market position in each region. In the second quarter, Canon launched the “SELPHY SQUARE QX10”, a mini photo printer which allows users to easily enjoy square format prints that are popular to Social Networking Service (“SNS”), and has been well received. Canon plans to tap new customer demand and to maintain its lead in this market.

Inkjet printer technology has been evolving, driving expansion of application from home use to office and commercial use such as poster printing and photo printing that require high-quality.

Canon offers a wide variety of products to meet such needs based on its core technology Full-photolithography Inkjet Nozzle Engineering (“FINE”), which enables realization of high-speed printing and high image quality at the same time.

For home use, Canon offers such printer solutions as “Canon PRINT Inkjet” to tighten the connection with cloud computing, smartphones and tablet PCs. Canon also offers more compact body, premium design, convenient front and rear dual paper feeder, and the function that enables connecting the smartphone to the printer by reading the QR code. Canon believes such enhancement of function and service will increase user-friendliness and satisfaction of users.

Canon has launched Refillable Ink Tank Printers that achieved high productivity and cost saving by featuring

built-in

ink tanks for business use in emerging markets, and gradually expanded to developed countries.

As large-format inkjet printers must meet the advanced photo and graphic printing needs of professionals, Canon has a lineup of graphic products that cater to all customers, starting with the “imagePROGRAF

PRO-1000”,

which supports

A2-size

paper, to the

60-inch

flagship model, “imagePROGRAF

PRO-6100”

with improved functionality and productivity. The color reproduction and expressiveness of dark areas of these products are improved by using

12-color

“LUCIA Pro ink”, which features new pigment ink and Chroma Optimizer, and the new

“L-COA

PRO” image processing engine.

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To meet companies’ growing demand for

low-cost

in-house

production of large formats such as Computer Aided Design (“CAD”) and posters, Canon newly developed the five-color pigment ink “LUCIA TD” that realizes high-quality image printing on normal paper and does not require special paper. For the CAD and posters market, Canon has a lineup of the “imagePROGRAF TX/TM” series that delivers high-speed printing, and the entry version “imagePROGRAF TA” series, with the best print quality and the quietness inherited from the advanced models.

Canon has maintained high share in the scanner market by achieving stable sales results with “CanoScan LiDE” series, the flatbed scanners which use Contact Image Sensor (“CIS”).

- Medical System 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 ICT 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. Continuing its long tradition of contributing to improvements in healthcare, Canon is making positive contributions toward hospital management and provides a range of patient-friendly healthcare systems and services.

Canon continues to support all the medical professionals and other concerned parties that are striving to control the

COVID-19

pandemic by offering total solutions for its diagnosis.

For example, Canon started the clinical evaluation on the effectiveness of the CT image analysis technology for diffuse pulmonary diseases, developed under the joint research with Fujita Health University (Toyoake City, Aichi Prefecture, Japan), which helps improve the diagnosis of novel coronavirus pneumonia. Canon also developed and will commercialize the first mobile Medical Container CT in Japan, equipped with measures against infectious diseases.

In addition, Canon started selling the new coronavirus antigen qualitative test kit “Rapiim

SARS-CoV-2-N”,

developed under the joint research with Yokohama City University (Yokohama City, Kanagawa Prefecture, Japan).

By combining an antibody with high specificity for

SARS-CoV-2

developed by Yokohama City University and Rapiim’s highly sensitive detection technology platform developed by Canon, it can accurately detect

SARS-CoV-2

without cross-reacting with other viruses such as influenza A and B, and is also capable of detecting a small amount of viral antigen of about 6.64 pg / mL in just 15 minutes. A large amount of virus can be detected in 4 minutes.

In the CT systems business, the mainstay of medical business units, Canon kept top share in the Japanese market. New products Canon launched so far continued to enhance its presence, such as “Aquilion Lightning / Helios I Edition” in 80/160 slices with a reconstruction technology that eliminates noise from images utilizing deep learning technology, and “Aquilion Exceed LB” (80 multi-slice CT) with wide-bore.

Canon equipped its

high-end

3T MRI named “Vantage Centurian” with Advanced intelligent

Clear-IQ

Engine (“AiCE”), first on MRI last year. This year, we expanded our MRI

line-up

with “AiCE” to models such as “Vantage Orian / S Grade” and “Vantage Gracian”.

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.

