Canon Annual Report 2018

CANON ANNUAL REPORT 2018
Fiscal Year Ended December 31, 2018

TA B L E OF CONTENTS
Strategy 1 Financial Highlights
2 To Our Shareholders
9 Business Strategy
Business Segment/ 18 At a Glance

Corporate Structure 20 Research & Development
22 Production
24 Sales & Marketing
26 ESG
Financial Section 34 Financial Overview
48 Ten-Year Financial Summary
50 Consolidated Balance Sheets
51 Consolidated Statements of Income
51 Consolidated Statements of
Comprehensive Income
52 Consolidated Statements of Equity
53 Consolidated Statements of Cash Flows
54 Notes to Consolidated Financial

Statements
90 Schedule II Valuation and

Qualifying Accounts Cover Photo:
Canon Medical’s 320-row
91 Management’s Report on Internal detector, Aquilion ONE™
Control Over Financial Reporting Achieves high-quality, wide-area, and high-
speed imaging with low radiation exposure.
92 Reports of Independent Registered Used widely for diagnosis of cerebral aneu-
Public Accounting Firm rysms and cancer.
Corporate Data 94 Transfer and Registrar’s Office
94 Shareholder Information
95 Major Consolidated Subsidiaries

F I N A N C IAL HIGHLIGHTS
Millions of yen Thousands of U.S. dollars

(except per share amounts) (except per share amounts)
2018 2017 Change (%) 2018
Net sales ¥ 3,951,937 ¥ 4,080,015 -3.1 $ 35,603,036

Operating profit 342,952 321,605 +6.6 3,089,658
Income before income taxes 362,892 353,884 +2.5 3,269,297
Net income attributable to Canon Inc. 252,755 241,923 +4.5 2,277,072
Net income attributable to Canon Inc.

shareholders per share:
—Basic ¥ 234.09 ¥ 222.88 +5.0 $ 2.11
—Diluted 234.08 222.88 +5.0 2.11
Total assets ¥ 4,899,465 ¥ 5,198,291 -5.7 $ 44,139,324
Canon Inc. shareholders’ equity ¥ 2,827,602 ¥ 2,870,630 -1.5 $ 25,473,892
Notes:
1. Canon’s consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles.
2. U.S. dollar amounts are translated from yen at the rate of JPY111=U.S.$1, the approximate exchange rate on the Tokyo Foreign Exchange Market as of December
28, 2018, solely for the convenience of the reader.
Net Sales (Billions of yen) Net Income Attributable to Canon Inc. (Billions of yen)
4,000 300
3,000
200
2,000
100
1,000
0 0
2014 2015 2016 2017 2018 2014 2015 2016 2017 2018
Net Income Attributable to Canon Inc. ROE/ROA (%)

Shareholders per Share (Yen)
300 10
200
6
4
100
0 0
2014 2015 2016 2017 2018 2014 2015 2016 2017 2018
Basic Diluted ROE ROA
CANON ANNUAL REPORT 2018 1

T O O U R SHAR EHOLDERS
FUJIO MITARAI
Chairman & CEO
Canon Inc.
Canon will further promote a grand strategic

transformation by accelerating reforms.
2 CANON ANNUAL REPORT 2018

BUSINESS SEGMENT/
STRATEGY FINANCIAL SECTION CORPORATE DATA
CORPORATE STRUCTURE
Performance in 2018
The global economy in 2018 was on a moderate recovery track for both interchangeable-lens digital cameras and digital
overall, including signs of a steady economic recovery in the compact cameras. Unit sales of inkjet printers decreased due
U.S., despite a serious rise in trade friction between the U.S. to a shrinking market for consumer products, despite solid
and China, as well as a slowdown in the Chinese economy. sales of large-format printers. In the Medical System Business
Against this backdrop, Canon strived to improve business Unit, sales increased due to an expansion of overseas demand,
performance through such measures as pursuing efficiency in mainly in emerging economies, despite restrained purchasing
all areas, ranging from R&D to production, sales and service, in Japan. In the Industry and Others Business Unit, although
based on our corporate portfolio that comprises new busi- sales slowed for flat panel display (“FPD”) lithography equip-
nesses—commercial printing, network cameras, medical and ment and OLED panel manufacturing equipment, unit sales
industrial equipment—and Canon’s traditional core businesses of semiconductor lithography equipment grew significantly.
including office equipment and cameras. Meanwhile, sales of network cameras enjoyed robust growth
With regard to conditions in each business, in the Office thanks to market expansion.
Business Unit, unit sales of office multifunction devices Consequently, consolidated net sales for 2018 decreased by
(“MFDs”) grew mainly for color models, largely due to such 3.1% year on year to ¥3,951.9 billion, and the gross profit ratio
factors as increased demand in emerging markets. As for was 46.4%. Operating profit increased by 6.6% year on year
laser printers, although hardware sales were strong, sales to ¥343.0 billion, while net income attributable to Canon Inc.
of consumables remained at the same level as the previous increased by 4.5% year on year to ¥252.8 billion. The full-year
year. In the Imaging System Business Unit, the digital camera dividend is ¥160 per share, comprising an interim dividend of
market continued to shrink, and sales declined significantly ¥80 per share and a year-end dividend of ¥80 per share.
Cash Dividend (Yen)
160
80
0
2010 2011 2012 2013 2014 2015 2016 2017 2018

Excellent Global Corporation Plan
Phase I Phase II Phase III Phase IV Phase V

1996–2000 2001–2005 2006–2010 2011–2015 2016–2020
To strengthen its finan- Aiming to become Canon moved ahead Responding to weak-
cial structure, Canon No. 1 in all major with such growth ness in the global
transformed its mindset business areas, strategies as enhancing economy, Canon revised
to a focus on total Canon focused on existing businesses and its management policy
optimization and profit- strengthening product expanding into new from a strategy target-
ability. The Company competitiveness along areas while also thor- ing expansion of scale
introduced various with the changing times oughly implementing to a strategy aimed at
business innovations, stepping up efforts to supply chain manage- further strengthening
including the selection digitalize its products. ment and IT reforms. its financial structure.
and consolidation of The Company also While actively pursu-
business areas, and conducted structural re- ing M&A activities, the
reform activities in such forms across all Canon Company restructured
areas as production and Group companies its business at a founda-
development. around the world. tional level to introduce
new growth engines for
future expansion.
Canon launched the Excellent Global to B2B. We subsequently reinforced and expanded our rap-
From
Corporation Plan in 1996, and has idly growing network camera business by making Milestone
Phase I to
Phase IV strengthened its management base Systems (“Milestone”) a subsidiary in 2014, followed by
1996–2015 through each of the plan’s five-year initia- Axis Communications (“Axis”) in 2015. Additionally, Canon
tives, from Phase I to Phase IV. Nanotechnologies, formerly Molecular Imprints, became a
During Phase I, we stressed thorough cash-flow manage- subsidiary in 2014, and we are accelerating the development
ment and significantly boosted productivity through the of next-generation semiconductor manufacturing equipment
introduction of our cell production system, along with other that uses nanoimprint lithography, which will make it pos-
measures. In Phase II, we stepped up efforts to digitalize our sible to achieve both miniaturization and cost reductions for
copying machines and camera offerings, while building the semiconductor devices.
foundation for a robust financial structure. During Phase III, As a manufacturer, Canon strives unceasingly to achieve
we actively carried out M&A activities, and welcomed Océ to production reforms and thorough cost reductions. At the
the Group in 2010, clearing the way for a move into the com- same time, we stay on top of opportunities to add excellent
mercial printing market, which has shown growth potential. companies to the Group, in order to shift our focus towards
As the markets for our core businesses—such as cameras changing growth markets, with the aim of unlocking new
and office equipment—were maturing, during Phase IV, growth potential.
which began in 2011, we promoted diversification via the
lateral expansion of our existing businesses—such as the
Cinema EOS System and commercial photo printers—while
also accelerating our M&A strategy. In this manner, we set
a clear direction for shifting our focus for growth from B2C

BUSINESS SEGMENT/
CORPORATE STRUCTURE
STRATEGIES
1 Establish a new production

system to achieve a
cost-of-sales ratio of 45%
KEY STRATEGIES
1
Establish a new production system to achieve a
cost-of-sales ratio of 45%
2
Reinforce and expand new businesses while
creating future businesses
3
Restructure our global sales network in
accordance with market changes
4
Enhance R&D capabilities through open
innovation
5
Complete the Three Regional Headquarters
management system capturing world dynamism Aiming to boost productivity through automated camera
production.
Under the Excellent Global Corporation In order to ensure the profit growth potential of our exist-
Phase V Plan’s Phase V, the most recent five-year ing businesses in maturing markets, we aim to achieve
2016–2020 a cost-of-sales ratio of 45% through ongoing efforts of
initiative that started in 2016, Canon is re-
expanding market share through the development of
sponding to the weakened growth potential Dantotsu products (unrivalled products with extraordinary
of the product portfolio that has supported features), and cost reduction initiatives beginning upstream
our development thus far under the basic policy of “embracing in the manufacturing process.
With regard to the development of Dantotsu products,
the challenge of new growth through a grand strategic trans-
we will accurately identify customer needs, and
formation.” In 2020, the final year of Phase V, Canon aims to incorporate the latest technologies, such as the cloud,
achieve net sales of ¥5 trillion, a cost-of-sales ratio of 45% or IoT, and AI, in order to introduce products that dominate
less, an operating profit ratio of 15% or more, a net income ratio the competition.
In order to reduce costs across the entire Canon Group,
of 10% or more and a shareholder’s equity ratio of 70% or more
we are making advances in assembly automation and
(based on exchange rates of US$1 = ¥125 and €1 = ¥135). robotization, promoting cost-efficient design starting at
In 2018, we worked to enhance our business performance by the development stage and pursuing in-house production
thoroughly improving efficiency in all areas, ranging from R&D to of machinery, equipment and key components. In-house
production is expected to yield such benefits as reduced
production, sales and service, based on our corporate portfolio
lead times, improved inventory levels and lower distribu-
that comprises new businesses—commercial printing, network
tion costs. Meanwhile, we will actively provide guidance
cameras, medical and industrial equipment—and Canon’s tradi- to our key suppliers on improving quality and cost in
tional core businesses including office equipment and cameras. order to minimize external costs. Furthermore, we will
Explanations regarding the progress of the key strategies of strive to create a new cost structure through the use of
common components and generic parts across several
Phase V, as well as our future course of action, are presented
business divisions.
as follows.

STRATEGIES STRATEGIES
2 Reinforce and expand new businesses

while creating future businesses
3 Restructure the global sales network in
accordance with market changes
The network camera market continues to expand. (Fukuoka, Japan) Canon China launched its own e-commerce site. The use of an
independent platform has enabled an analysis of customer trends in
greater detail.
Through M&A, Canon has established four new businesses Amid the dramatic changes in the purchasing behavior
and is laying a foundation to ensure their development as of customers that has accompanied the development of
future growth drivers. the internet, Canon is pursuing major reforms of sales
In the commercial printing business, we seek to build a channels at all four of its regional sales headquarters.
foundation for commercial printing centered on Océ, and Canon Marketing Japan is shifting from a product-
to establish a product system to handle high-variety, short- oriented organization to one with business units for
lot printing that realizes high image quality. In network each customer segment and a company-wide support
cameras, we will strive to enhance and expand related soft- structure. In the Americas, Canon U.S.A. is strengthen-
ware, while continuing to make inroads into a wide range ing partnerships with dealers based on a four-region
of fields including crime prevention and disaster monitor- management system. In Europe, the Middle East and
ing. The medical business will enhance sales performance Africa (“EMEA”), we have completed organizational
and the competitiveness of its products for diagnostic restructuring at our regional headquarters and have em-
equipment and explore the potential to expand operations barked upon reforms at sales companies in each country.
into additional fields. In the industrial equipment business, In addition, we are working to strengthen our business
Canon will accelerate development of next-generation in regions where future economic growth is expected
OLED panel manufacturing equipment and pursue devel- through such actions as establishing a local subsidiary in
opment of new types of industrial equipment. Saudi Arabia.
In addition, there is room for significant improvements Meanwhile, in Asia, Canon China has established its
in manufacturing costs within these new businesses. We own e-commerce site, an independent platform that en-
aim to bring these costs down through the establishment ables analysis of customer trends in greater detail.
of a new production system that will make possible a cost- In Australia, we are working together with Group
of-sales ratio of 45%. Each business will also implement companies on structural reforms.
thorough and strict standards for quality control that are
expected of B2B businesses.

BUSINESS SEGMENT/
CORPORATE STRUCTURE
STRATEGIES STRATEGIES
4 Enhance R&D capabilities

through open innovation
5 Complete the Three Regional
Headquarters management system
capturing world dynamism
The Research Frontiers Institute is a global research consortium led R&D on high-speed cut-sheet inkjet printers. (Océ, Netherlands)
by IBM. Canon provides young technicians to the institute to con-
duct R&D with a view to commercializing new technologies. (IBM
Research, Almaden Research Center, United States)
Canon is moving away from a policy of self-sufficiency With global headquarters in Japan, the United States and
and building an R&D system that actively utilizes external Europe, Canon aims to establish a system that promotes
technologies and expertise, through such measures as global development through diversification by leveraging
promoting joint and contract research with universities and the unique features of each region.
research institutions in Japan and abroad. In the United States, a country at the forefront of medi-
Meanwhile, as development grows increasingly competi- cal research, Canon U.S.A.’s Healthcare Optics Research
tive worldwide, we are revising the support system for our Laboratory is collaborating on research with Massachusetts
business divisions by limiting R&D to technologies deemed General Hospital and Brigham and Women’s Hospital. In
highly necessary for future success in order to promote the near future, we anticipate practical applications for an
faster, more efficient development. In addition, we remain ultra-miniature endoscope that enables real-time examina-
open to new M&A in all regions as we seek promising tion of such areas as the interiors of joints and paranasal
technologies that can be nurtured by Canon. cavities, as well as a guided needle insertion system that
assists with the insertion of needles in patients by guiding a
needle to a precise position and depth.
In Europe, our collaboration with Océ has enabled us
to develop UV curable flatbed printers capable of printing
on wood, metal, glass and other materials in addition to
paper. We have also recently entered the package printing
industry where we are pursuing technological innovation.

Key Challenges for 2019 In Conclusion
Canon views 2019 as a year of transformation, becom- With Japan entering a new era of its traditional calendar,
ing a company that achieves productivity on par with other 2019 will mark the start of a new age and a significant turn-
excellent global corporations in all areas, from R&D to pro- ing point for the country. Similarly, for Canon, we will enter
duction, sales and service. We will undertake the following a new era in which great change is required to obtain new
key challenges based on the theme, “Accelerating our grand growth potential in the face of evolving times.
strategic transformation through dramatic improvements in The global economy in 2019 is marked by concerns re-
productivity.” garding the growing impact of trade friction between the
The first challenge is to reinforce our existing businesses. United States and China. In order to respond swiftly to rapid
We will utilize such technologies as the cloud, IoT and AI changes in the business environment, chaotic political and
to advance the development of Dantotsu products that economic situations, dramatic advances in such technolo-
dominate the competition. We will also promote product gies as AI and also to create a strong corporate structure for
design that is suited to automation, thereby strengthening continued growth, Canon will work as one to forge a path
our assembly automation capabilities and pursue in-house toward further growth under Phase V of the Excellent Global
production of equipment and key components on a company- Corporation Plan.
wide basis. We look forward to your continued understanding
The second challenge is to strengthen and expand new and support.
businesses. We will accomplish this through concentrated in-
vestments in commercial printing, network cameras, medical
and industrial equipment, the four businesses Canon views as
the pillars to its future success.
The third challenge is to reform our R&D system to reflect
changes in industry and society. We will categorize devel-
opment themes into those related to the reinforcement of
existing businesses, those aimed at commercialization in the
near future and development for the mid to long term. We
will organize an appropriate framework for each in order to
improve development productivity. In addition, we will expand
and enhance our global search for startup companies pos-
sessing advanced technologies and new business models that
show promise for significant growth.
Fujio Mitarai
Chairman & CEO
Canon Inc.

BUSINESS
STRATEGY
E X IS T IN G B U S IN E S S 10
N E W B U S IN E S S 12
MEDICAL ...................... ...... 12
NETWORK CAMERAS ..... ...... 14
COMMERCIAL PRINTING ....... 16
INDUSTRIAL EQUIPMENT ..... 17

E X I S T I N G BUSINESS
We seek to further expand market share and

continually reinforce profitability

BUSINESS SEGMENT/
CORPORATE STRUCTURE
Multifunction Devices (“MFDs”) mount and realized even high image quality. We aim to keep
Sales of Office MFDs were driven by the imageRUNNER adding attractive new products to our camera lineup in order
ADVANCE Third Generation 2nd Edition series, which enables to maintain our leading market share and boost profitability.
compatibility with external cloud services, and the imageRUN-
NER C3020 series, which continued to perform strongly, Inkjet Printers
mainly in emerging markets. Amid demands from users for For inkjet printers, demand is growing for large-refillable ink
enhanced security due to growing risks of information leaks tank models in emerging markets, and sales were solid for
from IT equipment connected to networks, we will work to the imagePROGRAF TX series of large format inkjet printers,
expand sales by successively introducing new models that in- which are suitable for outputting CAD drawings and posters.
corporate industry-leading security features. For large-refillable ink tank models, we aim to grow faster than
the entire market, stepping up already active investment into
Laser Printers sales in emerging markets. In addition, at the end of 2018 we
In laser MFDs and laser printers, Canon introduced new prod- introduced the WG7000 series, Canon’s first A3 inkjet MFD
ucts that achieve low power consumption, compact body with an in-line printhead, and are aiming to cultivate new
designs, and high productivity. Going forward, we will focus users by targeting small and medium-sized businesses that pri-
on raising the proportion of sales attributable to medium- and oritize high-speed, low-cost, and high-volume printing.
high-speed models, where higher print volumes are expected,
while continuing to pursue sales promotional activities in co- Lithography Equipment
operation with our OEM partners, with the aim of improving Semiconductor devices are becoming increasingly diversified
overall profitability and further increasing our market share. as a result of the rapid spread of IoT and an increase in auto-
motive applications. In this environment, we aim to further
Cameras expand the market share of Canon’s semiconductor lithogra-
Canon maintained the global top share of the interchange- phy equipment by responding to the wide-ranging needs of
able-lens digital camera market thanks to the popularity of our customers. The television market has seen flat-screen tele-
new mirrorless camera models such as the EOS M50 (EOS visions spread, and is expected to demand expansion for large
Kiss M in Japan). In digital compact cameras, sales of the high-resolution panels. We aim to tap demand for higher
PowerShot G-series and other high-value-added products were definition by leveraging the strengths of our proprietary
brisk. Moreover, the full-frame EOS R mirrorless camera that single-shot exposure system with which our FPD lithography
went on sale in the second half of 2018 has newly adopted RF equipment can efficiently produce large panels.
A. W
hen used with our newly developed RF lenses, the Canon
EOS R mirrorless camera featuring a 35mm full-frame CMOS
sensor delivers high image quality and powers of expression.
B. O
ur MFDs are equipped with robust security features and
make working with documents a breeze. By connecting to
the cloud and other networks, they contribute to the im-
provement of productivity and the implementation of flexible
working styles. B

N E W B U SINESS — MEDICAL
Aiming to Expand Business Domains to Healthcare IT and