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In the component business, both the expanding demand in emerging markets and the demand to transition from Computed Radiography (“CR”) to Digital Radiography (“DR”) continue to drive steady market growth for

X-ray

equipment. On the other hand, technological competition with component manufacturers in Europe and the USA has been increasing for

high-end

products, and price competition with manufacturers in China and South Korea has been increasing for the

low-end

product segment where products are becoming commoditized. Under these market circumstances, Canon launched a new standard model with enhanced price competitiveness for some regions, and plans to make it available in other regions soon. In the dynamic

X-ray

equipment market, where high growth is expected, Canon is continuing its strong efforts to promote sales of fluoroscopy and angiography systems. With regard to our

X-ray

tube units,

X-ray

imaging devices, etc., Canon has developed competitive products for this business based on its highly reliable core technologies (high-voltage vacuum technology, hydrodynamic liquid metal bearing technology, cesium iodide deposition technology, etc.), which have contributed to strong sales. With regard to professional cameras which are mainly for medical equipment, Canon retains high competitiveness, due to its agile product development and quick adaptation to the market needs for camera miniaturization and better image quality.

In the ophthalmic equipment business, Canon continues to upgrade its Optical Coherence Tomography (“OCT”) Angiography software series which enables depiction of retinal blood vessels without using fluorescein, under stiffer competition in the growing OCT market.

- Industry 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 between U.S. and China had caused concerns primarily related to capital expenditure, such matter resulted to only have minor impacts. Capital expenditures on lithography equipment for memory devices and sensors remained solid, and those for Complementary Metal-Oxide-Semiconductor field-effect transistor (“CMOS”) sensors, communication devices, and other products were also strong based on progress in IoT and 5G technologies. 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 our product development process. As a result of its steady progress in developing value added products, Canon offers a wide variety of products for IoT devices and automotive semiconductors, which are rapidly becoming more widespread. As for memory productions, Canon is ready to expand its market share further by KrF scanner

“FPA-6300ES6a”

which realized the highest level of productivity and overlay, and by continuous upgrades of i-line stepper

“FPA-5550iZ2”.

For

back-end

lithography system lineup, Canon has introduced

“FPA-8000iW”,

which offers both high resolution and compatibility with large square substrates. It meets the high productivity needs of PLP (Panel Level Packaging) 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.

In the FPD lithography equipment market, delays in equipment installation were unavoidable as restrictions of traveling to China, where major panel manufacturers are located, have been enforced due to

COVID-19.

However, investing motivation towards FPD lithography equipment remains at a high level due to the needs in

large-sized

TVs and accelerated OLED applications, such as foldable displays. With the spread of flat-panel TVs, the TV market is expected to experience a transition to high-quality TVs represented by

large-sized,

4K/8K high-definition panels and OLED displays. 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 “MPAsp-E 903T” for small and

medium-size

panels productions to our lineup. Canon will expand market share by continuingly meeting various panel production needs.

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Solutions that combine network cameras and video analytics software are expanding beyond security applications as part of social infrastructure, and the market is expanding commensurate with the growth of cloud businesses. Canon’s solution offerings, which combines its lineup of network cameras capable of meeting diverse customer needs and video analytics software utilizing AI are steadily gaining ground as it expands its domestic and overseas channels. This year, the social needs for grasping the congestion situation increased rapidly due to

COVID-19.

In this context, the Canon Group quickly made proposals to the market for solutions that combine people count, crowd count,

passer-by

count, and the silhouetting of moving objects so that the situation can be monitored remotely and in real time.

Going forward, Canon continues to aim to be the global leader in network visual solutions by strengthening cooperation among the Canon Group companies, including Axis, Milestone and BriefCam accelerating the integration of technologies, and providing optimal solutions.

In the medium to long term, demand for sports relay broadcasting in developed countries and demand for 4K transmission in emerging countries are expected to remain strong, but the market for broadcast lenses has been temporarily stagnant due to the postponement of large-scale events caused by

COVID-19.

Among these, Canon will stimulate demand by launching the portable zoom lens “CJ20eX5B”, which is ideal for sports broadcasts and various program production locations, and will respond to the diverse needs of production sites by further expanding the lineup of 4K broadcasting lenses.

In the digital video camera market, Canon has responded to the diverse needs of production sites seeking high-definition video expression. In the digital cinema camera field, Canon strengthened and expanded its lineup with the launch of “EOS C 300 MKIII” and “EOS C 70”. In the field of 4K professional video cameras, demand for streaming video due to the

COVID-19

is rapidly increasing. Canon will continue to contribute to the development of video culture by responding to a wide range of professional needs in the field of video production by introducing products that reflect changes in market conditions.

As a new video solution, Canon developed and launched the Video Analysis software “Vision-based Navigation Software” using “Visual SLAM (Simultaneous Localization and Mapping) technology” that simultaneously performs self-localization and environmental mapping. By providing this video analysis systems as robot’s eye to collaborative companies, Canon aims to contribute to the productivity improvement and automation of logistics operations, and to equip service robots used in various applications such as cleaning, transportation, security, inspection, and exploration.