In-vitro Diagnostics, with a Core Focus on Diagnostic Imaging

BUSINESS SEGMENT/
CORPORATE STRUCTURE
Sustainable Growth Expected in the reconstruction technology, which was designed using deep
Healthcare Business learning. Installation of the leading-edge AI technology of AiCE
In 1940, shortly after its founding, Canon succeeded in develop- in a high-precision CT scanner and area detector CT refines
ing Japan’s first indirect X-ray camera, and has used its camera the scanner’s capabilities by maximizing the performance of its
and optical technologies, along with its image processing resolution capabilities, while achieving image reconstruction in
technologies to develop products such as digital radiography shorter times, and with lower radiation dosages.
equipment and ophthalmic equipment. Amid an increasing In addition, in 2018 we also commenced sales of the
global population and the graying of society, mainly in de- Vantage Orian, the first Canon brand MRI system. This prod-
veloped countries, in December 2016, we welcomed Canon uct provides a high-level response to advanced clinical needs
Medical Systems (“Canon Medical”) to the Group in order to through high-image-quality technology. At the same time,
advance our medical equipment business to the next stage. the Vantage Orian makes a significant contribution to hospital
Canon Medical, which holds the top market share in Japan and management through new technology that achieves major
the fourth highest share worldwide* in X-ray computed tomog- reductions in scanning time, and through its energy- and
raphy (“CT”) systems, provides diagnostic imaging equipment space-saving design. We are also working to achieve higher
including CT, magnetic resonance imaging (“MRI”) systems, performance, greater compactness, and lighter weight for our
diagnostic ultrasound systems, and diagnostic X-ray systems, as diagnostic ultrasound system, Aplio i-series, which covers a
well as in-vitro diagnostic systems and healthcare IT solutions, in wide range of clinical fields.
more than 150 countries and regions around the world. Meanwhile, Canon is also focusing on healthcare IT, which
Canon aims to expand its business domains to healthcare IT provides high-value-added medical information systems
and in-vitro diagnostics, with a core focus on diagnostic imaging. that consolidate and analyze vast amounts of data, includ-
* Based on in-house research ing medical images and patient information, and on in-vitro
diagnostics, which evaluate a patient’s health condition by an-
Actively Introducing New Canon Brand Products alyzing blood and other substances, and which is expected to
that Incorporate the Latest Technologies see a substantial growth in demand in the future. In addition,
Canon Medical focuses on initiatives using AI and IoT, in order to we will accelerate business expansion by leveraging the syner-
realize more efficient healthcare at optimal costs, and to provide gies between Canon and Canon Medical, based on our policy
high-value-added solutions that maximize patient outcomes. of cultivating the medical business as a third business pillar
As part of these efforts, Canon Medical led the world in de- following printing and cameras, including entry into business
veloping Advanced Intelligent Clear-IQ Engine image (“AiCE”) fields outside of the area of diagnostic equipment.
A. C
anon Medical’s next-generation 3-Tesla MRI scanner, the
Vantage Galan™ 3T, maximizes high-resolution imaging per-
formance while minimizing space requirements and energy
consumption. The device also employs noise-reduction tech-
nology to provide greater comfort to patients.
B. C
anon Medical’s Aplio™ i-series of diagnostic ultrasound
systems harness iBeam technology to send and receive
detailed and uniform ultrasound beams at all depths and
at high density. This technology delivers crystal-clear and
high-definition images with little noise. (National Cancer
Center, Japan) B

N E W B U SINESS — NETWORK CAMERAS
Aiming to be the Global Leader in

Network Visual Solutions

BUSINESS SEGMENT/
CORPORATE STRUCTURE
The Growing Network Camera Market Expanding and Strengthening the Solutions
Amid a rising awareness of security issues worldwide, the Business
shift from analog surveillance cameras to network cameras is The development of video analysis software harnessing AI
advancing. At the same time, as we quickly approach the IoT technology holds the key to future growth in the network
era in which everything connects to the Internet, the network camera market.
camera market is exhibiting dramatic growth and changes, Canon has commercialized video analysis software that
highlighted by the fact that the recordings captured by net- can count the number of people in a video, deduce personal
work cameras are not only used for security purposes, but attributes (gender and age), and apply silhouettes to moving
also beginning to be utilized in the areas of manufacturing people in order to protect their privacy. Furthermore, in 2018
and marketing. Canon welcomed to the Group Israel-based BriefCam, which
Canon expanded its network camera business to solutions develops and markets video analysis software using video
market in 2013, based on technologies cultivated in camera synopsis technology. BriefCam’s Video Synopsis® technology,
development. It then welcomed to the Group Sweden-based which enables reviewing several hours of recorded video in
Axis, which boasts around 90,000 partners worldwide, and a few minutes, is used by law enforcement agencies, public
Denmark-based Milestone, a global leader in video manage- transportation organizations, healthcare and educational in-
ment software, in order to establish a structure through which stitutions, and major corporations in more than 40 countries
Canon can expand its network camera business in a compre- and regions around the world.
hensive way. By incorporating high-quality, high-resolution video from
With the market still developing, Canon’s network camera network cameras into image analysis software to analyze
business continued to perform strongly in 2018. Axis tapped the movement of people and objects, there is potential
demand to further boost sales, while Canon launched sales of for this technology to be utilized in a wide range of solu-
the ME20F-SHN, an ultra-high-sensitivity network camera that tions business, for example, the monitoring of sports events
uses their proprietary CMOS sensor technology to capture or production sites, or marketing at commercial facilities.
images clearly even at night or in darkness. Wide-angle and Through collaboration with the new Group Companies,
telephotographic monitoring even in an environment with Axis, Milestone, and BriefCam, Canon aims to become a
low-illumination is made possible with the ME20F-SHN be- global leader in the field of network visual solutions by fusing
cause it can incorporate a variety of EF lenses used in Canon’s cutting-edge technologies such as imaging, network image
single-lens reflex cameras. processing, video management, and video synopsis.
A. F ukuoka City Subway assures transportation of over 160 mil-

lion people every year. Canon’s network cameras are installed
in various locations, including above ticket gates and train
platforms. They not only help provide safer and more secure
transportation services, but also contribute to improving op-
erational efficiency by facilitating the optimal deployment of
station personnel according to the ever-changing congestion
on platforms and stairwells.
B. B
riefCam’s software allows users to search by color, size, and
other attributes of the condensed video recordings created,
making it possible to efficiently extract target objects. B

N E W B U SINESS — COMMERCIAL PRINTING
The Océ ProStream 1000 continuous-feed color printer for the graphic arts market can print on offset coated paper thanks to Oce’s newly developed
ink set and ColorGrip technology. (Océ, Germany)
Expanding Business Areas in the Commercial Printing Market,

which is Experiencing Solid Growth due to Digitalization
Commercial Printing Market Entering a Expanding Beyond Commercial Printing to

Period of Major Change Enter Industrial Printing Domain
The adoption of digital printing is gaining traction in the com- In 2010, Canon welcomed Océ, a Netherlands-based com-
mercial printing market for printed materials, including books, pany that has gained tremendous support in the commercial
newspapers and magazines, sales promotion materials such as printing field in Europe and the Americas, to the Group,
catalogs and flyers, as well as itemized statements, invoices, thereby expanding the Group’s digital printing potential in all
and direct mail. This means, unlike traditional offset printing, areas of commercial printing, including continuous-feed, cut-
data can be printed immediately without the use of printing sheet, and wide-format printing.
plates. Subsequently, customers are increasingly requesting Going forward, in addition to building a foundation for the
short-run production, quick turnaround and variable-data commercial printing business with Océ at its core, we aim to
printing (where content is changed for each print). In the develop the technology capable of printing with high-image
commercial printing industry in particular, demand for digital quality for a broad range of media, underpinned by a rock-
printing is growing in the graphic arts market owing to the solid product framework. Also as you can see from the launch
need for high-quality printing of premium quality catalogs, of our first industrial-scale digital label press, Océ LabelStream
posters, and other items. 4000 series in 2018, we are now having our sights set on en-
tering the enormous industrial printing domain as well.

N E W B U SINESS — INDUSTRIAL EQUIPMENT
Canon Tokki produces OLED panel manufacturing equipment with unrivalled and high-level technologies, including vacuum evaporation technology for
depositing organic materials onto panel substrates in a vacuum and automated supply lines for glass substrates. Canon Tokki continues to be the indus-
try leader with an overwhelming market share.
Supporting Cutting-Edge Manufacturing of the IoT Era with

Canon Industrial Equipment
Semiconductor Devices and FPDs Enter the conventional method of using light to engrave circuit
a New Period of Growth patterns has reached its technological limit. The Canon
The advent of the IoT era has resulted in an ever-increasing Group has therefore developed nanoimprint lithography
demand for semiconductor devices owing to video streaming, technology, in which patterns are formed based on the basic
data centers, 5G communication, AI/deep learning, and auto- principle of pressing a mask (mold) engraved with circuit
mated driving moving into full swing. Demand is also expected patterns onto the surface of a wafer coated with resin. Using
to increase for OLED panels for foldable smartphones, high- this innovative technology we expect to significantly reduce
definition large televisions, and other applications. In response costs by simplifying the manufacturing process and hope to
to these market conditions, the Canon Group’s industrial equip- lower chip defect rates thanks to the etching of extremely
ment supports leading-edge manufacturing in a wide range of sharp circuit patterns. Furthermore, while Canon Tokki
fields, including semiconductors and electronic devices. leads the world in OLED panel manufacturing equipment,
boasting unrivalled technology for the vacuum evapora-
Developing Next-Generation Manufacturing tion equipment used to deposit organic material onto panel
Equipment with Innovative Proprietary substrates and automated supply lines for glass substrates,
Technology we will pursue even greater equipment productivity, and
The miniaturization of circuit patterns has improved semi- accelerate the development of next-generation OLED panel
conductor chip performance. However, it is now said that manufacturing equipment.

AT A G L A NCE
OFFICE BUSINESS UNIT Composition of Sales (%)
45.7%
Main Products
Office multifunction devices (MFDs) Laser multifunction printers (MFPs) • Office multifunction devices (MFDs)
• Laser multifunction printers (MFPs)
• Laser printers
• Digital continuous feed presses
• Digital sheet-fed presses
• Wide-format printers
• Document solutions
Digital sheet-fed presses (Inkjet) Digital sheet-fed presses (Electrophotographic)
IMAGING SYSTEM BUSINESS UNIT Composition of Sales (%)
25.5%
Interchangeable-lens digital cameras Interchangeable-lens digital cameras Main Products

—Mirrorless cameras —Digital SLR cameras • Interchangeable-lens digital cameras
• Digital compact cameras
• Digital camcorders
• Digital cinema cameras
• Interchangeable lenses
• Compact photo printers
• Inkjet printers
• Large format inkjet printers
• Commercial photo printers
• Image scanners
• Multimedia projectors
Inkjet printers Large format inkjet printers
• Broadcast equipment
• Calculators

BUSINESS SEGMENT/
CORPORATE STRUCTURE
Composition of Sales (%)

MEDICAL SYSTEM BUSINESS UNIT
11.1%
Main Products
• Diagnostic X-ray systems Computed tomography (CT) systems Diagnostic X-ray systems
• Computed tomography (CT)
systems
• Magnetic resonance imaging (MRI)
systems
• Diagnostic ultrasound systems
• Clinical chemistry analyzers
• Digital radiography systems
• Ophthalmic equipment
Diagnostic ultrasound systems Digital radiography systems
Composition of Sales (%)

INDUSTRY AND OTHERS BUSINESS UNIT
20.4%
Main Products Semiconductor lithography equipment FPD (Flat panel display) lithography equipment
• Semiconductor lithography
equipment
• FPD (Flat panel display) lithography
equipment
• Vacuum thin-film deposition
equipment
• Organic LED (OLED) panel
manufacturing equipment
• Die bonders
• Micromotors
• Network cameras
Organic LED (OLED) panel manufacturing equipment Network cameras
• Handy terminals
• Document scanners
Note: The percentage figures for the four business units presented in the pie charts above do not add up to 100% because “Eliminations,” recorded in consolidation accounting, were not in-
cluded in calculation considerations.

R E S E A R CH & DEVELOPM ENT
2018 Top Ten U.S. Patent Holders by Company
IBM* 9,100
Samsung Electronics 5,850
CANON 3,056
Intel 2,735
LG Electronics 2,474
Taiwan Semiconductor
Manufacturing 2,465
Microsoft 2,353
Qualcomm 2,300 *IBM is an abbreviation for International

Business Machines Corporation.
Apple 2,160 Source:

Preliminary data released by IFI CLAIMS
Patent Services, a U.S. research company
Ford 2,123 specialized in patent information
B
A. An international rugby union match was projected live in 8K resolution at Canon’s headquarters. The impressive vision made it feel like one was
watching the game in the stadium. B. Our newly developed ceramic material for 3D printers has the potential for application in a broad range of fields,
including industrial equipment and healthcare.

BUSINESS SEGMENT/
CORPORATE STRUCTURE
Canon is engaged in efforts to discover new technologies

that will help create future businesses
R&D Expenses and Patents of people’s lives.

Canon is bolstering R&D activities to enable the ongoing de- New imaging solutions
velopment of innovative products and services. In 2018, R&D We are working on the development of a Free Viewpoint
expenses amounted to ¥315.8 billion, and the ratio of R&D Video System, as an imaging solution that utilizes the imag-
expenses to net sales was 8.0%. This focus on R&D activities ing technology Canon has cultivated over many years. Images
has cemented Canon’s high status in the field of intellectual taken by multiple high-resolution cameras placed around a
property. In 2018, Canon was granted 3,056 patents in the stadium are processed in real time by an image processing
United States, ranking it third in the world and the top ranked computer system that renders them into high-resolution 3D
Japanese company for a fourteenth consecutive year. spatial data. This not only allows viewers to view images from
various angles and viewpoints, but also produces a realistic,
Initiatives to Establish New Businesses immersive viewing experience, giving viewers a sense that
Canon has a long-term perspective as it concentrates its ef- they are really there. Canon is also working to provide high-
forts on discovering new technologies for the future. resolution, immersive images using 8K cameras, with the aim
Diagnostic imaging support of creating new ways to enjoy sports and entertainment.
Canon is utilizing image processing and AI in its efforts to In addition, we are developing a wide-area security system
develop technologies that will help doctors make a diag- using software that makes it possible to detect and track a
nosis. Currently, we are working on joint R&D with Kyoto specific person from multiple camera images using Canon’s
University Hospital to support the diagnosis of lung nodules network cameras, and that utilizes AI to count people with
in CT images. By using a large database of cases and machine high accuracy, even in situations where many people are to-
learning, the software we developed are able to infer a spe- gether in a crowded space.
cific disease type and present the supporting evidence for the Materials research
suspected nodules that appear in lung CT images. We aim To improve the competitiveness of Canon products, we un-
to improve the quality of healthcare through our support for dertake research into the materials used in such areas as ink
medical diagnosis. colorant and coloring powders. With our inkjet printer ink,
Visual inspection technologies we have additionally succeeded in commercializing a magenta
In the past, Canon has successfully worked to develop a dye that enhances image quality. We have also developed
technology that utilizes AI to learn the normal appearance a technology for the highly accurate 3D printing of parts
of parts and detect abnormalities automatically. Now, we are with complex geometries, using Canon’s proprietary ceramic
using this technology further, to develop a technology that material. Canon continues to research and develop high
automatically detects cracks in infrastructure. By using AI to value-added materials in order to generate various differenti-
detect cracks, etc. in high-resolution images of infrastructure ated products of its own.
taken by cameras equipped with Canon’s CMOS sensors, this
technology increases the accuracy and efficiency of inspec-
tions, and is expected to contribute to the safety and security

P R O D U C TION
B C
A. Production of components for inkjet printers. We seek to raise the bar in the manufacturing of high-quality products while striving to improve pro-
duction efficiency. (Canon Hi-Tech (Thailand), Thailand) B. Master craftsmen, who hand down skills that are indispensable to Canon’s manufacturing
ethos. C. At Japan’s National Skills Competition in 2018, our technicians submitted an entry in the precision instrument assembling category. Canon has
collected prizes at this competition for fourteen successive years since 2005.

BUSINESS SEGMENT/
CORPORATE STRUCTURE
Canon aims to establish a new production system that

achieves a cost-of-sales ratio of 45% through the evolution of
our manufacturing capabilities
Globally Optimized Production Human Resources for Manufacturing

Canon employs a globally optimized production system in Canon conducts human resource training to nurture the skills
which we determine ideal production locations based on such of employees at our production sites worldwide. Our programs
factors as costs, taxes, logistics, ease of parts procurement, teach manufacturing techniques and craftsmanship and train
and labor. Our aim is to leverage the strengths of each region. employees with leadership potential in Canon management
In Japan, we are expanding production through automation, methods. Young technicians test their abilities by competing
while in the United States and Europe, we are promoting the in Japan’s National Skills Competition, where they cultivate a
localized production of consumables and other products. In spirit of challenge that is reflected in our manufacturing.
emerging countries, we are boosting productivity by honing To encourage advancement in manufacturing engineering,
our employees’ skills. This production method of Canon has Canon honors our most skilled technicians by awarding them
been expanded to include companies such as Océ and Canon the title of Master Craftsman, while those who contribute to
Medical, that joined the Group in recent years. Canon production through their skills and knowledge of as-
sembly and component processing earn the title of Meister.
Automation and In-house Production These technicians are the vanguard of Canon’s production
Seeking to create innovative and original products, Canon is improvement and play the important role of passing on their
actively pursuing in-house production of key devices and com- expertise to the next generation.
ponents such as CMOS sensors, manufacturing equipment
such as automated assembly machines and high-precision Initiatives for Environmentally Friendly
processing machines, as well as molding dies. To produce Manufacturing and Enhanced Product Quality
high-quality products at efficient costs, we strive to maintain From product design and development to production, logistics,
highly reliable automated production lines. We have been product use, and recycling, throughout the product’s lifecycle in
introducing fully automated production lines for toner car- all areas of our business, Canon is engaged in manufacturing ini-
tridges, and are currently pursuing full automation for the tiatives that are friendly to the global environment and minimize
manufacturing of cameras. At Oita Canon, our primary cam- environmental impact.
era plant, we are working to fully automate digital camera In addition, in order to ensure that our products are safe, can
production through the establishment of the Techno Wing be enjoyed with peace of mind, and provide satisfaction to our
R&D facility that combines Canon’s manufacturing and prod- customers, we at Canon have established a quality management
uct technologies. system that incorporates mechanisms unique to Canon on top of
At Miyazaki Canon, the construction of a new digital cam- ISO9001 requirements. We have realized an adequate quality as-
era plant is progressing, with operations due to commence surance system which sufficiently responds to laws and regulations
in August 2019. By utilizing the automation technology culti- of countries and regions around the world, and thoroughly imple-
vated at Oita Canon, Miyazaki Canon will pursue even greater ment operations. We drive quality improvement on an ongoing
efficiency as an “ideal factory.” basis, while constantly carrying out strict evaluations using cutting-
edge testing facilities that are at the forefront of the industry.

S A L E S & MAR KETING
B C
A. Canon’s display at PhotoPlus 2018, the largest photography and imaging exhibition in North America that showcases all of the latest products
and services in the industry. B. The first Canon Business Imaging Solutions Lounge in India. Visitors can try out various B2B products such as MFDs,
scanners, and projectors. C. Canon opened a Customer Experience Centre in Switzerland, showing our entire business portfolio, in particular, our com-
mercial printing products and services.

BUSINESS SEGMENT/
CORPORATE STRUCTURE
Accelerating growth in commercial printing, network cameras,

medical and industrial equipment as key drivers of
Canon’s next-generation business
Japan Middle East, Canon Saudi Arabia was launched to support grow-
Sales in Japan amounted to ¥869.6 billion, or 22.0% of consoli- ing demand in the region for business solutions. In September,
dated net sales. Sales in the IT solutions business increased due Canon Europe used Photokina 2018 as an important platform to
to strong IT investment by domestic companies, in response to engage with consumer and professional audiences and enable
workstyle reforms and labor shortages. Meanwhile, investment them to get hands on with the EOS R system.
in business equipment was weak, and MFPs and other hardware
declined. In the security business, sales of network cameras Asia and Oceania
and software, etc. continued to grow. In addition, regarding Sales in the Asia and Oceania region amounted to ¥990.5 billion,
products for consumers, although sales of mirrorless cameras or 25.1% of consolidated net sales. In the B2C field, we bolstered
increased significantly, sales of digital single lens reflex (“DSLR”) marketing by strengthening e-commerce, and expanded our mar-
cameras and inkjet printers decreased due to market shrinkage. ket share. Meanwhile, in the B2B field, we strengthened sales and
branding for MFDs and commercial printers, and promoted the
The Americas expansion of B2B business within the region. In particular, we intro-
Sales in the Americas amounted to ¥1,076.4 billion, or 27.2% duced strategic products exclusively for Asia, in order to enhance
of consolidated net sales. In recent years, Canon has promoted sales capabilities and branding for MFDs in the area. We are force-
a shift to digital marketing, including improving the convenience fully promoting business expansion in Asia as a whole, led by India,
of e-commerce based on customer-oriented marketing activities, which is experiencing remarkable growth. Furthermore, we partici-
and enhancing after-marketing efficiency. In office equipment, we pated in the China International Import Expo, which was held for
are continuing to implement the regional management system the first time in 2018, where we presented a wide range of prod-
that was introduced last year, which organizes activities in the U.S. ucts and solutions in areas such as business and healthcare. We are
into four regions. We held a nationwide summit for U.S. dealers, currently expanding our market share in the B2B field in China. In
and forged even stronger relationships with our top dealers. In Oceania, Canon has strengthened its B2B business through M&A.
addition, in order to accelerate new, original businesses by sales Composition of Sales by Region
companies, we have established an organizational structure to
promote innovation and are strengthening R&D. Canon is moving Asia and Oceania The Americas
ahead with the cultivation of new businesses. 25.1% 27.2%
¥990.5 billion ¥1,076.4 billion
Europe (Europe, Middle East, Africa)

Sales in Europe amounted to ¥1,015.4 billion, or 25.7% of con- Net Sales
¥3,951.9
solidated net sales. In line with its strategy to drive an ever-deeper billion
customer-centric approach, Canon Europe opened two Customer
Experience Centres in 2018 — in Switzerland and France — giv-
Japan Europe
ing customers new opportunities to interact with Canon people,
22.0% 25.7%
products and solutions. Highlighting Canon’s commitment to the ¥869.6 billion ¥1,015.4 billion

ESG
Environment Social
E S
G
Governance
In recent years, the ethical role of corporations has increased with the ideals laid out in the Sustainable Development Goals
in importance amid wide-ranging societal expectations and (“SDGs”) adopted by the United Nations in 2015. As members
responsibilities. Canon adopted kyosei as its corporate phi- of society, high expectations are being placed on corporations.
losophy in 1988, and since then we have worked to fulfill our Accordingly, we will contribute to society by leveraging our
responsibilities to society and build solid relationships not only technological capabilities to create new value, resolve social
with our customers and business partners, but also with coun- issues, and engage in activities to preserve and protect the
tries, communities, nature, and the global environment. The global environment, while continuing to be a company that
approach we take with our corporate philosophy harmonizes always gives due consideration to people and society.
Environment: Social: Governance:
Canon’s Approach Canon’s Approach Canon’s Approach

Based on the Canon Environmental Canon makes sincere efforts to engage Canon maintains sound corporate gov-
Vision, Canon is working to reduce envi- in corporate social responsibilities, in- ernance as part of efforts to maximize its
ronmental burden throughout the entire cluding product safety, human rights, shareholders’ value and become a truly
product lifecycle, from procurement of labor management, and accountable excellent global corporation.
raw materials and parts to collection procurement activities. In addition, as
and recycling of used products, in an a good corporate citizen, we promote
effort to realize a society that promotes efforts such as disaster relief and sup-
both enriched lifestyles and the global port for culture, and also work to resolve
environment. social issues through our technology and
business activities.
Key Activities Key Activities Key Activities

• Contributing to a Low-Carbon Society • Promoting Diversity • Board of Directors, Audit & Supervisory
• Contributing to a Circular Economy • Addressing the Issue of Conflict Board, Non-statutory Committees
• Eliminating Hazardous Substances and Minerals • Constructive Dialogue with
Preventing Pollution • Supporting Art and Culture Shareholders
• Contributing to a Society in Harmony
with Nature
For details, please refer to the Canon Sustainability Report. https://global.canon/en/csr/report/index.html

BUSINESS SEGMENT/
CORPORATE STRUCTURE
Environment
The Canon Eco Technology Park (Ibaraki Prefecture, Japan) was opened in 2018 as a hub for the Canon Group’s environmental activities.
Canon has been working for the improvement activities with and those used in manufacturing processes to prevent envi-
the goal of “achieving an average improvement of 3% per ronmental pollution and adverse effects on people’s health.
year in the lifecycle CO2 emissions improvement index per With regard to chemical substances in products, in particular,
product,” and, over the period from 2008 to 2018, achieved we have built a Group-wide environmental assurance system
an average annual improvement of 5%. As of 2018, the over- and established in-house standards that are in line with the
all improvement was 37.7%, compared to 2008. most stringent regulations in the world.
Contributing to a Low-Carbon Society Contributing to a Society in Harmony with

Canon tracks CO2 emissions throughout the product lifecycle Nature
(materials and parts manufactured by supplier, activities at op- Canon engages in various activities worldwide based on
erational sites, distribution, and customer use) and works to our Biodiversity Policy, and promotes the Canon Bird Branch
reduce emissions at each stage. Project as a symbol of these activities. This project comprises
activities at our sites that focus on birds. We promote this
Contributing to a Circular Economy project across the entire Canon Group in an effort to conserve
To ensure more efficient use of limited resources and reduce and protect biodiversity.
waste, Canon is making products smaller and lighter, and
reusing and recycling materials as much as possible. In par-
ticular, we are pursuing product-to-product recycling—in
Lifecycle CO2 Emissions Improvement Index per Product
other words, recycling used products into new ones. Canon
Improvement index
has established five reuse and recycling centers in four regions 100
around the world. With the aim of achieving more advanced
37.7%
and efficient recycling, we opened the Canon Eco Technology Improvement
Park, a reuse and recycling plant equipped with a state-of-the-

50
art automated recycling line.
Eliminating Hazardous Substances and

Preventing Pollution
0
Canon thoroughly manages chemical substances in products 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
*Indexed to 2008=100

Social
An interactive exhibit organized by the NCPCP and Canon using the high-resolution facsimiles of the Pine Trees (Shorin-zu byobu by Hasegawa Tohaku, one
of Japan’s national treasures). We aim to provide the public with more opportunities to view cultural assets and experience them on a more personal level.
Diversity Promotion
Under our corporate philosophy of kyosei, Canon respects Art and Culture
diversity globally and actively encourages the fair hiring and As a company that contributes to the development of visual
promotion of employees, regardless of gender, age, or dis- culture, Canon engages in activities to foster the richness of
ability. In 2012, Canon established Vital workforce and Value human feelings and emotions. In 2007, Canon and the Kyoto
Innovation through Diversity (“VIVID”), a company-wide hori- Culture Association (“NPO”) launched the Tsuzuri Project,
zontally integrated organization to promote diversity, and in which is officially named the Cultural Heritage Inheritance
2018, the President’s Meeting on Diversity Promotion was held Project, with the aim of preserving original cultural assets and
for 24 Group companies in Japan. In addition to promoting utilizing high-resolution facsimiles. By combining Canon’s
the active participation of female employees, which has been advanced digital technologies, ranging from input to image
our focus thus far, we have expanded the target to include processing and output, with skills from Kyoto’s traditional
utilization of more diverse human resources, including sexual craft techniques, we have produced and presented high-reso-
minorities such as the lesbian, gay, bisexual, and transgender lution facsimiles of important Japanese cultural assets passed
(“LGBT”) community, veteran employees, and persons with down from ancient times, including folding screens, fusuma
disabilities. (Japanese sliding doors), and handscrolls. As of March 2019,
Canon has presented 38 facsimiles of artworks.
Socially Responsible Procurement and In 2018, Canon and the National Center for the Promotion
Conflict Minerals of Cultural Properties (“NCPCP”), part of the National
Against the backdrop of increasingly global supply chains, a Institutes for Cultural Heritage, launched a joint project on the
number of social issues relating to human rights and environ- creation of high-resolution facsimiles of important Japanese
mental protection have been identified. In response, Canon works of art using the technologies employed by the Tsuzuri
formulated the Canon Supplier CSR Guidelines to promote Project as well as research and testing to develop new applica-
socially responsible procurement in partnership with suppli- tions for such technology.
ers. To address the issues of conflict minerals in Africa, Canon Canon is working to support Para-sports through photography
conducts a Reasonable Country of Origin Inquiry every year, as a Tokyo 2020 Gold Partner (Still Camera & Desktop Printer), by
receives an independent assurance report from a third-party providing various supports such as sponsoring a graphic maga-
auditor, and discloses its findings to the U.S. Securities and zine that introduces Para-sports to the public and taking photos
Exchange Commission. of Para-sports athletes for a school educational material.

BUSINESS SEGMENT/
CORPORATE STRUCTURE
Governance
At a monthly company-wide meeting of executive officers, the CEO provides updates on earnings progress and important matters to implement in the fu-
ture as a way to share crucial information.
Fundamental Policy Board of Directors

In order to establish a sound corporate governance structure While the focus of the organizational structure of the Board
and continuously raise corporate value, the Company believes of Directors is on Representative Directors that oversee com-
that it is essential to improve management transparency and pany-wide business strategies or execution such as the CEO,
strengthen management supervising functions. At the same COO, CFO, CTO, and Representative Directors or Executive
time, a sense of ethics and mission held by each executive and Directors that oversee multiple business fields or headquarters
employee of a company is very important in order to achieve functions, in order to secure sound management, an ad-
continuous corporate growth and development. Details of equate number of at least two or more Independent Outside
Canon Inc.’s corporate governance structure are available Directors are appointed. The Board of Directors, in accordance
on the Company’s website under “an overview of Corporate with laws and regulations, makes important decisions and su-
Governance at Canon Inc.” pervises the execution of duties by officers.
(https://global.canon/en/ir/strategies/governance.html). Except for the above, the CEO and other Representative
Directors are active in decision making and execution, and
Governance Structure under the command and supervision of the Representative
Fundamental Policy Directors, Executive Officers that are elected through resolu-
The Company is globally expanding its businesses in various tion of the Board of Directors make decisions and execute
business fields, including office equipment, consumer prod- operations of each business field or function.
ucts, medical equipment, and industrial equipment, and aims The Board of Directors consists of six members, four
to aggressively expand into new business fields in the future. Representative Directors from inside the Company and two
In order to make prompt decisions in each business field, and Outside Directors that qualify as Independent Directors.
make important decisions for the entire Canon Group or mat- Additionally, at a meeting of the Board of Directors held on
ters that straddle several business fields from a company-wide January 30, 2019, 40 individuals, including two females and
perspective and at the same time secure appropriate decision one non-Japanese, were elected as Executive Officers that
making and execution of operation, the Company judges the assumed this position from April 1, 2019.
corporate governance structure below to be effective. * Independent directors: Stock exchanges in Japan require listed companies to appoint out-
side directors and/or outside Audit & Supervisory Board members and to report their name.
Outside directors and Audit & Supervisory Board members should have no possible conflict
of interests with regular shareholders. People related to the parent company or major busi-
ness partners, consultants who receive large remunerations from the company, and their
close relatives cannot be selected as independent directors.

Governance
Audit & Supervisory Board property of the Company and its subsidiaries. In this way, the
As a body which is in charge of the audit of operations, Audit & Supervisory Board conducts strict audits of directors’
under the principles of autonomy, which is independent execution of duty, including the status of development of the
from the Board of Directors, the Company has full-time internal control system.
Audit & Supervisory Board Members that are familiar with Procedures in the Nomination of Directors etc.
the Company’s businesses or its management structure, and The Company established the “Nomination and
Independent Outside Audit & Supervisory Board Members Remuneration Advisory Committee,” a non-statutory com-
that have extensive knowledge in specialized areas such as mittee, which consists of the CEO, two Independent Outside
law, finance and accounting, and internal control. The Audit Directors, and one Independent Outside Audit & Supervisory
& Supervisory Board, which is composed of these individuals, Board Member. At the time, Director and Audit & Supervisory
cooperates with the Company’s accounting auditors and in- Board Member candidates are nominated and Executive
ternal audit division, oversees the status of duty execution of Officers are appointed (includes the selection of a successor
operations and corporate assets to secure the soundness for the chief executive officer position), the CEO recommends
of management. candidates thereof from among individuals that have been
The Audit & Supervisory Board consists of five individuals, recognized as having met the prescribed requirements, and
three of which are Independent Outside Audit & Supervisory the Committee checks the fairness and validity of such rec-
Board Members. In accordance with auditing policies and ommendation prior to submission to and deliberation by the
plans decided at Audit & Supervisory Board meetings, Board of Directors.
the Audit & Supervisory Board Members attend Board of Additionally, as for Audit & Supervisory Board Member
Directors’ meetings, and other important gatherings such candidates, prior to deliberation of the Board of Directors,
as Corporate Strategy Committee meetings. They are also consent of the Audit & Supervisory Board shall be acquired.
able to listen to reports from directors and employees, re- Corporate Strategy Committee, Risk Management
view documents related to important decisions, and conduct Committee, and Disclosure Committee
audits by investigating etc. the situation of businesses and The Company established the Corporate Strategy Committee,
Directors and Audit & Supervisory Board Members (as of April 1, 2019)
Representative Director Representative Director Directors

Chairman & CEO Executive Vice President & CTO & Kunitaro Saida (Outside)
Fujio Mitarai In charge of Office Business
Attorney
Toshio Homma
Representative Director Chief Executive of Office Imaging Products Haruhiko Kato (Outside)
President & COO Operations President & CEO
Masaya Maeda of Japan Securities Depository Center,
Incorporated
Representative Director
Executive Vice President & CFO Audit & Supervisory Board Members
Toshizo Tanaka Masaaki Nakamura
Group Executive of Finance & Accounting Headquarters Hiroaki Sato
Group Executive of Public Affairs Headquarters Yutaka Tanaka (Outside)
Group Executive of Facilities Management Headquarters
Hiroshi Yoshida (Outside)
Koichi Kashimoto (Outside)
Note: Although this annual report is for FY2018, the above list of Directors and Audit & Supervisory Board members is as of April 1, 2019.

BUSINESS SEGMENT/
CORPORATE STRUCTURE
consisting of Representative Directors and some Executive with improving systems to ensure reliability of financial re-
Officers. Among items to be decided by the CEO, the porting; the Compliance Subcommittee, which is tasked with
Committee undertakes prior deliberations on important mat- promoting corporate ethics and improving legal compliance
ters pertaining to Canon Group strategies. Outside Directors systems; and the Business Risk Management Subcommittee,
and Audit & Supervisory Board members attend Corporate which is charged with improving systems to manage overall
Strategy Committee meetings and are able to express their business risks, including risks related to product quality and in-
own opinions. formation leak. The Risk Management Committee verifies the
Based on a resolution passed by the Board of Directors, risk management system’s improvement and implementation
Canon set up the Risk Management Committee, which and reports the status to the CEO and the Board of Directors.
formulates policy and action proposals regarding improve- In addition, the Disclosure Committee was established to
ment of the Canon Group risk management system. The undertake deliberations pertaining to information disclosure,
Risk Management Committee consists of three entities: the including content and timing, to ensure important corporate
Financial Risk Management Subcommittee, which is tasked information will be disclosed in a timely and accurate manner.
Governance Structure (as of April 1, 2019)
General Meeting of Shareholders

Elect/Dismiss Elect/Dismiss Elect/Dismiss
Audit
Board of Directors Audit & Supervisory Board
6 Members Consult Nomination and Remuneration 5 Members
(Includes 2 Independent Members) Advisory Committee (Includes 3 Independent Members)
Report (CEO, two Independent Outside Directors,
Elect/Dismiss and one Independent Outside
Report Audit & Supervisory Board Member) Audit Cooperation
Approve/Supervise
Consult Accounting Auditor

Representative Directors
Corporate Strategy Committee (Audit Firm)
CEO and others
Representative Directors and
Executive Officers with direct control of
an organizational division
Cooperation
Risk Management Committee

Report Report Report
Financial Risk Management
Subcommittee
Cooperation
Report Compliance Subcommittee Financial
Instruct/Order
Approve/Supervise Business Risk Management Cooperation Audit
Subcommittee
Report
Disclosure Committee
Corporate Audit Center
Internal Audit Report
Executive Officers, and each General Manager

Governance
Internal Audit Division of Corporate Governance at Canon Inc.”

The Corporate Audit Center, the Company’s internal audit- As for the opinions or demands that are obtained through
ing arm, as an independent and specialized organization and dialogue with shareholders, accordingly, the department in
in accordance with internal audit rules, conducts audits and charge reports to the CFO and the CFO will report important
evaluations and provides guidance on such matters as compli- ones to the CEO or the Board of Directors.
ance with laws and the internal control system. Furthermore, Controlling Insider Information
audits of particular themes such as quality, the environ- The Company has set the “Rules on Prevention of Insider
ment, and information security are conducted mainly by the Trading,” which makes thorough control of undisclosed
Corporate Audit Center in cooperation with each division in material information and provides the procedure of infor-
charge. Additionally, based on top management policy, for all mation disclosure.
work processes, audits must be conducted from a specialized
viewpoint and there are plans to increase the number of its
members from the current 80 to strengthen auditing functions
by enabling audits from a specialized viewpoint in each theme.
Constructive Dialogue with Shareholders

Policy
For sustainable growth and to help improve corporate value
over a mid- to long-term perspective, the Company has con-
structive dialogue with shareholders through an ordinary
general meeting of shareholders, corporate strategy confer-
ences, financial results conferences, and interviews with major
institutional investors.
The Structure to Promote Dialogue
Finance & accounting (Investor Relations (“IR”)), legal affairs,
corporate communications are responsible for working to-
gether and promoting dialogue. The Executive Vice President
& CFO oversees the entire structure to promote dialogue.
For analysts and institutional investors, the CEO hosts a
corporate strategy conference at the beginning of the year.
Other than this, the CFO hosts quarterly financial results
conferences. For individual investors, conferences are held
when appropriate and on the Company’s official website,
specific pages containing information about corporate strat-
egy, financial results, and financial data etc. have been set up
using descriptions that are easy to understand. Additionally,
the Company works for dialog with domestic and overseas
analysts and institutional investors, arranging interview oppor-
tunities appropriately. For detail, please refer to “an Overview

F I N A N C IAL SECTION
TABLE OF CONTENTS
34 Financial Overview
48 Ten-Year Financial Summary
50 Consolidated Balance Sheets
51 Consolidated Statements of Income
51 Consolidated Statements of
Comprehensive Income
52 Consolidated Statements of Equity
53 Consolidated Statements of Cash Flows
54 Notes to Consolidated
Financial Statements
90 Schedule II Valuation and

Qualifying Accounts
91 Management’s Report on Internal

Control Over Financial Reporting
92 Reports of Independent Registered

Public Accounting Firm

F I N A N C IAL OVER VIEW
GENERAL Summary of operations

The following discussion and analysis provides information During 2018, unit sales of office MFDs increased compared with
that management believes to be relevant to understanding the previous year due to the expanded sales of color models,
Canon’s consolidated financial condition and results of opera- mainly outside of Japan. Additionally, unit sales of both mono-
tions. References in this discussion to the “Company” are to chrome and color laser printers increased compared with the
Canon Inc. and, unless otherwise indicated, references to the previous year, supported by the steady sales of newly launched
financial condition or operating results of “Canon” refer to models. Total sales volume of interchangeable-lens digital camer-
Canon Inc. and its consolidated subsidiaries. as decreased compared with the previous year due to contraction
of the market mainly for entry-class models. However, sales of
OVERVIEW mirrorless cameras increased. Looking at inkjet printers, although
Canon is one of the world’s leading manufacturers of office sales unit of refillable ink tank models increased in emerging
multifunction devices (“MFDs”), plain paper copying machines, markets, unit sales overall decreased compared with the previous
laser printers, cameras, inkjet printers, medical equipment, year, due to decreasing demand in developed economies. For
semiconductor lithography equipment and flat-panel-display medical equipment, newly launched diagnostic ultrasound sys-
(“FPD”) lithography equipment. Canon earns revenues primarily tems and Magnetic resonance imaging (“MRI”) systems experi-
from the manufacture and sale of these products domestically enced solid demand, mainly outside of Japan, achieving increased
and internationally. Canon’s basic management policy is to sales compared with the previous year. For industrial equipment,
contribute to the prosperity and well-being of the world while sales of semiconductor lithography equipment increased sig-
endeavoring to become a truly excellent global corporate group nificantly compared with the previous year, thanks to favorable
targeting continued growth and development. market conditions. However, manufacturing equipment for OLED
Canon divides its businesses into four segments: the Office panels decreased compared with the previous year mainly due
Business Unit, the Imaging System Business Unit, the Medical to a slowdown in investment in OLED panels. Sales of network
System Business Unit which was newly established in 2017, cameras increased steadily in response to the growing market.
and the Industry and Others Business Unit. Under these conditions, net sales for the year decreased by 3.1%
year on year to ¥3,951,937 million. In addition, the gross profit
Economic environment ratio dropped by 2.4 points to 46.4%. This was mainly due to
Looking back at the global economy in 2018, the U.S. econ- the fact that certain costs that were recorded under operating
omy steadily recovered as corporate earnings and employ- expenses in the prior years have been reclassified to cost of sales
ment conditions improved. In Europe, while domestic demand in 2018, following the adoption of new accounting standards
remained firm, the rate of growth decelerated due to sluggish related to revenue recognitions as described in Note 15 of the
export growth. In China, the economy slowed down due to Notes to Consolidated Financial Statements. The reclassified
sluggish capital investments and a decline in consumer spend- amount for the year ended December 31, 2018 was ¥115,700
ing. The economies of other emerging markets also worsened, million. Excluding the impact of this reclassification, the gross
due to such factors as local currency depreciation. In Japan, profit ratio increased by 0.6 points to 49.4%. Operating expenses
the economy recovered moderately supported by continu- decreased by 10.6% year on year to ¥1,492,602 million, thanks
ing improvements in employment conditions. As a result, the to Group-wide efforts to thoroughly manage expenses as well as
global economy overall continued to realize a moderate re- impairment loss on goodwill of commercial printing business dur-
covery. However, the pace of economic growth slowed down ing the previous year in addition to the impact of the aforemen-
from the latter half of the year as a result of trade friction. tioned reclassification of figures related to the adoption of new
accounting standards. As a result, operating profit increased by
Market environment 6.6% to ¥342,952 million. Other income (deductions) decreased
As for the markets in which Canon operates amid these condi- by ¥12,339 million, mainly due to gain on securities contributed
tions, office MFDs and laser printers enjoyed solid demand due to to the retirement benefit trust during the previous year, while
the shift from monochrome to color models and robust demand income before income taxes increased by 2.5% year on year
in emerging markets. The decline of the camera market contin- to ¥362,892 million and net income attributable to Canon Inc.
ued and the market for inkjet printers was slightly below the level increased by 4.5% to ¥252,755 million.
of the previous year. On the other hand, demand for medical Total assets decreased by ¥298,826 million to ¥4,899,465
equipment grew moderately. Within the Industry and Others sec- million at December 31, 2018, compared to the end of previous
tor, capital investment in semiconductor lithography equipment year, mainly due to the decrease of cash and cash equivalents.
increased, while capital investment in organic light-emitting diode Total liabilities decreased by ¥220,564 million to ¥1,881,552
(“OLED”) panel manufacturing equipment faced a temporary million at December 31, 2018, compared to the end of previ-
slowdown. Demand for network cameras enjoyed solid growth. ous year, mainly due to the repayment of the long-term debt.
The average value of the yen during the year was ¥110.43 Total equity decreased by ¥78,262 million to ¥3,017,913 million
against the U.S. dollar, a year-on-year appreciation of ap- at December 31, 2018, compared to the end of previous year,
proximately ¥2, and ¥130.29 against the euro, a year-on-year mainly due to the increase of accumulated other comprehensive
depreciation of approximately ¥4. loss resulting from the appreciation of yen.