NET SALES BY SEGMENT

The following table presents our net sales by segment for each of the periods shown.


	Years ended December 31
	2020			change			2019			change			2018
	(Millions of yen, except percentage data)
Office		1,440,212			-17.8	%		1,752,107			-6.2	%		1,868,355
Imaging System		712,238			-11.8			807,414			-16.8			970,435
Medical System		436,074			-0.6			438,525			0.2			437,578
Industry and Others		654,813			-4.9			688,433			-12.0			781,887
Eliminations		(83,094	)		—			(93,180	)		—			(106,318	)

Total		3,160,243			-12.1	%		3,593,299			-9.1	%		3,951,937

Notes:

From the beginning of the first quarter of 2019, Canon has reclassified certain businesses from the Imaging System Business Unit to the Industry and Others Business Unit.

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Based on the realignment of Canon’s internal reporting and management structure, from the beginning of the first quarter of 2020, Canon has reclassified certain businesses from the Industry and Others Business Unit to the Office Business Unit. Operating results for the fiscal years ended December 31, 2019 and 2018 also have been reclassified.

NET SALES BY GEOGRAPHIC AREA

The following table presents our net sales by geographic area for each of the periods shown.


	Years ended December 31
	2020		change			2019		change			2018
	(Millions of yen, except percentage data)
Japan		806,305		-7.6	%		872,534		0.3	%		869,577
Americas		852,451		-17.2			1,029,078		-4.4			1,076,402
Europe		795,616		-9.8			882,480		-13.1			1,015,428
Asia and Oceania		705,871		-12.8			809,207		-18.3			990,530

Total		3,160,243		-12.1	%		3,593,299		-9.1	%		3,951,937

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.

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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, copying machines 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.

In Southeast Asia and Oceania, Canon sells its products through subsidiaries located in those areas. In addition, copying machines are sold directly to

end-users

in Australia by Canon Australia Pty. Ltd.

For 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 2020 and 2019, OEM sales to HP Inc. constituted 11.4% and 13.0%, 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 copying machines, 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. Copying machines 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 contract of medical system products, 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 research and development 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

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Canon has also entered into cross-licensing agreements with other major industry participants.

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 research and development 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:

- Office Business Unit -

The markets for this segment are highly competitive. Canon’s primary competitors are Xerox Corporation/Fuji Xerox Co., Ltd.; Ricoh Company, Ltd.; Konica Minolta Inc.; HP Inc.; and Lexmark International, Inc. Canon believes that it is one of the leading global manufacturers of office MFDs, copying machines 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. In emerging markets, for example in China, the current market leaders for business machines are Fuji Xerox. Co., Ltd., Konica Minolta Inc. and Toshiba TEC Corporation. Canon plans to join this group by introducing products tailored to the Chinese market and by strengthening sales and service channels.

- Imaging System 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 Nikon Corporation and Sony Corporation.

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Average prices for compact digital cameras in the industry increased in 2020 from the previous year. Market contraction is having a major impact, resulting in severe conditions in the digital camera market. Despite these difficulties, 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.

Canon’s primary competitors in the compact digital camera market are Sony Corporation and Nikon Corporation. Canon’s primary competitors in the inkjet printer market are HP Inc., Seiko Epson Corporation and Brother Industries, Ltd.

- Medical System Business Unit -

Canon’s primary competitors in the diagnostic medical imaging market are General Electric Company, Siemens Healthineers AG, Koninklijke Philips N.V., Hitachi, Ltd., 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.

- Industry and Others Business Unit -

Very stiff 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.

As for network cameras, the market is competitive driven by higher functional requirements and price pressure from customers. Canon’s primary competitors are 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.

Environmental regulations

Canon is subject to a wide variety of laws, regulations, industry standards and global initiative 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 initiative that affect Canon’s businesses are summarized below.

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1.	UN Frameworks to Address Global Issues, which are related to the Environment including Climate Changes

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 over the next 10 years, which are composed of 17 goals and 169 targets. The goals and targets cover a wide-range 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. In the Agreement, all member states of UNFCCC agreed to take countermeasures to hold Global temperature rise to well below 2 degrees Celsius above

pre-industrial

levels and to pursue efforts to limit the temperature rise to 1.5 degrees Celsius. Further, large scale climate disasters have become more frequent in recent years and they accelerate the movement toward decarbonization. The EU announced European Green Deal in 2019. In 2020, the Chinese government announced that it would achieve carbon neutrality by 2060, and the Japanese government announced the same by 2050. Such trends would increase environmental regulations in the future.