BUSINESS SEGMENT/
CORPORATE STRUCTURE
Key performance indicators markets. Canon believes such investments will create the basis
The following are the key performance indicators (“KPIs”) that for future success in its business and operations.
Canon uses in managing its business. The changes from year to
year in these KPIs are set forth in the table below. Cash flow management
Canon also places significant emphasis on cash flow manage-
Net sales and profit ratio ment. The following are the KPIs relating to cash flow man-
As Canon pursues the goal to become a truly excellent global agement that Canon’s management believes to be important.
company, one indicator upon which Canon’s management places Inventory turnover measured in days is a KPI because it mea-
strong emphasis is revenue. The following are some of the KPIs sures the efficiency of supply chain management. Inventories
related to revenue that management considers to be important. have inherent risks of becoming obsolete, physically damaged or
Net sales is one such KPI. Canon derives net sales primarily from otherwise decreasing significantly in value, which may adversely
the sale of products and, to a lesser extent, provision of services affect Canon’s operating results. To mitigate these risks, manage-
associated with its products. Sales vary depending on such factors ment believes that it is crucial to continue reducing work-in-pro-
as product demand, the number and size of transactions within cess inventories by decreasing production lead times in order to
the reporting period, market acceptance for new products, and promptly recover related product expenses, while balancing risks
changes in sales prices. Other factors involved are market share of supply chain disruptions by optimizing finished goods invento-
and market environment. In addition, management considers the ries in order to avoid losing potential sales opportunities.
evaluation of net sales by segment to be important for the pur- The debt to total assets ratio is also one of the KPIs. For a
pose of assessing Canon’s sales performance in various segments, manufacturing company like Canon, it generally takes consider-
taking into account recent market trends. able time to realize profit from a business due to lead times re-
Gross profit ratio (ratio of gross profit to net sales) is another KPI quired for R&D, manufacturing and sales has to be followed for
for Canon. Through its reforms of product development, Canon success. Therefore, management believes that it is important to
has been striving to shorten product development lead times in or- have sufficient financial strength. Canon will continue to reduce
der to launch new, competitively priced products at a faster pace. its dependency on external funds for capital investments in fa-
Furthermore, Canon has further achieved cost reductions through vor of generating the necessary funds from its own operations.
enhancement of efficiency in its production. Canon believes that Canon Inc. shareholders’ equity to total assets ratio is another
these achievements have contributed to improving Canon’s gross KPI for Canon. Canon believes that its shareholders’ equity to
profit ratio, and will continue pursuing the curtailment of product total assets ratio measures its long-term sustainability. Canon
development lead times and reductions of production costs. also believes that achieving a high or rising shareholders’ equity
Operating profit ratio (ratio of operating profit to net sales), ratio indicates that Canon has maintained a strong financial po-
income before income taxes ratio (ratio of income before in- sition or further improved its ability to fund debt obligations and
come taxes to net sales), and R&D expense to net sales ratio are other unexpected expenses. In the long-term, Canon’s man-
considered to be KPIs by Canon. Canon is focusing on two ar- agement believes a high shareholders’ equity ratio will enable
eas for improvement. Canon is striving to control and reduce its the company to maintain a high level of stable investments for
selling, general and administrative expenses as its first key point. its future operations and development. As Canon puts strong
Secondly, Canon’s R&D policy is designed to maintain adequate emphasis on its R&D activities, management believes that it is
spending in core technology to sustain Canon’s leading position important to maintain a stable financial base and, accordingly, a
in its current business areas and to exploit opportunities in other high level of its shareholders’ equity to total assets ratio.
KEY PERFORMANCE INDICATORS

2018 2017 2016 2015 2014
Net sales (Millions of yen) 3,951,937 4,080,015 3,401,487 3,800,271 3,727,252
Gross profit to net sales ratio 46.4% 48.8% 49.2% 50.8% 49.9%
R&D expense to net sales ratio 8.0% 8.2% 9.0% 8.8% 8.4%
Operating profit to net sales ratio 8.7% 7.9% 6.4% 9.0% 9.3%
Income before income taxes to net sales ratio 9.2% 8.7% 7.2% 9.1% 10.3%
Inventory turnover measured in days 56 days 49 days 59 days 47 days 50 days
Debt to total assets ratio 8.2% 10.2% 11.9% 0.0% 0.0%
Canon Inc. shareholders’ equity to total assets ratio 57.7% 55.2% 54.2% 67.0% 66.8%
Notes: 1. Inventory turnover measured in days is determined by: Inventory divided by net sales for the previous six months, multiplied by 182.5. The increase of
inventory turnover in 2016 was primarily due to the acquisition of Canon Medical Systems Corporation (“CMSC”) on December 19, 2016. If this factor
were excluded, the inventory turnover would show 50 days.
2. 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, 2016, 2015, and 2014 respectively.

FINANCIAL OVERVIEW
CRITICAL ACCOUNTING POLICIES AND ESTIMATES contracts are not within the acceptable range then the revenue
The consolidated financial statements are prepared in accor- is subject to allocation based on the estimated standalone sell-
dance with U.S. generally accepted accounting principles (“U.S. ing prices. Canon recognizes the incremental costs of obtaining
GAAP”) and based on the selection and application of signifi- a contract as an expense when related office products are sold.
cant accounting policies which require management to make Canon also provides leasing arrangement to the customers
significant estimates and assumptions. These estimates and primarily for the sales of office products. Approximately 4%
assumptions include future market conditions, net sales growth of total revenue is generated from these leasing arrangements
rate, gross margin and discount rate. Though Canon believes for the year ended December 31, 2018. Revenue from the sale
that the estimates and assumptions are reasonable, actual of these products under sales-type leases is recognized at the
future results may differ from these estimates and assumptions. inception of the lease. Interest income on sales-type leases and
Canon believes that the following are the more critical judg- direct-financing leases is recognized over the life of each re-
ment areas in the application of its accounting policies that spective lease using the interest method. Leases not qualifying
currently affect its financial condition and results of operations. as sales-type leases or direct-financing leases are accounted for
as operating leases and related revenue is recognized ratably
Revenue recognition over the lease term. When product leases are bundled with
Canon generates revenue principally through the sale of office, maintenance contracts, revenue is allocated based upon the
imaging system and medical system products, industrial equip- estimated standalone selling prices of the lease and non-lease
ment, supplies and related services under separate contractual components. Lease components generally include product,
arrangements. Revenue is recognized when, or as, control of financing and executory costs, while non-lease components
promised goods or services transfers to customers in an amount generally consist of maintenance contracts and supplies.
that reflects the consideration to which Canon expects to be The transaction prices that Canon is entitled to receive in
entitled in exchange for transferring these goods or services. exchange for transferring goods or services to the customer
Revenue from sales of office products, such as office MFDs include certain forms of variable consideration, including
and laser printers, and imaging system products, such as product discounts, customer promotions and volume-based
digital cameras and inkjet printers, is recognized upon ship- rebates mainly for imaging system products, which are sold
ment or delivery, depending upon when the customer obtains predominantly through distributors and retailers. Canon
controls of these products. includes estimated amounts in the transaction price only to
Revenue from sales of equipment that are sold with customer the extent it is probable that a significant reversal of cumula-
acceptance provisions related to their functionality including opti- tive revenue recognized will not occur when the uncertainty
cal equipment such as semiconductor lithography equipment and associated with the variable consideration is resolved. Variable
FPD lithography equipment, and certain medical equipment such considerations are estimated based upon historical trends and
as Computed tomography (“CT”) systems and MRI systems, is other known factors at the time of sale, and are subsequently
recognized when the equipment is installed at the customer site adjusted in each period based on current information. In ad-
and the agreed-upon specifications are objectively satisfied. dition, Canon may provide a right of return on our products
Most of Canon’s service revenue is generated from office for a short time period after a sale. These rights are accounted
and medical system products which is recognized over time. for as variable consideration when determining the transaction
For the service contracts of office products, the customer typi- price, and accordingly Canon recognizes revenue based on the
cally pays a variable amount based on usage, a stated fixed fee estimated amount to which Canon expects to be entitled after
or a stated base fee plus a variable amount which frequently considering expected returns.
include the provision of consumables as well as break fix ac- Taxes collected from customers and remitted to governmen-
tivities. The majority portion of service revenue from the office tal authorities are excluded from revenues in the consolidated
products is recognized as billed since invoiced amount directly statements of income.
correlates with the value to the customer of the underlying
performance obligation to date. For the service contracts of Allowance for doubtful receivables
medical system products, the customer typically pays a stated Allowance for doubtful receivables is determined using a com-
fixed fee for the stand ready maintenance service and revenue bination of factors to ensure that Canon’s trade and financing
is recognized ratably over the contract period. receivables are not overstated due to uncollectibility. These
The majority of service arrangements for office products are factors include the length of time receivables are past due, the
executed in combination with related products. Transaction credit quality of customers, macroeconomic conditions and
prices for products and services need to be allocated to each historical experience. Also, Canon records specific reserves for
performance obligation on a relative standalone selling price ba- individual accounts when Canon becomes aware of a cus-
sis where significant judgements are required. Canon estimates tomer’s inability to meet its financial obligations to Canon, due
the standalone selling price using a range of prices that would for example to bankruptcy filings or deterioration in the cus-
meet the allocation objective based on all the information that tomer’s operating results or financial position. If circumstances
is reasonably available including market conditions and other related to customers change, estimates of the recoverability of
observable inputs. If transaction prices of the product or service receivables are further adjusted.

BUSINESS SEGMENT/
CORPORATE STRUCTURE
Valuation of inventories reporting unit. Fair value of a reporting unit is determined primar-
Inventories are stated at the lower of cost or net realizable ily based on the discounted cash flow analysis which involves esti-
value. Cost is determined by the average method for domes- mates of projected future cash flows and discount rates. Estimates
tic inventories and principally the first-in, first-out method of projected future cash flows are primarily based on Canon’s
for overseas inventories. Net realizable value is the estimated forecast of future growth rates. Estimates of discount rates are
selling price in the ordinary course of business less the esti- determined based on the weighted average cost of capital, which
mated costs of completion and the estimated costs necessary considers primarily market and industry data as well as specific risk
to make a sale. Canon routinely reviews its inventories for factors. Canon has completed its impairment test in the fourth
their salability and for indications of obsolescence to deter- quarter of 2018. The fair values of all reporting units exceeded its
mine if inventories should be written-down to market value. respective carrying amount, and thus no impairment charge was
Judgments and estimates must be made and used in con- recognized as a result of 2018 impairment test. However, with
nection with establishing such allowances in any accounting regard to goodwill attributed to commercial printing business in-
period. In estimating the net realizable value of its inventories, cluded in Office Business Unit for which the impairment charge of
Canon considers the age of the inventories and the likelihood ¥33,912 million was recognized for the year ended December 31,
of spoilage or changes in market demand for its inventories. 2017, and goodwill attributed to Medical System Business Unit
and network camera business included in Industry and Others
Impairment of long-lived assets Business Unit were resulted from recent acquisitions, fair values in
Long-lived assets, such as property, plant and equipment, and excess of reported carrying values as a percentage are lower than
acquired intangibles subject to amortization, are reviewed for other reporting units. As a result, a future reduction in cash flows
impairment whenever events or changes in circumstances indi- of the related business, could trigger an impairment. The goodwill
cate that the carrying amount of an asset may not be recover- related to these reporting units are ¥28,066 million, ¥500,896
able. If the carrying amount of the asset exceeds its estimated million and ¥211,598 million, respectively. Intangible assets with
undiscounted future cash flows, an impairment charge is recog- finite useful lives consist primarily of software, trademarks, patents
nized in the amount by which the carrying amount of the asset and developed technology, license fees and customer relation-
exceeds the fair value of the asset. Determining the fair value of ships, which are amortized using the straight-line method. The
the asset involves the use of estimates and assumptions. estimated useful lives of software are from 3 years to 7 years,
trademarks are 15 years, patents and developed technology are
Property, plant and equipment from 7 years to 17 years, license fees are 7 years, and customer
Property, plant and equipment are stated at cost. Depreciation relationships are from 11 years to 15 years, respectively.
is calculated principally by the declining-balance method,
except for certain assets which are depreciated by the straight- Income tax uncertainties
line method over the estimated useful lives of the assets. Canon considers many factors when evaluating and estimat-
ing income tax uncertainties. These factors include an evalu-
Business combinations ation of the technical merits of the tax positions as well as
The acquisition is accounted for using the acquisition method the amounts and probabilities of the outcomes that could be
of accounting. The acquisition method of accounting requires realized upon settlement. The actual resolutions of those un-
the identification and measurement of all acquired tangible and certainties will inevitably differ from those estimates, and such
intangible assets and assumed liabilities at their respective fair val- differences may be material to the financial statements.
ues, as of the acquisition date. The determination of the fair value
of net assets acquired involves significant judgment and esti- Valuation of deferred tax assets
mates, such as future cash flow projections, appropriate discount Canon currently has significant deferred tax assets, which
and capitalization rates and other estimates based on available are subject to periodic recoverability assessments. Realization
market information. Estimates of future cash flows are based of Canon’s deferred tax assets is principally dependent upon
on a number of factors including operating results, known and its achievement of projected future taxable income. Canon’s
anticipated trends, as well as market and economic conditions. judgments regarding future profitability may change due to
future market conditions, its ability to continue to successfully
Goodwill and other intangible assets execute its operating restructuring activities and other factors.
Goodwill and other intangible assets with indefinite useful lives Any changes in these factors may require possible recognition
are not amortized, but are instead tested for impairment annually of significant valuation allowances to reduce the net carrying
in the fourth quarter of each year, or more frequently if indica- value of these deferred tax asset balances. When Canon de-
tors of potential impairment exist. All goodwill is assigned to the termines that certain deferred tax assets may not be recover-
reporting unit or units that benefit from the synergies arising from able, the amounts, which may not be realized, are charged to
each business combination. If the carrying amount assigned to the income tax expense and will adversely affect net income.
reporting unit exceeds the fair value of the reporting unit, Canon
recognizes an impairment charge in an amount equal to that Employee retirement and severance benefit plans
excess, limited to the total amount of goodwill allocated to that Canon has significant employee retirement and severance

FINANCIAL OVERVIEW
benefit obligations that are recognized based on actuarial pension benefit obligations which, in turn, could lead to an
valuations. Inherent in these valuations are key assumptions, increase in service cost and amortization cost through amortiza-
including discount rates and expected return on plan assets. tion of actuarial gain or loss, a decrease in interest cost, and vice
Management must consider current market conditions, includ- versa. For 2018, a decrease of 50 basis points in the discount
ing changes in interest rates, in selecting these assumptions. rate increases the projected benefit obligation by approximately
Other assumptions include assumed rate of increase in com- ¥94,366 million. The net effect of changes in the discount rate,
pensation levels, mortality rate, and withdrawal rate. Changes as well as the net effect of other changes in actuarial assump-
in assumptions inherent in the valuation are reasonably likely tions and experience, is deferred until subsequent periods.
to occur from period to period. Actual results that differ from Decreases in expected returns on plan assets may increase net
the assumptions are accumulated and amortized over future periodic benefit cost by decreasing the expected return amounts,
periods and, therefore, generally affect future pension expens- while differences between expected value and actual fair value
es. While management believes that the assumptions used are of those assets could affect pension expense in the following
appropriate, the differences may affect employee retirement years, and vice versa. For 2018, a change of 50 basis points
and severance benefit costs in the future. in the expected long-term rate of return on plan assets would
In preparing its financial statements for 2018, Canon estimat- cause a change of approximately ¥4,657 million in net periodic
ed a weighted-average discount rate used to determine benefit benefit cost. Canon multiplies management’s expected long-
obligations of 0.6% for Japanese plans and 2.4% for foreign term rate of return on plan assets by the value of its plan assets
plans and a weighted-average expected long-term rate of to arrive at the expected return on plan assets that is included in
return on plan assets of 2.9% for Japanese plans and 4.4% for pension expense. Canon defers recognition of the difference be-
foreign plans. In estimating the discount rate, Canon uses avail- tween this expected return on plan assets and the actual return
able information about rates of return on high-quality fixed-in- on plan assets. The net deferral affects future pension expense.
come government and corporate bonds currently available and Canon recognizes the funded status (i.e., the difference
expected to be available during the period to the maturity of between the fair value of plan assets and the projected benefit
the pension benefits. Canon establishes the expected long-term obligations) of its pension plans in its consolidated balance
rate of return on plan assets based on management’s expecta- sheets, with a corresponding adjustment to accumulated other
tions of the long-term return of the various plan asset catego- comprehensive income (loss), net of tax.
ries in which it invests. Management develops expectations with
respect to each plan asset category based on actual historical Recently Issued Accounting Guidance
returns and its current expectations for future returns. Please refer to Note 1 of the Notes to Consolidated
Decreases in discount rates lead to increases in actuarial Financial Statements.
CONSOLIDATED RESULTS OF OPERATIONS

SUMMARY OF OPERATIONS
Millions of yen
2018 change 2017 change 2016
Net sales 3,951,937 -3.1% 4,080,015 +19.9% 3,401,487
Products and Equipment 3,194,724 -9.3% 3,521,156 +17.9% 2,986,188
Services 757,213 +35.5% 558,859 +34.6% 415,299
Operating profit 342,952 +6.6% 321,605 +48.6% 216,425
Income before income taxes 362,892 +2.5% 353,884 +44.6% 244,651
Net income attributable to Canon Inc. 252,755 +4.5% 241,923 +60.6% 150,650
Note: See note to KEY PERFORMANCE INDICATORS
Return on Sales (%)
9
Sales
In the current business term, the world economy seemingly
mounted a gradual recovery on the whole, yet decelerated in
the latter half largely due to adverse effects of trade friction. 6
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
3
2018 totaled ¥3,951,937 million, a decrease of 3.1% from
the previous year largely due to adverse effect of a shrinking
market. The adoption of the new revenue standard required
the reconsideration of the scope of performance obligations 0
related to service contracts, which has resulted in a change in 2014 2015 2016 2017 2018

BUSINESS SEGMENT/
CORPORATE STRUCTURE
classification of revenues between the products and service Gross profit

revenues. As a result, net sales of products and equipment Canon’s gross profit in 2018 decreased by 7.8% to ¥1,835,554
totaled ¥3,194,724 million, a year-on-year decrease of 9.3%, million from 2017. The gross profit ratio also dropped by 2.4
while net sales of services totaled ¥757,213 million, a year-on- points to 46.4%. This was mainly due to the fact that certain
year increase of 35.5%. For further information, please refer costs that were under operating expenses have been reclassified
to Note 15 of the Notes to Consolidated Financial Statements. under cost of sales following the adoption of new accounting
Overseas operations are significant to Canon’s operating standards related to revenue recognitions as described in Note
results and generated 78.0% of total net sales in 2018. Such 15 of the Notes to Consolidated Financial Statements. The
sales are denominated in the applicable local currency and are reclassified amount for the year ended December 31, 2018 was
subject to fluctuations in the value of the yen relative to those ¥115,700 million. Excluding the impact of this reclassification,
currencies. Despite efforts to reduce the impact of currency the gross profit ratio increased by 0.6 points to 49.4%.
fluctuations on operating results, including localization of
manufacturing in some regions along with procuring parts and Operating expenses
materials from overseas suppliers, Canon believes such fluc- The major components of operating expenses are payroll, R&D,
tuations have had and will continue to have a significant effect advertising expenses and other marketing expenses. Operating
on its results of operations. expenses decreased by 10.6% year on year to ¥1,492,602
The average value of the yen during the year was ¥110.43 million, thanks to Group-wide efforts to thoroughly manage
against the U.S. dollar, a year-on-year appreciation of ap- expenses as well as impairment loss on goodwill of commercial
proximately ¥2, and ¥130.29 against the euro, a year-on-year printing business during the previous year in addition to the
depreciation of approximately ¥4. The effects of foreign impact of the aforementioned reclassification of figures related
exchange rate fluctuations positively affected net sales by to the adoption of new accounting standards.
approximately ¥1,024 million in 2018. This favorable impact
consisted of approximately ¥17,800 million of unfavorable Operating profit
impact for the U.S. dollar denominated sales and favorable Operating profit in 2018 increased by 6.6% from 2017 to a
impact of ¥22,534 million for the euro denominated sales, total of ¥342,952 million. The ratio of operating profit to net
and unfavorable impact of ¥3,710 million for other foreign sales increased by 0.8 points to 8.7% from 2017.
currency denominated sales.
Other income (deductions)
Cost of sales Other income (deductions) for 2018 was ¥19,940 million, a
Cost of sales principally reflects the cost of raw materials, parts decrease of ¥12,339 million from 2017 mainly due to gain on
and labor used by Canon in the manufacture of its products. securities contributed to the retirement benefit trust during
A portion of the raw materials used by Canon is imported or the previous year.
includes imported materials. Many of these raw materials are
subject to fluctuations in world market prices accompanied by Income before income taxes
fluctuations in foreign exchange rates that may affect Canon’s Income before income taxes in 2018 was ¥362,892 million, an
cost of sales. Other components of cost of sales include increase of 2.5% from 2017, and constituted 9.2% of net sales.
depreciation expenses, maintenance expenses, light and fuel
expenses, and rent expenses. The ratios of cost of sales to net
sales for 2018 and 2017 were 53.6% and 51.2%, respectively.
Sales by Segment
Sales(Billions
by Segment
of yen) (Billions of yen) Sales by Geographic
Sales byArea
Geographic
(Billions of Area
yen) (Billions of yen)
5,000 5,000 5,000 5,000
4,000 4,000 4,000 4,000
3,000 3,000 3,000 3,000
2,000 2,000
Office Business Unit
Office Business Unit 2,000 2,000
Imaging System Imaging System
Business Unit Business Unit Japan Japan
1,000 1,000
Medical System Medical System 1,000 1,000 Americas Americas
Business Unit Business Unit
Europe Europe
0 0 Industry and Others
Industry and Others
Business Unit Business Unit Asia and Oceania Asia and Oceania
0 0
2014 2015 2016
2014 2017
2015 2016
2018 2017 Eliminations
2018 Eliminations 2014 2015 2014
2016 2015
2017 2016
2018 2017 2018

FINANCIAL OVERVIEW
Income taxes for the business unit of ¥1,807,301 million, a year-on-year

Income taxes in 2018 decreased by ¥1,874 million from 2017. increase of 0.1%, while income before income taxes increased
The effective tax rate for 2018 was 26.5%, which was lower by 17.3% year on year to ¥229,187 million partly due to im-
than the statutory tax rate in Japan. This was mainly due to the pairment loss on goodwill during the previous year.
tax credit for R&D expenses. Within the Imaging System Business Unit, although unit
sales of interchangeable-lens digital cameras decreased over-
Net income attributable to Canon Inc. all compared with the previous year due to shrinking market,
As a result, net income attributable to Canon Inc. in 2018 in- Canon maintained the top share of the overall interchangeable-
creased by 4.5% to ¥252,755 million, which represents 6.4% lens digital cameras market, mainly in key countries in Europe
of net sales. and the Americas as well as in Japan and China. In mirrorless
cameras, sales were strong for such new models as the EOS
Segment information R, Canon’s first mirrorless camera equipped with a full-frame
Canon divides its businesses into four segments: the Office sensor, and the entry-class EOS Kiss M. As for digital compact
Business Unit, the Imaging System Business Unit, the Medical cameras, although unit sales decreased compared with the
System Business Unit which was newly established in 2017, previous year amid the shrinking market, sales of such high-
and the Industry and Others Business Unit. value-added models as the PowerShot G-series enjoyed solid
The Office Business Unit mainly includes Office MFDs / Laser demand. For inkjet printers, unit sales of refillable ink tank mod-
MFPs / Laser printers / Digital continuous feed presses / Digital els increased significantly in emerging markets. However, unit
sheet-fed presses / Wide-format printers / Document solutions sales decreased overall compared with the previous year, mainly
The Imaging System Business Unit mainly includes due to the shrinking market in developed economies. For large
Interchangeable-lens digital cameras / Digital compact cameras format inkjet printers, the imagePROGRAF TX series, which is
/ Digital camcorders / Digital cinema cameras / Interchangeable suitable for outputting CAD drawings and poster designs, gar-
lenses / Compact photo printers / Inkjet printers / Large format nered high praise from the market and enjoyed solid sales. As a
inkjet printers / Commercial photo printers / Image scanners / result, sales for the business unit decreased by 11.3% year on
Multimedia projectors / Broadcast equipment / Calculators year to ¥1,008,165 million, while income before income taxes
The Medical System Business Unit mainly includes Digital decreased by 31.1% year on year to ¥121,254 million.
radiography systems / Diagnostic X-ray systems / CT systems / Within the Medical System Business Unit, sales increased due
MRI systems / Diagnostic ultrasound systems / Clinical chemis- to such newly launched products as the Alphenix-series of next-
try analyzers / Ophthalmic equipment generation diagnostic X-ray systems and the Vantage Orian, a
The Industry and Others Business Unit mainly includes high-image-quality MRI system incorporating leading-edge tech-
Semiconductor lithography equipment / FPD (Flat panel dis- nology. As a result, sales for the business unit increased by 0.3%
play) lithography equipment / Vacuum thin-film deposition year on year to ¥437,578 million, while income before income
equipment / Organic LED (OLED) panel manufacturing equip- taxes increased by 31.0% year on year to ¥29,479 million.
ment / Die bonders / Micromotors / Network cameras / Handy In the Industry and Others Business Unit, unit sales of
terminals / Document scanners semiconductor lithography equipment increased from the
previous year due to increasing demand for memory devices
Sales by segment used in data centers. However, for FPD lithography equipment
Within the Office Business Unit, unit sales of office MFDs and OLED panel manufacturing equipment, sales decreased
increased from the previous year, thanks to expanded sales of compared with the previous year mainly due to a temporary
such color models as the imageRUNNER ADVANCE Gen3 2nd slowdown in investment in OLED panels. As for network cam-
Edition series, which enhances convenience through compat- eras, Axis enjoyed solid sales amid increasing market demand.
ibility with external cloud services, and the imageRUNNER Consequently, sales for the business unit increased by 1.6%
C3020 series of strategic models for emerging markets. As for year on year to ¥805,211 million, while income before income
laser printers, sales of hardware increased from the previous taxes increased by 60.7% year on year to ¥67,607 million.
year, supported by steady sales mainly of new models that Intersegment sales of ¥106,318 million are eliminated
achieve low power consumption, compact body designs and from total sales for the four segments, and are described as
high productivity. Sales of consumables remained at the same “Eliminations”.
level as the previous year. These factors resulted in total sales

BUSINESS SEGMENT/
CORPORATE STRUCTURE
SALES BY SEGMENT
Millions of yen
Office 1,807,301 +0.1% 1,804,782 +3.4% 1,745,996
Imaging System 1,008,165 -11.3% 1,136,188 +3.7% 1,095,289
Medical System 437,578 +0.3% 436,187 — —
Industry and Others 805,211 +1.6% 792,850 +22.6% 646,483
Eliminations (106,318) — (89,992) — (86,281)
Total 3,951,937 -3.1% 4,080,015 +19.9% 3,401,487
SALES BY GEOGRAPHIC AREA

Millions of yen
Japan 869,577 -1.7% 884,828 +25.2% 706,979

Americas 1,076,402 -2.8% 1,107,515 +14.9% 963,544
Europe 1,015,428 -1.3% 1,028,415 +12.6% 913,523
Asia and Oceania 990,530 -6.5% 1,059,257 +29.6% 817,441
Total 3,951,937 -3.1% 4,080,015 +19.9% 3,401,487

Note: This summary of net sales by geographic area is determined by the location where the product is shipped to the customers.
Sales by geographic area Income before income taxes for the Medical System
Please refer to the table of sales by geographic area in Note 22 Business Unit in 2018 increased by 31.0% from the previous
of the Notes to Consolidated Financial Statements. year to ¥29,479 million, mainly due to cost reduction and
In Japan, net sales decreased by 1.7% from the previous favorable sales of diagnostic X-ray systems and MRI systems.
year mainly owing to the decline in sales of interchangeable- Income before income taxes for the Industry and Others
lens digital cameras and compact digital cameras. Business Unit in 2018 increased by 60.7% from the previous
In Americas, despite solid sales of network cameras, net year to ¥67,607 million, thanks to strong sales of semiconduc-
sales decreased by 2.8% from the previous year mainly owing tor lithography equipment and network cameras.
to the negative effect of the yen’s appreciation and the decline
in sales of interchangeable-lens digital cameras and compact FOREIGN OPERATIONS AND FOREIGN CURRENCY
digital cameras. TRANSACTIONS
In Europe, net sales decreased by 1.3% from the previous Canon’s marketing activities are performed by subsidiaries in
year mainly owing to the decline in sales of interchangeable- various regions in local currencies, while the cost of sales is
lens digital cameras and compact digital cameras. generally in yen. Given Canon’s current operating structure,
In Asia and Oceania, net sales decreased by 6.5% from appreciation of the yen has a negative impact on net sales
the previous year mainly owing to the decline in sales of and the gross profit ratio. To reduce the financial risks from
interchangeable-lens digital cameras, compact digital cameras, changes in foreign exchange rates, Canon utilizes derivative
manufacturing equipment for OLED panels which is sold by financial instruments, which consist principally of forward cur-
Canon Tokki, and manufacturing equipment for FPD. rency exchange contracts.
The operating profit on foreign operation sales is usually
Income before income taxes by segment lower than that from domestic operations because foreign
Please refer to the table of segment information in Note 22 of operations consist mainly of marketing activities. Marketing
the Notes to Consolidated Financial Statements. activities are generally less profitable than production activities,
Income before income taxes for the Office Business Unit in which are mainly conducted by the Company and its domestic
2018 increased by 17.3% from the previous year to ¥229,187 subsidiaries. Please refer to the table of geographic information
million, as impairment loss on goodwill incurred during the in Note 22 of the Notes to Consolidated Financial Statements.
previous year.
Income before income taxes for the Imaging System LIQUIDITY AND CAPITAL RESOURCES
Business Unit in 2018 decreased by 31.1% from the previ- Cash and cash equivalents decreased by ¥201,169 million
ous year to ¥121,254 million, owing to shrinking market for to ¥520,645 million in fiscal 2018 compared to the previ-
interchangeable-lens digital cameras. ous year. Canon’s cash and cash equivalents are primarily

FINANCIAL OVERVIEW
denominated in Japanese yen and in U.S. dollars, with the ¥136,094 million. The Company paid dividends in fiscal 2018
remainder denominated in other currencies. of ¥160.00 per share.
Net cash provided by operating activities decreased by To the extent Canon relies on external funding for its liquid-
¥225,264 million to ¥365,293 million in fiscal 2018 compared ity and capital requirements, it generally has access to various
to the previous year due to increase of capital used for opera- funding sources, including the issuance of additional share
tions and income tax paid. The major component of Canon’s capital, issuance of corporate bond or loans. While Canon
cash inflow is cash received from customers, and the major has been able to obtain funding from its traditional financing
components of Canon’s cash outflow are payments for parts sources and from the capital markets, and believes it will con-
and materials, selling, general and administrative expenses, tinue to be able to do so in the future, there can be no assur-
R&D expenses and income taxes. ance that adverse economic or other conditions will not affect
For fiscal 2018, cash inflow from cash received from cus- Canon’s liquidity or long-term funding in the future.
tomers decreased due to sales deterioration. There were no Short-term loans (including the current portion of long-term
significant changes in Canon’s collection rates. Cash outflow for debt) decreased by ¥801 million to ¥38,527 million at December
payments for parts and materials increased due to an increase 31, 2018 compared with ¥39,328 million at December 31,
of inventory level resulting from sales decline. Cash outflow for 2017. Long-term debt (excluding the current portion) decreased
payments for income taxes increased due to an increase in tax- by ¥131,276 million to ¥361,962 million at December 31, 2018
able income in fiscal 2017. compared with ¥493,238 million at December 31, 2017 thanks
Net cash used in investing activities increased by ¥30,605 mil- to the repayment for long-term loans.
ales (%) Return
lion on Sales million
to ¥195,615 by Segment
(%) (Billions of yen)Sales by Segment (Billions of yen)Sales by Segment (Billions ofSales
in fiscal 2018 mainly due to an increase Canon’s long-term debt mainly yen) by Geographic Area (BillionsSales
consists of bank borrowings by Geographic Are
of yen)
9 5,000 5,000 5,000 5,000 5,000
in payment for acquisitions of businesses. and lease obligations.
Canon defines “free cash flow” as cash flows from operating In order to facilitate access to global capital markets, Canon
4,000 4,000
activities less cash flows from investing activities. For fiscal 2018, 4,000obtains credit ratings from 4,000 two rating agencies: Moody’s4,000
6free cash flow decreased by ¥255,869 million to ¥169,678 mil- Investors Services, Inc. (“Moody’s”) and Standard and Poor’s
3,000
lion as compared with ¥425,547 million 3,000 for fiscal 2017. 3,000Ratings Services (“S&P”). 3,000In addition, Canon maintains 3,000 a rating
Note: “Free cash flow” is non-GAAP measure. Refer to “Non-GAAP Financial from Rating and Investment Information, Inc. (“R&I”), a rating
Measures”
2,000 section for the explanation 2,000
and the reconciliation to the 2,000agency in Japan, for access to the Japanese capital market.
Office Business Unit 2,000Unit
Office Business 2,000Unit
Office Business
reported GAAP measure.
3 Imaging System As of February 28,System
Imaging 2019, Canon’s debt ratings are: Moody’s:
Imaging System
Business Unit Business Unit Business Unit
Canon’s1,000management places importance 1,000 on cash flow man- 1,000Aa3 (long-term); S&P:1,000
AA- (long-term), A-1+ (short-term); and Japan
Medical System Medical System 1,000
Medical System Americas
agement and frequently monitors this indicator. Furthermore, Business Unit R&I: AA+ (long-term). Canon does not have
Business Unit any Unit
Business rating down-
Europe
Canon’s management
0 believes that this0indicator is significant in
Industry and Others0grade triggers that would accelerate the maturity of a material
Industry and Others Industry and Others
Asia and Ocean
0 Business Unit Business Unit 0 Business Unit 0
understanding Canon’s current liquidity and the alternatives of
Eliminations amount of its Eliminations
debt. A downgrade in Canon’s credit ratings or
Eliminations
015 2016 2017 20182014 2015 2014 2016 2015
2017 2016
2018 2017 20182014 2015 2016 2017 20182014 2015 2016 2017 2018 2014 2015 2016 2017 20182014 2015 2016 2
use in financing activities because it takes into consideration its outlook could, however, increase the cost of its borrowings.
operating and investing activities and believes that such indica- Canon’s management policy in recent periods to optimize
tor is beneficial to an investor’s understanding. Canon refers to inventory levels is intended to maintain an appropriate balance
this indicator together with relevant U.S. GAAP financial mea- among relevant imperatives, including minimizing working
sures shown in its consolidated statements of cash flows and capital, avoiding undue exposure to the risk of inventory ob-
consolidated balance sheets for cash availability analysis. solescence, and maintaining the ability to sustain sales despite
Net cash used in financing activities totaled ¥354,830 mil- the occurrence of unexpected disasters.
lion in fiscal 2018, mainly resulting from the dividend payout Canon’s total inventory turnover ratios were 56, 49, and
of ¥178,159 million, the repayment for long-term loans of 59 days at the end of the fiscal years 2018, 2017, and 2016,
Property, Increase in Property, Return on Canon Inc. Return on Canon Inc.

quipment (Billions ofPlant
yen) and Equipment
Working
(Billions Capital
of yen) Ratio Working Capital Ratio Working Capital Ratio
Shareholders’ Equity (%) Shareholders’ Equity (%
300 3.0 3.0 3.0 12 12
2.5 2.5 2.5

9 9
200 2.0 2.0 2.0
1.5 1.5 1.5 6 6
100 1.0 1.0 1.0

3 3
0.5 0.5 0.5
0 0 0 0 0 0
015 2016 2017 20182014 2015 2016 2014
2017 2015
2018 2016 2017 20182014 2015 2016 2017 20182014 2015 2016 2014
2017 2015
2018 2016 2017 20182014 2015 2016 2

BUSINESS SEGMENT/
CORPORATE STRUCTURE
respectively. The inventory turnover in 2018 was reflecting Return on assets (net income attributable to Canon Inc.
the foregoing circumstances. The inventory turnover in 2016 divided by the average of total assets) was 5.0% in 2018,
was primarily impacted by acquisition of CMSC on December compared to 4.7% in 2017 and 3.1% in 2016.
19, 2016. If this factor were excluded, the inventory turnover
would show 50 days. Return on Canon Inc. shareholders’ equity (net income at-
tributable to Canon Inc. divided by the average of total Canon
Increase in property, plant and equipment on an accrual Inc. shareholders’ equity) was 8.9% in 2018 compared with
basis in 2018 amounted to ¥159,316 million compared with 8.6% in 2017 and 5.2% in 2016.
¥147,542 million in 2017 and ¥171,597 million in 2016. For
2019, Canon projects its increase in property, plant and equip- The debt to total assets ratios were 8.2%, 10.2% and
ment will be approximately ¥175,000 million. 11.9% as of December 31, 2018, 2017 and 2016, respec-
tively. Canon had short-term loans and long-term debt of
Employer contributions to Canon’s worldwide defined benefit ¥400,489 million as of December 31, 2018, ¥532,566 mil-
pension plans were ¥35,044 million in 2018, ¥50,628 million lion as of December 31, 2017 and ¥613,139 million as of
in 2017 and ¥14,575 million in 2016. Employer contributions December 31, 2016.
to Canon’s worldwide defined contribution pension plans were
¥19,570 million in 2018, ¥18,979 million in 2017, and ¥17,603 Non-GAAP Financial Measures
million in 2016. In addition, employer contributions to the mul- We have reported our financial results in accordance with U.S.
tiemployer pension plan of certain subsidiaries were ¥4,452 mil- generally accepted accounting principles (“U.S. GAAP”). In ad-
lion in 2018, ¥4,165 million in 2017 and ¥3,482 million in 2016. dition, we have discussed our results using the combination of
Working capital in 2018 decreased by ¥102,642 million two GAAP cash flow measures, Net cash provided by operat-
to ¥1,020,527 million, compared with ¥1,123,169 million ing activities and Net cash used for investing activities, which
in 2017 and ¥1,116,379 million in 2016. Canon believes its we refer to as “Free Cash Flow” which is non-GAAP measure.
working capital will be sufficient for its requirements for the We believe this measure is beneficial to an investor’s under-
foreseeable future. Canon’s capital requirements are primar- standing on Canon’s current liquidity and the alternatives of
ily dependent on management’s business plans regarding the use in financing activities because it takes into consideration
levels and timing of purchases of fixed assets and investments. its operating and investing activities.
The working capital ratio (ratio of current assets to current A reconciliation of these non-GAAP financial measures and
liabilities) for 2018 was 1.99 compared to 2.01 for 2017 and the most directly comparable measures calculated and pre-
to 2.14 for 2016. sented in accordance with GAAP are set forth on the follow-
ing table.
FREE CASH FLOW

Millions of yen
2018 2017
Net cash provided by operating activities 365,293 590,557
Net cash used in investing activities (195,615) (165,010)
Free cash flow 169,678 425,547
OFF-BALANCE SHEET ARRANGEMENTS with less financial risk.