The European Green Deal is also accelerating the trend of resource circulation. In Europe, the new Circular Economy Action Plan was announced in 2020, and the road map of the regulations was presented. ICT (Information and Communication Technology) industry is one of the priority target and new regulations such as durability, repairability, reuse, and remanufacturing are anticipated.

Canon is striving to reduce CO2 emissions toward the

low-carbon

society. Canon has established 2021-2023

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)”. Canon has successfully reduced its “Life Cycle CO2 emission” per product, that was an average improvement of 4.7% (2008—2019) and cumulative 40.0% as compared with 2008. Also, total lifecycle CO2 emissions in 2019 were 7.785 million tons. Further, Canon continues to reduce its “Life Cycle CO2 emission” per product, that was an average improvement of 4.6% (2008—2020) and cumulative 41.3% as compared with 2008. Total lifecycle CO2 emissions in 2020 were 7.723 million tons, which were verified by a third party in March 2021. 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 the climate change-related information based on a framework of the TCFD (Task Force on Climate-related Financial Disclosure) set by Climate Disclosure Standard Board and also has disclosed the environmental impact information through a platform of the CDP. In 2020, Canon is qualified as a Climate A Listed Company and a Water A Listed Company by the 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.	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

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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, Korea, India, UAE and EAEU.

3.	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 takes necessary actions for a scheme which creates the information needed for input into the database. 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 and have adverse effects on its operating results and financial condition.

4.	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 2021, 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.

5.	State Legislation in the United States Concerning Recycling of Waste Electric and Electronic Products

E-waste

recycling laws have been enacted or proposed in more than twenty American states. Although certain state laws cover only displays or television sets, printers and other products are covered by other states, such as Illinois, Michigan and Hawaii, among others. These laws require manufacturers to bear the costs of collecting and recycling electrical and electronic equipment based on sales volume or market share by brand of covered products. Canon expects that compliance with such state requirements might increase its costs, such as recycling fees and product guarantees.

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6.	Chinese Regulation for the Management of the Recycling and Disposal of Waste Electrical and Electronic Products

The Regulation for the Management of the Recycling and Disposal of Waste Electrical and Electronic Products was issued by the Chinese government in 2009 and implemented on January 1, 2011. Producers and importers are required to pay a fee to a government fund. The list of products falling under the waste electrical and electronic products catalogue issued on February 9, 2015 includes printers, copying machines and facsimile machines. As of February 2021, the unit price of the fee has not been decided, but Canon will have to pay a fee when the unit price is decided by the Chinese government.

These requirements will likely increase Canon’s costs and could adversely affect its operating results and financial condition.

7.	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 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, 2020, the following Canon affiliates 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 2020 were approximately ¥1,228 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, 2020 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 and Sudan through unaffiliated third parties. Canon does not have any direct agreements, commercial arrangements, or other contacts with the governments of Syria or Sudan, or

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with entities controlled by those governments. Total net sales to Syria and Sudan in the year ended December 2020 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 and Sudan 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, 2020, Canon Inc. had 343 consolidated subsidiaries and 9 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, 2020.


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 14 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 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, 2020 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		930	R&D of display products and manufacturing of semiconductor devices

Tamagawa Office, Kanagawa		384	Quality engineering

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Name and location	Floor space (including leased space)		Principal activities and products manufactured
Domestic	(Thousands of square feet)

Oita Plant, Oita		464	Manufacturing of semiconductor devices

Yako Office, Kanagawa		906	Development of inkjet printers, inkjet chemical products

Utsunomiya Office, Tochigi		2,764	Manufacturing of lenses for cameras and other applications, R&D in optical technologies, development and sales of broadcasting equipment, R&D, manufacturing, sales and servicing of semiconductor production equipment

Toride Plant, Ibaraki		3,018	R&D in electrophotographic technologies, mass-production trials and supports; manufacturing of office imaging products, chemical products; training of manufacturing

Ami Plant, Ibaraki		964	Manufacturing of FPD production equipment

Canon Electronics Inc., Tokyo, Saitama and Gunma		1,310	Components, magnetic heads, document scanners and laser printers

Canon Finetech Nisca Inc., Saitama, Ibaraki and Yamanashi		1,106	Label printer, Card printer, Optical equipment, Motor

Canon Precision Inc., Aomori		1,591	Toner cartridges, sensors and micromotors

Canon Optron Inc., Ibaraki		144	Optical crystals (for lithography equipments, cameras, telescopes) and vapor deposition materials

Canon Chemicals Inc., Ibaraki		1,907	Toner cartridges and rubber functional components