As part of its ongoing business, Canon does not participate in Canon would have to perform under a guarantee if the
transactions that generate relationships with unconsolidated borrower defaults on a payment within the contract terms.
entities or financial partnerships, such as entities often referred The contract terms are 1 year to 30 years in case of employ-
to as structured finance or special purpose entities established ees with housing loans, and 1 year to 7 years in case of af-
for the purpose of facilitating off-balance sheet arrangements filiates and other companies with lease obligations and bank
or other contractually narrow or limited purposes. loans. The maximum amount of undiscounted payments
Canon provides guarantees for its employees, affiliates Canon would have had to make in the event of default is
and other companies. The guarantees for the employees are ¥4,458 million at December 31, 2018. The carrying amounts
principally made for their housing loans. The guarantees for of the liabilities recognized for Canon’s obligations as a guar-
affiliates and other companies are made for their lease obliga- antor under those guarantees at December 31, 2018 were
tions and bank loans to ensure that those companies operate not significant.

FINANCIAL OVERVIEW Return on Sales (%)
9
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS

The following summarizes Canon’s contractual obligations at December 31, 2018. 3
Payments due by period

Millions of yen Total Less than 1 year 1-3 years 3-5 years More than 5 years
Contractual obiligations: 0
2014 2015 2016 2017 2018
Long-term debt:
Loan from the banks 360,000 — 360,000 — —
Other debt 4,602 2,640 1,443 509 10
Operating lease obligations 115,084 29,817 41,239 23,730 20,298
Purchase commitments for:
Property, plant and equipment 54,905 54,905 — — —
Parts and raw materials 120,344 120,344 — — —
Other long-term liabilities:
Contribution to defined benefit pension plans 32,400 32,400 — — —
Total 687,335 240,106 402,682 24,239
Increase in Property, 20,308
Plant
Note: The table does not include provisions for uncertain tax positions and related accrued interest and penalties, as the and
specific Equipment
timing of future (Billions
payments of yen)
related
to these obligations cannot be projected with reasonable certainty. See Note 12, Income Taxes in the Notes 300to Consolidated Financial Statements for further
details. Contribution to defined benefit pension plans reflects the expected amount only for the next fiscal year, since contributions beyond the next fiscal year
are not currently determinable due to uncertainties related to changes in actuarial assumptions, returns on plan assets and changes to plan membership.
Canon provides warranties of generally less than one year RESEARCH AND DEVELOPMENT,
200
against defects in materials and workmanship on most of PATENTS AND LICENSES
its consumer products. Estimated product warranty related Canon has started its 5-year management plan, the Excellent
costs are established at the time revenue are recognized and Global Corporation Plan Phase V (“Phase V”) from the year
are included in selling, general and administrative expenses. 2016. In Phase V, our slogan
100 is “Embrace the challenge of new
Estimates for accrued product warranty costs are primarily growth through a grand strategic transformation” and there
based on historical experience, and are affected by ongoing are three key strategies related to R&D:
product failure rates, specific product class failures outside of • Establish a new production system to achieve a cost-of-
the baseline experience, material usage and service delivery sales ratio of 45%; 0
2014 2015 2016 2017 2018
costs incurred in correcting a product failure. As of December • Reinforce and expand new businesses while creating
31, 2018 accrued product warranty costs amounted to future businesses; and
¥17,318 million. • Enhance R&D capabilities through open innovation.
At December 31, 2018, commitments outstanding for the Canon has been striving to implement the three R&D re-
purchase of property, plant and equipment were approxi- lated strategies as follows:
mately ¥54,905 million, and commitments outstanding for • Establish a new production system to achieve a cost-of-
the purchase of parts and raw materials were approximately sales ratio of 45%: Strengthen domestic mother factories
¥120,344 million, both for use in the ordinary course of its by integrating design, procurement, production engi-
business. Canon anticipates that funds needed to fulfill these neering and manufacturing technology operations while
commitments will be generated internally through operations. pursuing total cost reduction by advancing production
During 2019, Canon expects to contribute ¥13,089 million
to its Japanese defined benefit pension plans and ¥19,311 mil- R&D Expenses (Billions of yen)
lion to its foreign defined benefit pension plans. 400
Canon’s management believes that current financial re-
sources, cash generated from operations and Canon’s poten-
tial capacity for additional debt and/or equity financing will be 300
sufficient to fund current and future capital requirements.
200
100
0
2014 2015 2016 2017 2018

BUSINESS SEGMENT/
CORPORATE STRUCTURE
engineering capabilities with more sophisticated robots and comprehensive image processing including optical design, me-
next-generation technologies such as the IoT, big data and chanical noise analysis, and thermal air flow analysis. With these
artificial intelligence. simulation systems, Canon has succeeded in further reducing
• Reinforce and expand new businesses while creating the need for prototypes, lowering costs and shortening product
future businesses: Create and expand new businesses by development lead times.
accelerating the horizontal expansion of existing busi- Canon believes that new products protected by the robust
ness with the exploration of new application possibility of patent portfolio will not easily allow competitors to compete
Canon’s technologies into new fields. Also, invest inten- with them, and will give them an advantage in establishing
sively on the R&D of promising businesses areas such as standards in the market and industry.
commercial printing, network cameras and life sciences Canon obtained the third greatest number of patents in the
while actively taking advantage of M&A to accelerate the United States in 2018, according to the annual ranking list,
early expansion of these businesses. released by IFI CLAIMS® Patent Services.
• Enhance R&D capabilities through open innovation:
Construct a more open R&D system that proactively lever- MARKET RISK EXPOSURES
ages external technologies and knowledge to accelerate and Canon is exposed to market risks, including changes in foreign
improve efficiency of the R&D. Especially in our fundamental currency exchange rates, interest rates and prices of market-
research and development, Canon is promoting joint and able securities and investments. In order to hedge the risks
contract research with various partners including universi- of changes in foreign currency exchange rates, Canon uses
ties, research institutes, and startups around the world. derivative financial instruments.
Canon is currently working on collaborative research with
Massachusetts General Hospital and Brigham and Women’s Equity price risk
Hospital to develop medical robotics and ultra-miniature endo- Canon holds marketable securities included in current assets,
scope at the Healthcare Optics Research Laboratory in Boston. which consist generally of highly-liquid and low-risk instru-
Also, CMSC has started collaborative research on Deep Learning ments. Investments included in noncurrent assets are held
Reconstruction in MRI systems, together with Kumamoto as long-term investments. Canon does not hold marketable
University and the University of Bordeaux. securities and investments for trading purposes.
Canon has developed simulation systems covering
Maturities and fair values of such marketable securities and investments with original maturities of more than three months
were as follows at December 31, 2018.
Millions of yen
Fair value
Debt securities
Due within one year 630
Fund trusts and others 1,038
Equity securities 13,787
15,455

FINANCIAL OVERVIEW
Foreign currency exchange rate and selected by Canon taking into account their financial condi-
interest rate risk tion, and contracts are diversified across a number of major
Canon operates internationally, exposing it to the risk of financial institutions.
changes in foreign currency exchange rates. Derivative finan- Canon’s international operations expose Canon to the risk
cial instruments are comprised principally of foreign currency of changes in foreign currency exchange rates. Canon uses
exchange contracts utilized by the Company and certain of its foreign exchange contracts to manage certain foreign currency
subsidiaries to reduce the risk. Canon assesses foreign curren- exchange exposures principally from the exchange of U.S. dol-
cy exchange rate risk by continually monitoring changes in the lars and euros into Japanese yen. These contracts are primarily
exposures and by evaluating hedging opportunities. Canon used to hedge the foreign currency exposure of forecasted
does not hold or issue derivative financial instruments for trad- intercompany sales and intercompany trade receivables which
ing purposes. Canon is also exposed to credit-related losses in are denominated in foreign currencies. In accordance with
the event of non-performance by counterparties to derivative Canon’s policy, a specific portion of foreign currency exposure
financial instruments, but it is not expected that any counter- resulting from forecasted intercompany sales are hedged using
parties will fail to meet their obligations. Most of the counter- foreign exchange contracts which principally mature within
parties are internationally recognized financial institutions and three months.
The following table provides information about Canon’s major derivative financial instruments related to foreign currency ex-
change transactions existing at December 31, 2018. All of the foreign exchange contracts described in the following table have a
contractual maturity date in 2019.
Millions of yen U.S.$ Euro Others Total

Forwards to sell foreign currencies:
Contract amounts 108,126 101,356 21,023 230,505
Estimated fair value 857 1,235 513 2,605
Forwards to buy foreign currencies:
Contract amounts 24,025 2,807 3,984 30,816
Estimated fair value (158) (11) (59) (228)
Canon expects that fair value changes and cash flows result- The amount of the hedging ineffectiveness was not material
ing from reasonable near-term changes in interest rates will for the years ended December 31, 2018, 2017 and 2016. The
be immaterial. Accordingly, Canon believes interest rate risk amounts of net losses excluded from the assessment of hedge
is insignificant. See also Note 9 of the Notes to Consolidated effectiveness (time value component) which was recorded in
Financial Statements. other income (deductions) were ¥682 million, ¥332 million
Changes in the fair value of derivative financial instruments and ¥311 million for the years ended December 31, 2018,
designated as cash flow hedges, including foreign currency 2017 and 2016, respectively.
exchange contracts associated with forecasted intercompany Canon has entered into certain foreign currency exchange
sales, are reported in accumulated other comprehensive contracts to manage its foreign currency exposures. These
income (loss). These amounts are subsequently reclassified foreign currency exchange contracts have not been designated
into earnings through other income (deductions) in the same as hedges. Accordingly, the changes in fair values of these
period as the hedged items affect earnings. Substantially all contracts are recorded in earnings immediately.
such amounts recorded in accumulated other comprehensive
income (loss) at year-end are expected to be recognized in LOOKING FORWARD
earnings over the next twelve months. Canon excludes the Under the corporate philosophy of kyosei—living and working
time value component from the assessment of hedge ef- together for the common good—Canon’s basic management
fectiveness. Changes in the fair value of a foreign currency policy is to contribute to the prosperity and well-being of the
exchange contract for the period between the date that the world while endeavoring to become a truly excellent global
forecasted intercompany sales occur and its maturity date are corporation targeting continued growth and development.
recognized in earnings and not considered hedge ineffective- Based on this basic management policy, Canon launched
ness. From the quarter beginning January 1, 2019, Canon will the Excellent Global Corporation Plan in 1996 and, from Phase
adopt ASU No. 2017-12, Derivatives and Hedging (Topic 815): I through to Phase IV, has worked to strengthen its manage-
Targeted Improvements to Accounting for Hedging Activities. ment base and improve corporate value. In 2016, under the
After the adoption of this guidance, gains and losses resulting slogan “Embracing the challenge of new growth through a
from derivative financial instruments designated as cash flow grand strategic transformation,” Canon embarked on a new
hedges associated with forecasted intercompany sales, which five-year initiative: Phase V of the Excellent Global Corporation
are currently included in other income (deductions) in the con- Plan. Under this plan, Canon aims to facilitate growth through
solidated statements of income, will be included in net sales. structural transformation by reinforcing existing businesses

BUSINESS SEGMENT/
CORPORATE STRUCTURE
and taking steps to cultivate and strengthen new businesses. (2) Bolstering and expanding new businesses
The global economy is expected to continue to slow down • In commercial printing, our aims involve drawing up
from the latter half of 2018 and overall, there are concerns of comprehensive strategy for all printing-related businesses,
further economic slowdown occurring as a result of intensify- building platforms for the commercial printing business
ing trade friction. centered on Océ, and establishing product structures
In the businesses in which Canon is involved, for office geared to high-resolution and high-mix, small-lot printing.
MFDs, color models are expected to grow steadily. Overall de- • W ith network cameras, we will enhance and upgrade
mand for laser printers is expected to remain at the same level related software, and promote expansion into a wide
as that of the previous year, supported by the trend of shifting range of fields beyond crime prevention and disaster
from monochrome to color models and increasing demand monitoring applications.
in emerging markets. For interchangeable-lens digital cam- • In the medical field, we will enhance our product
eras, while demand for interchangeable-lens digital cameras strengths and sales capabilities with respect to diagnostic
equipped with full-frame sensors is expected to grow steadily, equipment, and will explore possibilities for expanding our
overall demand is expected to decrease. Projections for digi- business into areas besides diagnostic equipment.
tal compact cameras indicate continued market contraction, • With industrial equipment, we will accelerate development
centered mainly on low-priced models. With regard to inkjet of next-generation OLED panel manufacturing equipment
printers, demand is expected to continue to decrease slightly and promote development of new industrial equipment.
from the previous year. (3) Reforming R&D operation in anticipation of industrial
As for the medical equipment market, demand is expected and social changes
to remain firm, mainly outside of Japan, with increasing • We will take an approach to the theme of development,
demand in emerging markets and increased demand for ad- grouped into the three areas of: 1. initiatives related to
vanced medical care in the United States and Europe. Looking enhancing existing businesses, 2. initiatives aiming to
at industrial equipment, as for the semiconductor lithography commercialize opportunities in the near future, and 3.
equipment, while demand for automotive devices is expected initiatives over the medium to long term. Accordingly, we
to increase, capital investment is expected to slow down for will strive to improve development productivity by forming
memory devices. For FPD lithography equipment and OLED a development framework that is tailored to those three
panel manufacturing equipment, capital investment in small- areas of focus.
and medium-size display panels is expected to continue to • We will expand and enhance our worldwide research into
slow down. As for network cameras, demand is expected to start-up companies that have substantial potential for
continue expanding for high-spec models and image analysis growth drawing on their cutting-edge technologies and
software due to the growing use of network cameras for a new business models.
widening range of applications.
The Canon Group recognizes the Business Term in 2019 Forward looking statements
as a year for achieving transformation into an enterprise The foregoing discussion and other disclosure in this report
wielding high productivity on par with other excellent global contains forward-looking statements that reflect manage-
corporations in every field of business ranging from R&D to ment’s current views with respect to certain future events and
production, sales and service, underpinned by a new busi- financial performance. Actual results may differ materially
ness portfolio containing four additional new business areas from those projected or implied in the forward-looking state-
(commercial printing, network cameras, medical system, and ments. Further, certain forward-looking statements are based
industrial equipment). Accordingly, we will work to address upon assumptions of future events that may not prove to be
the following key challenges under the theme, “Accelerate accurate. The following important factors could cause actual
Grand Strategic Transformation to achieve fundamental results to differ materially from those projected or implied in
improvements in productivity.” any forward-looking statements: foreign currency exchange
rate fluctuations; the uncertainty of Canon’s ability to imple-
(1) Revitalizing existing businesses ment its plans to localize production and other measures to
• We promote efforts to strengthen development of reduce the impact of foreign currency exchange rate fluctua-
DANTOTSU products that overwhelm competitors, making tions; uncertainty as to economic conditions in Canon’s major
extensive use of cloud, AI and IoT technologies. markets; uncertainty of continued demand for Canon’s high-
• We will enhance assembly automation by turning out value-added products; Canon’s ability to continue to develop
product designs suitable to automation, and promote in- products and to market products that incorporate new tech-
house production of equipment and key parts throughout nology on a timely basis, are competitively priced, and achieve
the Group. market acceptance; the possibility of losses resulting from
• We will make quality and cost improvements by strength- foreign currency transactions designed to reduce financial risks
ening procurement functions and collaborating with from changes in foreign currency exchange rates; and inven-
suppliers, and promote in-house production and standard- tory risk due to shifts in market demand.
ization of parts.

Sales by Segment (Billions of yen) Sales by Geographic Area (Billions of yen)
5,000 5,000
4,000 4,000
3,000
TEN-YEAR FINANCIAL SUMMARY 3,000
2,000
Office Business Unit 2,000
Imaging System
Business Unit Japan
1,000
Medical System 1,000 Millions of yen (except per share amounts) Americas
Business Unit
2018 2017 2016 Europe
2015
0 Industry and Others
Business Unit Asia and Oceania
Net sales: 0
2014 2015 2016 2017 2018 Eliminations 2014 2015 2016 2017 2018
Domestic 869,577 884,828 706,979 714,280
Overseas 3,082,360 3,195,187 2,694,508 3,085,991
Total 3,951,937 4,080,015 3,401,487 3,800,271
Percentage of previous year 96.9% 119.9% 89.5% 102.0%
Net income attributable to Canon Inc. 252,755 241,923 150,650 220,209

Percentage of sales 6.4% 5.9% 4.4% 5.8%
Advertising 58,729 61,207 58,707 80,907

Research and development expenses 315,842 333,371
Return on Canon Inc. 306,537 332,678
Working of
Depreciation Capital Ratioplant and equipment
property, 175,771 Shareholders’
189,712 Equity (%)199,133 223,759
3.0 12
Increase in property, plant and equipment 159,316 147,542 171,597 195,120
2.5
Long-term debt, excluding current installments 361,962 9 493,238 611,289 881

2.0
Canon Inc. shareholders’ equity 2,827,602 2,870,630 2,783,129 2,966,415
Total
1.5 assets 4,899,465 6 5,198,291 5,138,529 4,427,773
Per share data:
1.0
Net income attributable to Canon Inc. 3
0.5
shareholders per share:
Basic 234.09 222.88 137.95 201.65
0
Diluted 234.08 0 222.88 137.95 201.65
2014 2015 2016 2017 2018 2014 2015 2016 2017 2018
Dividend per share 160.00 160.00 150.00 150.00
Stock price:
High 4,395 4,472 3,656 4,539
Low 2,877 3,218 2,780 3,402
Average number of common shares in thousands 1,079,753 1,085,439 1,092,071 1,092,018

Number of employees 195,056 197,776 197,673 189,571
Common Stock Price Range (Tokyo Stock Exchange) (Yen)

8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

BUSINESS SEGMENT/
CORPORATE STRUCTURE
Thousands of U.S. dollars

(except per share amounts)
2014 2013 2012 2011 2010 2009 2018
724,317 715,863 720,286 694,450 695,749 702,344 $ 7,834,027

3,002,935 3,015,517 2,759,502 2,862,983 3,011,152 2,506,857 27,769,009
3,727,252 3,731,380 3,479,788 3,557,433 3,706,901 3,209,201 35,603,036
99.9% 107.2% 97.8% 96.0% 115.5% 78.4% 96.9%
254,797 230,483 224,564 248,630 246,603 131,647 2,277,072

6.8% 6.2% 6.5% 7.0% 6.7% 4.1% 6.4%
79,765 86,398 83,134 81,232 94,794 78,009 529,090

311,896 307,500 296,281 308,900 317,286 306,128 2,845,423
213,739 223,158 211,973 210,179 232,327 277,399 1,583,523
182,343 188,826 270,457 226,869 158,976 216,128 1,435,279
1,148 1,448 2,117 3,368 4,131 4,912 $ 3,260,919

2,978,184 2,910,262 2,598,026 2,551,132 2,645,782 2,688,109 25,473,892
4,460,618 4,242,710 3,955,503 3,930,727 3,983,820 3,847,557 44,139,324
229.03 200.78 191.34 204.49 199.71 106.64 $ 2.11

229.03 200.78 191.34 204.48 199.70 106.64 2.11
150.00 130.00 130.00 120.00 120.00 110.00 1.44
4,045 4,115 4,015 4,280 4,520 4,070 39.59

2,889 2,913 2,308 3,220 3,205 2,115 25.92
1,112,510 1,147,934 1,173,648 1,215,832 1,234,817 1,234,482

191,889 194,151 196,968 198,307 197,386 168,879
Notes: 1. U
.S. dollar amounts are translated from yen at the rate of U.S.$1 = JPY111, the approximate exchange rate on the Tokyo Foreign Exchange Market as of
December 28, 2018.
2. 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 from 2017 to 2009 respectively.

C O N S O L IDATED BALANCE SHEETS
Canon Inc. and Subsidiaries
December 31, 2018 and 2017
Millions of yen
ASSETS 2018 2017
Current assets:
Cash and cash equivalents (Note 1) 520,645 721,814
Short-term investments (Note 2) 956 1,965
Trade receivables, net (Notes 3 and 15) 612,953 650,872
Inventories (Notes 4 and 15) 611,281 570,033
Prepaid expenses and other current assets (Notes 6, 15 and 18) 304,346 287,965
Total current assets 2,050,181 2,232,649

Noncurrent receivables (Note 19) 18,230 35,444
Investments (Note 2) 42,556 48,320
Property, plant and equipment, net (Notes 5 and 6) 1,090,992 1,126,620
Intangible assets, net (Notes 7 and 8) 391,021 420,972
Goodwill (Notes 7 and 8) 908,511 936,722
Other assets (Notes 6, 11 and 12) 397,974 397,564
Total assets 4,899,465 5,198,291
LIABILITIES AND EQUITY

Current liabilities:
Short-term loans and current portion of long-term debt (Note 9) 38,527 39,328
Trade payables (Note 10) 352,489 380,654
Accrued income taxes (Note 12) 41,264 77,501
Accrued expenses (Notes 11, 15 and 19) 321,137 330,188
Other current liabilities (Notes 5, 15 and 18) 276,237 281,809
Total current liabilities 1,029,654 1,109,480

Long-term debt, excluding current installments (Notes 9 and 20) 361,962 493,238
Accrued pension and severance cost (Note 11) 382,789 365,582
Other noncurrent liabilities (Note 12) 107,147 133,816
Total liabilities 1,881,552 2,102,116

Commitments and contingent liabilities (Note 19)
Equity:
Canon Inc. shareholders’ equity:
Common stock
Authorized 3,000,000,000 shares; issued 1,333,763,464 shares in 2018 and 2017 174,762 174,762
Additional paid-in capital 404,389 401,386
Legal reserve (Note 13) 67,116 66,879
Retained earnings (Note 13) 3,508,908 3,429,312
Accumulated other comprehensive income (loss) (Note 14) (269,071) (143,228)
Treasury stock, at cost; 254,013,641shares in 2018 and 254,007,681shares in 2017 (1,058,502) (1,058,481)
Total Canon Inc. shareholders’ equity 2,827,602 2,870,630

Noncontrolling interests 190,311 225,545
Total equity 3,017,913 3,096,175
Total liabilities and equity 4,899,465 5,198,291

See accompanying Notes to Consolidated Financial Statements.

C O N S O L IDATED STATEMENTS OF INCOME
Years ended December 31, 2018, 2017 and 2016
Millions of yen
2018 2017 2016

Net sales (Note 15)
Products and Equipment 3,194,724 3,521,156 2,986,188
Services 757,213 558,859 415,299
3,951,937 4,080,015 3,401,487
Cost of sales (Notes 5, 8, 11, 15 and 19)
Products and Equipment 1,762,171 1,875,581 1,574,679
Services 354,212 213,880 154,810
2,116,383 2,089,461 1,729,489
Gross profit 1,835,554 1,990,554 1,671,998
Operating expenses (Notes 1, 5, 8, 11, 15, 16, 19 and 21):
Selling, general and administrative expenses 1,176,760 1,301,666 1,149,036
Research and development expenses 315,842 333,371 306,537
Impairment losses on goodwill — 33,912 —
1,492,602 1,668,949 1,455,573
Operating profit 342,952 321,605 216,425
Other income (deductions):
Interest and dividend income 6,604 6,012 4,762
Interest expense (797) (818) (1,061)
Other, net (Notes 1, 2, 11, 14 and 18) 14,133 27,085 24,525
19,940 32,279 28,226
Income before income taxes 362,892 353,884 244,651
Income taxes (Note 12) 96,150 98,024 82,681

Consolidated net income 266,742 255,860 161,970
Less: Net income attributable to noncontrolling interests 13,987 13,937 11,320

Net income attributable to Canon Inc. 252,755 241,923 150,650
Yen
Net income attributable to Canon Inc. shareholders per share (Note 17):
Basic 234.09 222.88 137.95
Diluted 234.08 222.88 137.95
Cash dividends per share 160.00 160.00 150.00
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Millions of yen
2018 2017 2016
Other comprehensive income (loss), net of tax (Note 14):
Foreign currency translation adjustments (93,146) 47,090 (107,666)
Net unrealized gains and losses on securities (141) (9,362) 997
Net gains and losses on derivative instruments 488 2,588 (2,948)
Pension liability adjustments (30,570) 21,207 (70,355)
(123,369) 61,523 (179,972)
Comprehensive income (loss) 143,373 317,383 (18,002)
Less: Comprehensive income attributable to noncontrolling interests 6,918 18,807 1,745
Comprehensive income (loss) attributable to Canon Inc. 136,455 298,576 (19,747)

C O N S O L IDATED STATEMENTS OF EQUITY
Millions of yen
Accumulated Total
Additional other Canon Inc. Non-
Common paid-in Legal Retained comprehensive Treasury shareholders’ controlling Total
stock capital reserve earnings income (loss) stock equity interests equity
Balance at December 31, 2015 174,762 401,358 65,289 3,365,158 (29,742) (1,010,410) 2,966,415 218,048 3,184,463
Equity transactions with noncontrolling
interests and other 27 258 285 (5,270) (4,985)
Dividends to Canon Inc. shareholders (163,810) (163,810) (163,810)
Dividends to noncontrolling interests (4,077) (4,077)
Acquisition of subsidiaries 1,047 1,047
Transfer to legal reserve 1,269 (1,269) — —
Comprehensive income:
Net income 150,650 150,650 11,320 161,970
Other comprehensive income (loss),
net of tax (Note 14):
Foreign currency translation adjustments (101,257) (101,257) (6,409) (107,666)
Net unrealized gains and losses
on securities 1,196 1,196 (199) 997
Net gains and losses on
derivative instruments (2,924) (2,924) (24) (2,948)
Pension liability adjustments (67,412) (67,412) (2,943) (70,355)
Total comprehensive income (loss) (19,747) 1,745 (18,002)
Repurchases and reissuance of treasury stock (1) (13) (14) (14)
interests and other 1 1 (1) —
Acquisition of subsidiaries 60 60
Transfer to legal reserve 321 (321) — —
Net income 241,923 241,923 13,937 255,860
Foreign currency translation adjustments 44,168 44,168 2,922 47,090
on securities (9,767) (9,767) 405 (9,362)
derivative instruments 2,562 2,562 26 2,588
Pension liability adjustments 19,690 19,690 1,517 21,207
Total comprehensive income (loss) 298,576 18,807 317,383
Repurchases of treasury stock (50,036) (50,036) (50,036)
Reissuance of treasury stock (131) 1,978 1,847 1,847
Cumulative effects of accounting standard
update—adoption of ASU No.2014-09 (106) (106) (76) (182)
update—adoption of ASU No. 2016-01 5,343 (5,343) — — —
interests and other 3,003 (4,200) (1,197) (36,518) (37,715)
Transfers to legal reserve 237 (237) — —
Net income 252,755 252,755 13,987 266,742
Foreign currency translation adjustments (89,823) (89,823) (3,323) (93,146)
on securities (141) (141) — (141)
derivative instruments 488 488 — 488
Pension liability adjustments (26,824) (26,824) (3,746) (30,570)
Total comprehensive income (loss) 136,455 6,918 143,373
Repurchases of treasury stock (25) (25) (25)
Reissuance of treasury stock 0 4 4 4

C O N S O L IDATED STATEMENTS OF CASH FLOWS
Millions of yen
2018 2017 2016

Cash flows from operating activities:
Adjustments to reconcile consolidated net income to net cash provided by
operating activities:
Depreciation and amortization 251,554 261,881 250,096
Loss on disposal of fixed assets 5,726 6,935 5,203
Equity in earnings of affiliated companies (1,414) (1,196) (890)
Impairment losses on goodwill (Notes 8 and 21) — 33,912 —
Gain on securities contributed to retirement benefit trust (Note 2) — (17,836) —
Deferred income taxes (11,849) (17,603) 7,188
(Increase) decrease in trade receivables (17,724) 3,563 (4,155)
(Increase) decrease in inventories (61,755) 2,967 6,156
Increase (decrease) in trade payables (31,212) 4,951 56,844
Increase (decrease) in accrued income taxes (35,284) 46,296 (16,456)
Increase (decrease) in accrued expenses 2,541 18,503 (5,256)
Increase (decrease) in accrued (prepaid) pension and severance cost (17,738) 522 5,489
Other, net (Note 6) 15,706 (8,198) 34,094
Net cash provided by operating activities 365,293 590,557 500,283
Cash flows from investing activities:
Purchases of fixed assets (Note 5) (191,399) (189,484) (206,971)
Proceeds from sale of fixed assets (Note 5) 9,634 26,444 6,177
Purchases of securities (2,311) (2,220) (84)
Proceeds from sale and maturity of securities 1,615 970 1,181
Decrease in time deposits, net 401 3,373 15,414
Acquisitions of businesses, net of cash acquired (Note 7) (13,346) (6,557) (649,570)
Other, net (209) 2,464 (3,272)
Net cash used in investing activities (195,615) (165,010) (837,125)
Cash flows from financing activities:
Proceeds from issuance of long-term debt (Note 9) 439 1,570 610,552
Repayments of long-term debt (Note 9) (136,094) (126,578) (856)
Increase (decrease) in short-term loans, net (Note 9) 2,501 5,628 (80,580)
Transactions with noncontrolling interests (37,942) — (4,993)
Dividends paid (178,159) (162,887) (163,810)
Repurchases and reissuance of treasury stock (21) (50,034) (14)
Other, net (5,554) (8,163) (4,607)
Net cash provided by (used in) financing activities (354,830) (340,464) 355,692
Effect of exchange rate changes on cash and cash equivalents (16,017) 6,538 (22,270)
Net change in cash and cash equivalents (201,169) 91,621 (3,420)
Cash and cash equivalents at beginning of year 721,814 630,193 633,613
Cash and cash equivalents at end of year 520,645 721,814 630,193
Supplemental disclosure for cash flow information:

Cash paid during the year for:
Interest 749 1,026 738
Income taxes 131,616 71,473 76,714

N O T E S TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business variable interest entities where the Company or its consoli-
Canon Inc. (the “Company”) and subsidiaries (collectively dated subsidiaries are the primary beneficiaries. All significant
“Canon”) is one of the world’s leading manufacturers in such intercompany balances and transactions have been eliminated.
fields as office products, imaging system products, medical
system products and industry and other products. Office prod- (d) Use of Estimates
ucts consist mainly of office multifunction devices (“MFDs”), The preparation of the consolidated financial statements in
laser multifunction printers (“MFPs”), laser printers, digital conformity with U.S. GAAP requires management to make
continuous feed presses, digital sheet-fed presses, wide-format estimates and assumptions that affect the reported amounts
printers and document solutions. Imaging system products of assets and liabilities and the disclosure of contingent assets
consist mainly of interchangeable-lens digital cameras, digital and liabilities at the date of the consolidated financial state-
compact cameras, digital camcorders, digital cinema cameras, ments and the reported amounts of revenues and expenses
interchangeable lenses, compact photo printers, inkjet print- during the period. Significant estimates and assumptions are
ers, large format inkjet printers, commercial photo printers, reflected in valuation and disclosure of accounts including:
image scanners, multimedia projectors, broadcast equipment revenue recognition, allowance for doubtful receivables, inven-
and calculators. Medical system products consist mainly of tories, long-lived assets, goodwill and other intangible assets
digital radiography systems, diagnostic X-ray systems, comput- with indefinite useful lives, environmental liabilities, deferred
ed tomography (“CT”) systems, magnetic resonance imaging tax assets, uncertain tax positions and employee retirement
(“MRI”) systems, diagnostic ultrasound systems, clinical chem- and severance benefit obligations. Actual results could differ
istry analyzers and ophthalmic equipment. Industry and other materially from those estimates.
products consist mainly of semiconductor lithography equip-
ment, FPD (Flat panel display) lithography equipment, vacuum (e) Translation of Foreign Currencies
thin-film deposition equipment, organic LED (“OLED”) panel Assets and liabilities of the Company’s subsidiaries located
manufacturing equipment, die bonders, micromotors, network outside Japan with functional currencies other than Japanese
cameras, handy terminals and document scanners. Sales are yen are translated into Japanese yen at the rates of exchange
made principally under the Canon brand name, almost entirely in effect at the balance sheet date. Income and expense items
through sales subsidiaries. These subsidiaries are responsible are translated at the average exchange rates prevailing during
for marketing and distribution, and primarily sell to retail deal- the year. Gains and losses resulting from translation of finan-
ers in their geographic area. Further segment information is cial statements are excluded from earnings and are reported in
described in Note 22. other comprehensive income (loss).
Canon sells laser printers on an OEM basis to HP Inc.; such Gains and losses resulting from foreign currency transac-
sales constituted 13.6%, 13.1% and 14.8% of consolidated tions, including foreign exchange contracts, and translation
net sales for the years ended December 31, 2018, 2017 and of assets and liabilities denominated in foreign currencies are
2016, respectively, and are included in the Office Business Unit. included in other income (deductions) in the consolidated
Canon’s manufacturing operations are conducted primarily statements of income. Foreign currency exchange gains and
at 30 plants in Japan and 18 overseas plants which are located losses were net losses of ¥6,044 million, ¥9,775 million and
in countries or regions such as the United States, Germany, ¥2 million for the years ended December 31, 2018, 2017 and
France, the Netherlands, Taiwan, China, Malaysia, Thailand, 2016, respectively.
Vietnam and Philippines.
(f) Cash Equivalents
(b) Basis of Presentation All highly liquid investments acquired with original maturities
The Company and its domestic subsidiaries maintain their of three months or less are considered to be cash equivalents.
books of account in conformity with financial accounting Certain debt securities with original maturities of less than three
standards of Japan. Foreign subsidiaries maintain their books months, classified as available-for-sale securities of ¥70,500 mil-
of account in conformity with financial accounting standards lion at December 31, 2018 and 2017, respectively, are included
of the countries of their domicile. in cash and cash equivalents in the consolidated balance sheets.
Certain adjustments and reclassifications have been incorpo-
rated in the accompanying consolidated financial statements (g) Investments
to conform with U.S. generally accepted accounting principles Investments consist primarily of time deposits with original
(“U.S. GAAP”). These adjustments were not recorded in the maturities of more than three months, debt and equity securi-
statutory books of account. ties and investments in affiliated companies.
Canon classifies investments in debt securities as available-
(c) Principles of Consolidation for-sale securities. Canon does not hold any trading securities
The consolidated financial statements include the accounts which are bought and held primarily for the purpose of sale
of the Company, its majority owned subsidiaries and those in the near term, or any held-to-maturity securities. Canon

BUSINESS SEGMENT/
CORPORATE STRUCTURE
reports investments with maturities of less than one year as inventories and principally by the first-in, first-out method for
short-term investments. overseas inventories.
Available-for-sales debt securities and equity securities with
readily determinable fair value that are not accounted for (j) Impairment of Long-Lived Assets
under the equity method are recorded at fair value which is Long-lived assets, such as property, plant and equipment, and
determined based on quoted market prices, projected dis- acquired intangible assets subject to amortization, are re-
counted cash flows or other valuation techniques as appropri- viewed for impairment whenever events or changes in circum-
ate. The changes in fair value are recognized in net income stances indicate that the carrying amount of an asset may not
for equity securities and in other comprehensive income for be recoverable. Recoverability of assets to be held and used is
available-for-sales debt securities. measured by a comparison of the carrying amount of the asset
Available-for-sale debt securities are regularly reviewed for and the estimated undiscounted future cash flows expected
other-than-temporary declines in the carrying amount based to be generated by the asset. If the carrying amount of the
on criteria that include the length of time and the extent to asset exceeds its estimated undiscounted future cash flows, an
which the market value has been less than cost, the financial impairment charge is recognized in the amount by which the
condition and near-term prospects of the issuer and Canon’s carrying amount of the asset exceeds the fair value of the as-
intent and ability to retain the investment for a period of set. Assets to be disposed of by sale are reported at the lower
time sufficient to allow for any anticipated recovery in market of the carrying amount or fair value less costs to sell, and are
value. For available-for-sale securities for which the declines no longer depreciated.
are deemed to be other-than-temporary and there is no intent
to sell, the impairment are separated into the amount related (k) Property, Plant and Equipment
to credit loss, which is recognized in earnings and the amount Property, plant and equipment are stated at cost. Depreciation
related to all other factors is recognized in other comprehen- is calculated principally by the declining-balance method,
sive income (loss). For available-for-sale securities for which the except for certain assets which are depreciated by the straight-
declines are deemed to be other-than-temporary and there is line method over the estimated useful lives of the assets.
an intent to sell, the impairments in their entirety are recog- The depreciation period ranges from 3 years to 60 years for
nized in earnings. Canon recognizes an impairment loss to the buildings and 1 year to 20 years for machinery and equipment.
extent by which the cost basis of the investment exceeds the Assets leased to others under operating leases are stated at
fair value of the investment. cost and depreciated to the estimated residual value of the as-
Canon measures non-marketable equity securities without sets by the straight-line method over the lease term, generally
readily determinable fair value at cost, minus impairment, if from 2 years to 5 years.
any, plus or minus changes resulting from observables price
changes in orderly transactions for the identical or a similar (l) Goodwill and Other Intangible Assets
investment of the same issuer. Goodwill and other intangible assets with indefinite useful
Realized gains and losses are determined by the average lives are not amortized, but are instead tested for impairment
cost method and reflected in earnings. annually in the fourth quarter of each year, or more frequently
Investments in affiliated companies over which Canon if indicators of potential impairment exist. All goodwill is as-
has the ability to exercise significant influence, but does not signed to the reporting unit or units that benefit from the syn-
hold a controlling financial interest, are accounted for by the ergies arising from each business combination. If the carrying
equity method. amount assigned to the reporting unit exceeds the fair value
of the reporting unit, Canon recognizes an impairment charge
(h) Allowance for Doubtful Receivables in an amount equal to that excess, limited to the total amount
Allowance for doubtful trade and finance receivables is main- of goodwill allocated to that reporting unit.
tained for all customers based on a combination of factors, in- Intangible assets with finite useful lives consist primarily
cluding aging analysis, macroeconomic conditions and histori- of software, trademarks, patents and developed technology,
cal experience. An additional reserve for individual accounts is license fees and customer relationships, which are amortized
recorded when Canon becomes aware of a customer’s inability using the straight-line method. The estimated useful lives of
to meet its financial obligations, such as in the case of bank- software are from 3 years to 7 years, trademarks are 15 years,
ruptcy filings. If circumstances related to customers change, patents and developed technology are from 7 years to 17
estimates of the recoverability of receivables would be further years, license fees are 7 years, and customer relationships are
adjusted. When all collection options are exhausted including from 11 years to 15 years, respectively. Certain costs incurred
legal recourse, the accounts or portions thereof are deemed to in connection with developing or obtaining internal-use soft-
be uncollectable and charged against the allowance. ware are capitalized. These costs consist primarily of payments
made to third parties and the salaries of employees working
(i) Inventories on such software development. Costs incurred in connection
Inventories are stated at the lower of cost or net realizable with developing internal-use software are capitalized at the
value. Cost is determined by the average method for domestic application development stage. In addition, Canon develops