Canon Components, Inc., Saitama		723	Contact image sensors, inkjet cartridges and medical equipment

Oita Canon Inc., Oita		2,095	Digital cameras, lenses and digital video camcorders

Nagahama Canon Inc., Shiga		1,095	Laser printers, toner cartridges and A-Si drums, Semiconductor production-related equipment

Oita Canon Materials Inc., Oita		3,081	Chemical products for copying machines and printers, and inkjet cartridges

Ueno Canon Materials Inc., Mie		654	Chemical products for copying machines and printers

Fukushima Canon Inc., Fukushima		1,310	Inkjet printers and inkjet cartridges

Canon Semiconductor Equipment Inc., Ibaraki		239	Development and production of semiconductor production-related equipment

Canon Ecology Industry Inc., Ibaraki		1,422	Recycling of toner cartridges, repair and recycling of business machines

Fukui Canon Materials Inc., Fukui		193	OPC raw stock, material for optics, High water-repellent material

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Name and location	Floor space (including leased space)		Principal activities and products manufactured
Domestic	(Thousands of square feet)

Miyazaki Canon Inc., Miyazaki		831	Digital cameras

Canon Mold Co., Ltd., Ibaraki		221	Molds

Canon ANELVA Corporation, Kanagawa and Yamanashi		745	Production equipment for electron devices, flat panel display and semiconductors

Canon Machinery Inc., Shiga		658	Automated production equipment and semiconductor production-related equipment

Canon Tokki Corporation, Niigata, Kanagawa and Tokyo		373	Vacuum technology-related equipment

Nagasaki Canon Inc., Nagasaki		477	Digital cameras

Canon Medical Systems Corporation, Tochigi		1,423	R&D, manufacturing and sales of medical equipment

Canon Electron Tubes & Devices Corporation, Tochigi		357	R&D, manufacturing and sales of electron tubes and its application products

Overseas

Europe

Canon Giessen GmbH, Giessen, Germany		348	Remanufacturing of copying machines, repair of cameras, service and support for Canon sales companies

Canon Bretagne S.A.S., Liffre, France		505	Manufacturing and recycling of toner cartridges

Canon Production Printing Netherlands B.V., Venlo, the Netherlands		2,347	Document management, digital sheet-fed presses and wide format printers

Americas

Canon Virginia, Inc., Virginia, U.S.		1,546	Toner cartridges, molds and remanufacturing of copying machines

Asia

Canon Inc., Taiwan, Taiwan		1,597	Lenses and digital cameras

Canon Opto (Malaysia) Sdn. Bhd., Selangor, Malaysia		611	Lenses and optical lens parts


Name and location	Floor space (including leased space)		Principal activities and products manufactured
Overseas	(Thousands of square feet)

Canon Dalian Business Machines, Inc., Dalian, China		1,734	Production and recycling of toner cartridges, production of laser printers

Canon Zhuhai, Inc., Zhuhai, China		1,722	Digital cameras, digital video camcorders and contact image sensors

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Name and location	Floor space (including leased space)		Principal activities and products manufactured
Overseas	(Thousands of square feet)

Canon Prachinburi (Thailand) Ltd., Prachinburi, Thailand		1,268	Copying machines

Canon Hi-Tech (Thailand) Ltd., Ayutthaya and Nakohon Ratchasima, Thailand		3,275	Inkjet printers, office MFDs, scanners, molds and plastic injection molded parts

Canon Zhongshan Business Machines Co., Ltd., Zhongshan, China		52	Laser printers

Canon Vietnam Co., Ltd., Hanoi, Vietnam		3,377	Inkjet printers, laser printers, office MFDs, scanners and contact image sensors

Canon (Suzhou) Inc., Suzhou, China		1,528	Copying machines

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)
Canon Mold Co., Ltd., Ibaraki		New production base (Manufacturing of molds)

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, plain paper copying machines, laser printers, cameras, inkjet printers, medical equipment, semiconductor lithography equipment and FPD 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.

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Canon divides its businesses into four segments: the Office Business Unit, the Imaging System Business Unit, the Medical System Business and the Industry and Others Business Unit.

Economic environment

Looking back at 2020, the global economy fell significantly with no signs of controlling the spread of infections, although the balanced measures to curb infections and expand economic activities were implemented around the world amid the global

COVID-19

pandemic. In the U.S., despite a record decline in consumption caused by movement restrictions implemented in the first half of the year, the economy gradually recovered in the second half of the year while repeating deregulation and tighter regulations of economic activities. In Europe, the consumption headed toward a recovery phase resulting from the easing of large-scale lockdowns and night curfews that were enacted in each country from March. The European economy, however, continued to slow down due to restrictions on economic activities being reinstated due to a resurgence of infections. In China, economic recovery has accelerated mainly through domestic demand and exports resulting from a rapid resumption of economic activities. Even in other emerging markets, despite restrictions on movement and economic activities in some countries, economies showed signs of recovery resulting from gradual resumption of economic activities amid the

COVID-19

pandemic. In Japan, the recovery trend continued due to the resumption of economic activities and the easing of voluntary restrictions after the lifting of the State of Emergency, although infections began to rise again in November.

Market environment

Amid these conditions, the markets in which Canon operates were greatly affected by the spread of

COVID-19.

For office MFDs and laser printers, demand for both monochrome and color models declined due to insufficient recovery of corporate activities in the spread of

COVID-19.

For cameras, despite a significant decline in demand due to the impact of

COVID-19,

demand headed toward an improvement phase due to a recovery in consumption in the second half of the year. For inkjet printers, the pace of recovery gradually increased in some emerging countries in the second half of the year, in addition to developed countries and China, where demand for products were solid due to a rise in remote working and education. For medical equipment, although restrictions on sales activities to medical institutions in the first half of the year due to the impact of

COVID-19

were eased in the second half of the year, sales activities were nonetheless affected by the prolonged impact of

COVID-19.

For industrial equipment, demand for both FPD lithography equipment and semiconductor lithography equipment remained solid.

The average value of the yen for the year was ¥106.68 against the U.S. dollar, a

year-on-year

appreciation of approximately ¥2, and ¥122.07 against the euro, the same level as the previous year.

Summary of operations

In 2020, sales of MFDs for the office and production printing market both decreased, although they showed signs of recovery since the second half of the year. Unit sales of laser printers, both monochrome and color models, were below those of the previous year. Sales of services and consumables also declined resulting from the moderate recovery in customers’ print volumes after cancellation of office closures in response to the spread of

COVID-19

and the resumption of corporate activities. For interchangeable-lens digital cameras, although unit sales were below those of the previous year, sales were better than expected in the second half of the year due to strong sales of the EOS R5 and EOS R6 full-frame mirrorless cameras. As for inkjet printers, unit sales, including refillable ink tank models, were significantly above those of the previous year due to the recovery in demand in some emerging countries on top of demand for remote working and education in developed countries and China. In medical equipment, amid the postponement of installation and restrictions on sales activities, sales were slightly below those of the previous year, as a result of capturing demand for equipment supplies to medical institutions supported by the government of each country in the second half of the year. For industrial equipment, despite solid demand for semiconductor lithography equipment for memory devices, and for OLED panel manufacturing equipment, sales for FPD lithography equipment decreased compared with those of the previous

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year as a result of postponement of installation due to the impact of

COVID-19.

As for network cameras, which are being used in a growing range of applications and where the market is growing, sales increased slightly from those of the previous year due to a moderate recovery in sales activities. Under these conditions, net sales for the year decreased by 12.1%

year-on-year

to ¥3,160,243 million. Gross profit as a percentage of net sales decreased by 1.3 points to 43.5%. Gross profit for the year decreased by 14.5%

year-on-year

to ¥1,375,868 million. Operating expenses decreased by 11.9%

year-on-year

to ¥1,265,321 million, due to the further promotion of efficiency for expenses throughout the entire Group. As a result, although operating profit decreased by 36.6%

year-on-year

to ¥110,547 million, it exceeded the prediction which had been revised upward in the most recent forecast. Other income (deductions) decreased by ¥1,340 million to ¥19,733 million, mainly due to decrease of interest and dividend income, while income before income taxes decreased by 33.4% year on year to ¥130,280 million and net income attributable to Canon Inc. decreased by 33.3% year on year to ¥83,318 million.

Total assets decreased by ¥146,304 million to ¥4,625,614 million at December 31, 2020, compared with the end of previous year, mainly due to a decrease of fixed and intangible assets, and accounts receivables. Total liabilities decreased by ¥46,365 million to ¥1,841,573 million at December 31, 2020, compared with the end of previous year, mainly due to a decrease of accrued pension liabilities and accrued expenses. Total equity decreased by ¥99,939 million to ¥2,784,041 million at December 31, 2020, compared with the end of previous year, mainly due to the dividend payout, the repurchasing of treasury stock and an increase of accumulated other comprehensive loss resulting from the appreciation of the yen.

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


	2020			2019			2018			2017			2016
Net sales (Millions of yen)		3,160,243			3,593,299			3,951,937			4,080,015			3,401,487
Gross profit to net sales ratio		43.5	%		44.8	%		46.4	%		48.8	%		49.2	%
R&D expense to net sales ratio		8.6	%		8.3	%		8.0	%		8.2	%		9.0	%
Operating profit to net sales ratio		3.5	%		4.9	%		8.7	%		7.9	%		6.4	%
Income before income taxes to net sales ratio		4.1	%		5.4	%		9.2	%		8.7	%		7.2	%
Inventory turnover measured in days		60 days			59 days			56 days			49 days			59 days
Debt to total assets ratio		10.9	%		10.8	%		8.2	%		10.2	%		11.9	%
Canon Inc. shareholders’ equity to total assets ratio		55.7	%		56.3	%		57.5	%		55.1	%		54.0	%

Notes:

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 segment to be important for the purpose of assessing Canon’s sales performance in various segments, taking into account recent market trends.

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Gross profit ratio (ratio of gross profit to net sales) is another KPI for Canon. Through its reforms of product development, Canon has been striving to shorten product development lead times in order to launch new, competitively priced products at a faster pace. Furthermore, Canon has further pursued cost reductions through enhancement of efficiency in its production. Canon believes that these approaches will improve Canon’s gross profit ratio, and so will continue pursuing the curtailment of product development lead times and reductions of production costs.

Operating profit ratio (ratio of operating profit to net sales), income before income taxes ratio (ratio of income before income taxes to net sales), and R&D expense to net sales ratio are considered to be KPIs by Canon. Canon is focusing on two areas for improvement. Canon is striving to control and reduce its selling, general and administrative expenses as its first key point. Secondly, Canon’s R&D policy is designed to maintain adequate 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.

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 both the infection control and economic activities. Although the global economy is expected to recover in 2021, it is expected that some regions would continue to be affected by

COVID-19.

Canon believes that the following are

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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 principally through the sale of office, imaging system and medical system products, industrial equipment, 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 office products, such as office MFDs and laser printers, and imaging system products, such as digital cameras and inkjet printers, is recognized upon shipment or delivery, depending upon when the customer obtains controls of these products.

Revenue from sales of equipment that are sold with customer acceptance provisions related to their functionality including optical equipment such as semiconductor lithography equipment and FPD lithography equipment, and certain medical equipment such as CT systems and MRI systems, is recognized when the equipment is installed at the customer site and the agreed-upon specifications are objectively satisfied.

Most of Canon’s service revenue is generated from maintenance service in the office and medical system products which is recognized over time. For the service contracts of office products, 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 office products 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 medical system products, 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 office products 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 office products 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 our 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 imaging system products, 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

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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 our 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 is determined using a combination of factors to ensure that Canon’s trade and financing receivables are not overstated due to uncollectibility. These factors include the length of time receivables are past due, the credit quality of customers, macroeconomic conditions, historical experiences and future prospects based on a current expected credit loss model (Please refer to Note 1 (x) of the Notes to Consolidated Financial Statement). Also, Canon records specific reserves for individual accounts when Canon becomes aware of a customer’s inability to meet its financial obligations to Canon, due for example to bankruptcy filings or deterioration in the customer’s operating results or financial position. If circumstances related to customers change, estimates of the recoverability of receivables are further adjusted.

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 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

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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 it 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.

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 2020 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 System Business 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, 2020 is ¥506,513 million. 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 18 years, license fees are 8 years, and customer relationships are 15 years, respectively.

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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.

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 2020, 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 4.8% 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 2020, a decrease of 50 basis points in the discount rate increases the projected benefit obligation by approximately ¥97,818 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 2020, a change of 50 basis points in the expected long-term rate of return on plan assets would cause a change of approximately ¥5,229 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.

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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.

Recently Issued Accounting Guidance

Please refer to Note 1 of the Notes to Consolidated Financial Statements.

Consolidated results of operations

2020 compared with 2019

Summarized results of operations for 2020 and 2019 are as follows:


	2020		Change			2019
	(Millions of yen, except per share
	amounts and percentage data)
Net sales
Products and Equipment		2,489,829		-12.2	%		2,835,428
Services		670,414		-11.5			757,871

		3,160,243		-12.1			3,593,299
Operating profit		110,547		-36.6			174,420
Income before income taxes		130,280		-33.4			195,493
Net income attributable to Canon Inc.		83,318		-33.3			124,964

Net income attributable to Canon Inc. shareholders per share:
Basic		79.37		-32.0			116.79
Diluted		79.35		-32.0			116.77

Note: See notes to Item 3A “Selected Financial Data”.

Sales

In the current business term, on a global basis, the economic slowdown continued. In such an environment, although each of Canon Group’s businesses endeavored to expand sales particularly with respect to new products, Canon’s consolidated net sales in 2020 totaled ¥3,160,243 million, a decrease of 12.1% from the previous year largely due to adverse effect of a shrinking market as well as unfavorable currency effects of foreign exchange rate fluctuation. Net sales of products and equipment totaled ¥2,489,829 million, a

year-on-year

decrease of 12.2%, while net sales of services totaled ¥670,414 million, a

year-on-year

decrease of 11.5%.

Overseas operations are significant to Canon’s operating results and generated 74.5% of total net sales in 2020. Such sales are denominated in the applicable local currency and are subject to fluctuations in the value of the yen relative to those currencies. Despite efforts to reduce the impact of currency fluctuations on operating results, including localization of manufacturing in some regions along with procuring parts and materials from overseas suppliers, Canon believes such fluctuations have had and will continue to have a significant effect on its results of operations.

The average value of the yen during the year was ¥106.68 against the U.S. dollar, a

year-on-year

appreciation of approximately ¥2, and ¥122.07 against the euro, the same level as the previous year. The effects of foreign exchange rate fluctuations negatively affected net sales by approximately ¥27,159 million in 2020. This unfavorable impact consisted of approximately ¥22,416 million of unfavorable impact for the U.S. dollar denominated sales and favorable impact of ¥1,999 million for the euro denominated sales, and unfavorable impact of ¥6,742 million for other foreign currency denominated sales.

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Cost of sales

Cost of sales principally reflects the cost of raw materials, parts and labor used by Canon in the manufacture of its products. A portion of the raw materials used by Canon is imported or includes imported materials. Many of these raw materials are subject to fluctuations in world market prices accompanied by fluctuations in foreign exchange rates that may affect Canon’s cost of sales. Other components of cost of sales include depreciation expenses, maintenance expenses, light and fuel expenses, and rent expenses. The ratios of cost of sales to net sales for 2020 and 2019 were 56.5% and 55.2%, respectively.

Gross profit

Canon’s gross profit in 2020 decreased by 14.5% to ¥1,375,868 million from 2019. The gross profit ratio also dropped by 1.3 points to 43.5%. The decrease in the gross profit and gross profit ratio were mainly due to a decrease in sales, the effect of product mix and the negative effect of appreciation of the yen against other foreign currencies such as U.S. dollar.

Operating expenses

The major components of operating expenses are payroll, R&D, advertising expenses and other marketing expenses. Operating expenses decreased by 11.9% year on year to ¥1,265,321 million, thanks to the pursuit of cost efficiencies in Canon as well as positive effects of currency exchange fluctuation.

Operating profit

Operating profit in 2020 decreased by 36.6% from 2019 to a total of ¥110,547 million. The ratio of operating profit to net sales decreased by 1.4 points to 3.5% from 2019.

Other income (deductions)

Other income (deductions) for 2020 was ¥19,733 million, a decrease of ¥1,340 million from 2019 mainly due to a decrease in interest income.

Income before income taxes

Income before income taxes in 2020 was ¥130,280 million, a decrease of 33.4% from 2019, and constituted 4.1% of net sales.

Income taxes

Income taxes in 2020 decreased by ¥21,809 million from 2019. The effective tax rate for 2020 was 26.4%, which was lower than the statutory tax rate in Japan. This was mainly due to income of foreign subsidies taxed at lower than Japanese statutory tax rate.

Net income attributable to Canon Inc.

As a result, net income attributable to Canon Inc. in 2020 decreased by 33.3% to ¥83,318 million, which represents 2.6% of net sales.

Segment information

Canon operates four segments: the Office Business Unit, the Imaging System Business Unit, the Medical System Business Unit and the Industry and Others Business Unit.

•

The Office Business Unit mainly includes office MFDs, laser MFPs, laser printers, digital continuous feed presses, digital

sheet-fed

presses, wide-format printers and document solutions.

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•

The Imaging System Business Unit mainly includes interchangeable—lens digital cameras, digital compact cameras, interchangeable lenses, Compact photo printers, inkjet printers, large format inkjet printers, commercial photo printers, image scanners and calculators.

•

The Medical System Business Unit mainly includes digital radiography systems, diagnostic X-ray systems, CT systems, MRI systems, diagnostic ultrasound systems, clinical chemistry analyzers and ophthalmic equipment.

•

The Industry and Others Business Unit mainly includes semiconductor lithography equipment, FPD lithography equipment, vacuum thin-film deposition equipment, OLED panel manufacturing equipment, die bonders, network cameras, digital camcorders, digital cinema cameras, multimedia projectors, broadcast equipment, micromotors, handy terminals and document scanners.

Sales by segment

Please refer to the table of sales by segment in Note 22 of the Notes to Consolidated Financial Statements.

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