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
or obtains certain software to be sold where related costs are in an amount that reflects the consideration to which Canon
capitalized after establishment of technological feasibility. expects to be entitled in exchange for transferring these goods
or services. For further information, please refer to Note 15.
(m) Environmental Liabilities
Liabilities for environmental remediation and other environ- (r) Research and Development Costs
mental costs are accrued when environmental assessments or Research and development costs are expensed as incurred.
remedial efforts are probable and the costs can be reasonably
estimated. Such liabilities are adjusted as further information (s) Advertising Costs
develops or circumstances change. Costs of future obligations Advertising costs are expensed as incurred. Advertising ex-
are not discounted to their present values. penses were ¥58,729 million, ¥61,207 million and ¥58,707
million for the years ended December 31, 2018, 2017 and
(n) Income Taxes 2016, respectively.
Deferred tax assets and liabilities are recognized for the estimat-
ed future tax consequences attributable to differences between (t) Shipping and Handling Costs
the financial statement carrying amounts of existing assets and Shipping and handling costs totaled ¥54,844 million, ¥52,953
liabilities and their respective tax bases and operating loss and million and ¥44,296 million for the years ended December 31,
tax credit carryforwards. Deferred tax assets and liabilities are 2018, 2017 and 2016, respectively, and are included in selling,
measured using enacted tax rates expected to apply to taxable general and administrative expenses in the consolidated state-
income in the years in which those temporary differences are ments of income.
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in (u) Derivative Financial Instruments
income in the period that includes the enactment date. Canon All derivatives are recognized at fair value and are included in
records a valuation allowance to reduce the deferred tax assets prepaid expenses and other current assets, or other current
to the amount that is more likely than not realizable. liabilities in the consolidated balance sheets.
Canon recognizes the financial statement effects of tax posi- Canon uses and designates certain derivatives as a hedge
tions when it is more likely than not, based on the technical of a forecasted transaction or the variability of cash flows to
merits, that the tax positions will be sustained upon examina- be received or paid related to a recognized asset or liability
tion by the tax authorities. Benefits from tax positions that meet (“cash flow” hedge). Canon formally documents all relation-
the more-likely-than-not recognition threshold are measured at ships between hedging instruments and hedged items, as well
the largest amount of benefit that is greater than 50% likely of as its risk-management objective and strategy for undertaking
being realized upon settlement. Interest and penalties accrued various hedge transactions. Canon also formally assesses, both
related to unrecognized tax benefits are included in income at the hedge’s inception and on an ongoing basis, whether
taxes in the consolidated statements of income. the derivatives that are used in hedging transactions are highly
effective in offsetting changes in cash flows of hedged items.
(o) Stock-Based Compensation When it is determined that a derivative is not highly effective
Canon measures stock-based compensation cost at the grant as a hedge or that it has ceased to be a highly effective hedge,
date, based on the fair value of the award, and recognizes the Canon discontinues hedge accounting prospectively. Changes
cost on a straight-line basis over the requisite service period, in the fair value of a derivative that is designated and qualifies
which is the vesting period. as a cash flow hedge are recorded in other comprehensive
income (loss), until earnings are affected by the variability in
(p) N
et Income Attributable to Canon Inc. cash flows of the hedged item. Gains and losses from hedg-
Shareholders per Share ing ineffectiveness are included in other income (deductions).
Basic net income attributable to Canon Inc. shareholders Gains and losses related to the components of hedging instru-
per share is computed by dividing net income attributable ments excluded from the assessment of hedge effectiveness
to Canon Inc. by the weighted-average number of common are included in other income (deductions).
shares outstanding during each year. Diluted net income at- Canon also uses certain derivative financial instruments
tributable to Canon Inc. shareholders per share includes the which are not designated as hedges. The changes in fair val-
effect from potential issuances of common stock based on the ues of these derivative financial instruments are immediately
assumptions that all stock options were exercised. recorded in earnings.
Canon classifies cash flows from derivatives as cash flows
(q) Revenue Recognition from operating activities in the consolidated statements of
Canon generates revenue principally through the sale of cash flows.
office, imaging system and medical system products, indus-
trial equipment, supplies and related services under separate (v) Guarantees
contractual arrangements. Revenue is recognized when, or as, Canon recognizes, at the inception of a guarantee, a liability
control of promised goods or services transfers to customers for the fair value of the obligation it has undertaken in issu-
ing guarantees.
BUSINESS SEGMENT/
CORPORATE STRUCTURE
(w) Recent Accounting Guidance of net benefit cost and present it in the same line item or items
as other compensation costs arising from services rendered by
Recently adopted accounting guidance the pertinent employees during the period. The other compo-
In May 2014, the Financial Accounting Standards Board nents of net benefit cost are required to be presented separately
(“FASB”) issued Accounting Standards Update (“ASU”) No. from the service cost component, such as in other income (de-
2014-09, Revenue from Contracts with Customers (Topic ductions) in the income statement. The amendments also allow
606) Section C – Background Information and Basis for only the service cost component to be eligible for capitalization
Conclusions, which is a new accounting standard related (for example, as a cost of internally manufactured inventory).
to revenue from contracts with customers, as amended. The amendments were to be applied retrospectively for the
(Accounting Standards Codification (“ASC”) 606) This stan- presentation of the service cost component and the other com-
dard requires an entity to recognize revenue when promised ponents of net benefit cost, and prospectively for the capitaliza-
goods or services are transferred to customers in an amount tion of the service cost component of net benefit cost. Canon
that reflects the consideration to which the entity expects to adopted this guidance from the quarter beginning January 1,
be entitled in exchange for those goods or services. Canon 2018. The adoption of the new presentation requirement of the
adopted this standard from the quarter beginning January service cost component and the other components of net ben-
1, 2018 with modified retrospective method of adoption to efit cost resulted in reclassification of ¥2,137 million and ¥1,835
contracts that were not completed as of the adoption. The million from cost of sales, ¥4,419 million and ¥4,161 million
cumulative-effects to the retained earnings and the impact from selling, general and administrative expenses and ¥3,318
on the consolidated result of operations for the year ended million and ¥6,445 million from research and development
December 31, 2018 from the adoption of this standard were expenses into other income (deductions) for the years ended
not material. For further information, please refer to Note 15. December 31, 2017 and 2016, respectively. Please refer to Note
In January 2016, the FASB issued ASU No. 2016-01, Financial 11 for additional information. The adoption of the capitalization
Instruments – Overall (Subtopic 825-10): Recognition and of the service cost component of net benefit cost did not have
Measurement of Financial Assets and Financial Liabilities, which a material impact on its consolidated results of operations and
addresses certain aspects of recognition, measurement, presen- financial condition.
tation, and disclosure of financial instruments. This guidance
includes the requirement that equity investments that do not re- Recently issued accounting guidance not yet adopted
sult in consolidation and are not accounted for under the equity In February 2016, the FASB issued ASU No. 2016-02, Leases
method be measured at fair value with changes in the fair value (Topic 842) Section A – Leases: Amendments to the FASB
recognized in net income. Canon adopted this standard from Accounting Standards Codification, which requires lessees to
the quarter beginning January 1, 2018, and Canon recognized recognize most leases on their balance sheets but recognize
a cumulative-effect adjustment to retained earnings of ¥5,343 expenses on their income statements in a manner similar to the
million as of January 1, 2018 for the unrealized gains, net of current guidance. For lessors, the standard modifies the clas-
tax, on available-for-sale equity securities previously recognized sification criteria and the accounting for sales-type and direct
in accumulated other comprehensive income. financing leases. FASB also modified the definition of lease.
In October 2016, the FASB issued ASU No. 2016-16, Income Additionally, the guidance expands qualitative and quantitative
Taxes (Topic 740): Intra-entity Transfers of Assets other than disclosures related to lease. The guidance is effective for annual
Inventory, which requires an entity to recognize the income tax reporting periods beginning after December 15, 2018. Canon
consequences of an intra-entity transfer of an asset other than applies the guidance from the quarter beginning after January
inventory when the transfer occurs. Consequently, the amend- 1, 2019. Canon applies the package of practical expedients that
ments in this guidance eliminate the exception for an intra- allows us not to reassess whichever any existing contracts at
entity transfer of an asset other than inventory. Two common or expired contracts prior to the adoption date are or contain
examples of assets included in the scope of this guidance are leases, lease classification and whichever initial direct costs quali-
intellectual property and property, plant, and equipment. The fy for capitalization, in addition to short term lease exception.
amendments in this guidance should be applied on a modified Canon also adopts the transition method which no restatement
retrospective basis through a cumulative effect adjustment of comparative periods and no reassessment of land easements
directly to retained earnings as of the beginning of the period not previously accounted for as a lease that exist at or expired
of adoption. Canon adopted this standard from the quarter prior to the adoption date are required. The right of use assets
beginning January 1, 2018. The adoption of this guidance for operating leases recognized at January 1, 2019 is ¥125,649
did not have a material impact on its consolidated results of million almost same as the lease obligations and are included in
operation and financial condition. noncurrent assets and liabilities in the accompanying consolidat-
In March 2017, the FASB issued ASU No. 2017-07, ed balance sheets. Canon does not expect the adoption of this
Compensation – Retirement Benefits (Topic 715): Improving guidance such as the modification the definition of lease and
the Presentation of Net Periodic Pension Cost and Net Periodic the changes in lessor accounting to have material impact on its
Postretirement Benefit Cost, which requires an entity to disag- consolidated results of operation.
gregate the service cost component from the other components

In August 2017, the FASB issued ASU No. 2017-12, retrospective basis through a cumulative effect adjustment
Derivatives and Hedging (Topic 815): Targeted Improvements directly to retained earnings as of the beginning of the period
to Accounting for Hedging Activities, which amends existing of adoption. This guidance is effective for Canon from the
guidance to simplify the application of the hedge accounting quarter beginning January 1, 2019. Gains and losses resulting
in certain situations and enable an entity to better portray the from derivative financial instruments designated as cash flow
economic results of an entity’s risk management activities in hedges associated with forecasted intercompany sales, which
its financial statements. This guidance eliminates the require- are currently included in other income (deductions) in the con-
ment to separately measure and report hedge ineffectiveness, solidated statements of income, will be included in net sales
and requires an entity to present the earnings effect of the after the adoption of this guidance. Canon does not expect
hedging instrument in the same income statement line item other material impacts from the adoption on its consolidated
which the earnings effect of the hedged item is reported. The results of operation and financial condition.
amendments in this guidance should be applied on a modified
2. INVESTMENTS
The cost, gross unrealized holding gains, gross unrealized holding losses and fair value for available-for-sale debt securities and equity
securities included in short-term investments and investments by major security type at December 31, 2018 and 2017 are as follows:
December 31
Gross unrealized Gross unrealized
Millions of yen Cost holding gains holding losses Fair value
2018: Current:
Corporate bonds 630 — — 630
630 — — 630
Gross unrealized Gross unrealized

Millions of yen Cost holding gains holding losses Fair value
2017: Current:
Corporate bonds 1,222 — — 1,222
1,222 — — 1,222
Noncurrent:
Government bonds 305 — 16 289
Corporate bonds 640 182 — 822
Fund trusts* 122 2 — 124
Equity securities* 10,965 11,612 1,676 20,901
12,032 11,796 1,692 22,136
*A
fter the adoption of ASU No. 2016-01, equity investments are measured at fair value with changes in the fair value recognized in net income from the quarter
beginning January 1, 2018.
Maturities of available-for-sale debt securities included in short-term investments in the accompanying consolidated balance
sheet are as follows at December 31, 2018:
Millions of yen
Cost Fair value
Due within one year 630 630
630 630
The unrealized and realized gains and losses related to debt securities were not significant for the years ended December 31,
2018, 2017 and 2016, respectively.

BUSINESS SEGMENT/
CORPORATE STRUCTURE
The unrealized and realized gains and losses related to equity securities for the year ended December 31, 2018 are as follows:
Years ended December 31, 2018 Millions of yen

Net gains and (losses) recognized during the period on equity securities (6,092)
Less: Net gains and (losses) recognized during the period on equity securities sold during the period 675
Unrealized gains and (losses) recognized during the period on equity securities still held at December 31 (6,767)
Gross realized gains related to equity securities were equity securities accounted for under the cost method totaled
¥18,514 million and ¥750 million for the years ended ¥3,760 million at December 31, 2017. The impairment or
December 31, 2017 and 2016, respectively. Gross realized other adjustments resulting from observable price changes
losses, including write-downs for impairments that were other- recorded during the year ended December 31, 2018 and 2017
than-temporary, were ¥42 million and ¥1,032 million for the were not significant.
years ended December 31, 2017, 2016, respectively. Time deposits with original maturities of more than three
During the year ended December 31, 2017, Canon contrib- months are ¥326 million and ¥743 million at December 31,
uted certain marketable equity securities, not including those 2018 and 2017, respectively, and are included in short-term
of its subsidiaries and affiliated companies, to an established investments in the accompanying consolidated balance sheets.
employee retirement benefit trust, with no cash proceeds Investments in affiliated companies accounted for by the
there on. The fair value of those securities at the time of equity method amounted to ¥21,312 million and ¥20,496
contribution was ¥30,473 million. Upon contribution of those million at December 31, 2018 and 2017, respectively.
available-for-sale securities, the unrealized gains amounting Canon’s share of the net earnings in affiliated companies ac-
to ¥17,836 million were realized and were included in “Other, counted for by the equity method, included in other income
net” in the consolidated statements of income. (deductions), were earnings of ¥1,414 million, ¥1,196 million
The carrying amount of non-marketable equity securities and ¥890 million for the years ended December 31, 2018,
without readily determinable fair value totaled ¥4,629 million 2017 and 2016 respectively.
at December 31, 2018. Aggregate cost of non-marketable
3. TRADE RECEIVABLES
Trade receivables are summarized as follows:
December 31 Millions of yen
2018 2017
Notes 29,878 37,077
Accounts 594,552 627,173
624,430 664,250
Less allowance for doubtful receivables (11,477) (13,378)
612,953 650,872
4. INVENTORIES
Inventories are summarized as follows:
2018 2017
Finished goods 393,820 377,632
Work in process 165,003 144,251
Raw materials 52,458 48,150
611,281 570,033

5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost less accumulated depreciation and are summarized as follows:
2018 2017
Land 272,443 274,551
Buildings 1,629,927 1,638,202
Machinery and equipment 1,793,499 1,804,982
Construction in progress 67,045 46,940
3,762,914 3,764,675
Less accumulated depreciation (2,671,922) (2,638,055)
1,090,992 1,126,620
Depreciation expenses for the years ended December 31, 31, 2018 and 2017, respectively, and are included in other
2018, 2017 and 2016 were ¥175,771 million, ¥189,712 mil- current liabilities in the accompanying consolidated balance
lion and ¥199,133 million, respectively. sheets. Fixed assets presented in the consolidated statements
Amounts due for purchases of property, plant and equip- of cash flows include property, plant and equipment and
ment were ¥32,433 million and ¥23,432 million at December intangible assets.
6. FINANCE RECEIVABLES AND OPERATING LEASES
Finance receivables represent financing leases which consist 7 years. The components of the finance receivables, which are
of sales-type leases and direct-financing leases resulting from included in prepaid expenses and other current assets, and
the sales of Canon’s and complementary third-party products. other assets in the accompanying consolidated balance sheets,
These receivables typically have terms ranging from 1 year to are as follows:

2018 2017
Total minimum lease payments receivable 351,198 361,686
Unguaranteed residual values 12,661 15,055
Executory costs (2,112) (2,216)
Unearned income (31,007) (32,286)
330,740 342,239
Less allowance for credit losses (2,675) (2,681)
328,065 339,558
Less current portion (111,629) (120,186)
216,436 219,372
The activity in the allowance for credit losses is as follows:
Years ended December 31 Millions of yen

2018 2017
Balance at beginning of year 2,681 2,325
Charge-offs (1,284) (1,523)
Provision 938 1,436
Translation adjustments and other 340 443
Balance at end of year 2,675 2,681

BUSINESS SEGMENT/
CORPORATE STRUCTURE
Canon has policies in place to ensure that its products are case of bankruptcy filings. Finance receivables which are past
sold to customers with an appropriate credit history, and con- due or individually evaluated for impairment at December 31,
tinuously monitors its customers’ credit quality based on infor- 2018 and 2017 are not significant.
mation including length of period in arrears, macroeconomic The cost of equipment leased to customers under operat-
conditions, initiation of legal proceedings against customers ing leases included in property, plant and equipment, net at
and bankruptcy filings. The allowance for credit losses of fi- December 31, 2018 and 2017 was ¥120,457 million and
nance receivables are evaluated collectively based on historical ¥103,078 million, respectively. Accumulated depreciation on
experience of credit losses. An additional reserve for individual equipment under operating leases at December 31, 2018 and
accounts is recorded when Canon becomes aware of a cus- 2017 was ¥82,698 million and ¥78,307 million, respectively.
tomer’s inability to meet its financial obligations, such as in the
The following is a schedule by year of the future minimum lease payments to be received under financing leases and noncan-
celable operating leases at December 31, 2018.
Year ending December 31: Millions of yen

Financing leases Operating leases
2019 127,068 9,207
2020 98,772 6,409
2021 66,719 2,917
2022 37,181 1,202
2023 14,792 317
Thereafter 6,666 60
351,198 20,112
Canon has a syndication arrangement to sell its entire inter- in other, net under the cash flow from operating activities in
ests in finance receivables to a third-party financial institution. the consolidated statement of cash flows. Canon continues to
The transactions under the arrangement are accounted for as provide collection and administrative services for the financial
sales in accordance with ASC 860 “Transfers and Servicing.” institution. The amount associated with the servicing liability
The finance receivables sold and derecognized from its consoli- measured at fair value was not material as of December 31,
dated balance sheet was ¥21,909 million during the year end- 2018. Canon also retains limited recourse obligations which
ed December 31, 2018 and the amount remained uncollected cover credit defaults. The recourse obligation was not material
was ¥22,956 million as of December 31, 2018. This amount as of December 31, 2018.
includes uncollected finance receivables which were sold There were no significant transfers of finance receivables for
before 2018. Cash proceeds from the transaction are included the years ended December 31, 2017 and 2016.
7. ACQUISITIONS
On March 17, 2016, Canon entered into a Shares and Other five-year initiative that Canon has been implementing since
Securities Transfer Agreement with Toshiba Corporation and 2016, “embracing the challenge of new growth through a
acquired the share options for consideration of cash to acquire grand strategic transformation” has been set as a basic policy.
all the ordinary shares of Toshiba Medical Systems Corporation With regard to “strengthening and growing new businesses,
which was renamed as Canon Medical Systems Corporation and creating future businesses,” a particularly important strat-
(“CMSC”), as of January 4, 2018, which was exercisable upon egy, Canon intends to develop medical system business within
the clearances of necessary competition regulatory authori- the realm of “safety and security,” as a next-generation pillar
ties. As such clearances were obtained, Canon exercised the of growth.
share options and acquired all the ordinary shares of CMSC CMSC is one of the leading global companies in the medical
on December 19, 2016. The acquisition date was December equipment industry. Within the field of medical X-ray com-
19, 2016 and the purchase price was ¥665,498 million, which puted tomography systems in particular, CMSC is the over-
approximates the fair value at that date. whelming market share leader in Japan and has been steadily
The acquisition was accounted for using the acquisition increasing its global market share. By maximizing the com-
method of accounting. Acquisition-related costs were ex- bination of both companies’ management resources, Canon
pensed as incurred and were not material. aims to solidify its business foundation for medical system that
Under Phase V of the Excellent Global Corporation Plan, a can contribute to the world.

The purchase price allocation was based on estimated price allocation was preliminary at December 31, 2016. The
fair values of the assets acquired and liabilities assumed at purchase price allocation was finalized in the fourth quarter
acquisition date. Since the acquisition date of CMSC was of 2017. The certain underlying inputs for inventories and
near the balance sheet date in 2016, and CMSC is composed intangible assets have been updated during the measure-
of various entities located around the world, the purchase ment period.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at acquisition date.
Measurement
Period
Millions of yen Preliminary Adjustment Final
Cash and cash equivalents 25,301 — 25,301
Other current assets 169,545 (1,962) 167,583
Intangible assets 227,500 627 228,127
Other noncurrent assets 42,975 — 42,975
Total assets acquired 465,321 (1,335) 463,986
Current liabilities 199,223 (877) 198,346
Noncurrent liabilities 92,231 (1,049) 91,182
Total liabilities assumed 291,454 (1,926) 289,528
Noncontrolling interest 1,047 — 1,047
Net identifiable assets acquired 172,820 591 173,411
Goodwill 492,678 (591) 492,087
Net assets acquired 665,498 — 665,498
Intangible assets acquired, which are subject to amortiza- synergies from combining operations of CMSC and Canon,
tion, mainly consist of customer relationships of ¥143,600 such as accelerating entry into new fields, further improve-
million, and patents and developed technology of ¥73,000 ment in quality through shared production technology and ex-
million. Canon has estimated the amortization period for the panding business domains through the enhancement of R&D
customer relationships, and patents and developed technol- capabilities. None of the goodwill is expected to be deductible
ogy to be 15 years and 10 years, respectively. The weighted for tax purposes.
average amortization period for all intangible assets is approxi- Canon acquired businesses other than that described above
mately 13 years. during the years ended December 31, 2018 and 2017 that
Goodwill recorded is attributable primarily to expected were not material to its consolidated financial statements.
8. GOODWILL AND OTHER INTANGIBLE ASSETS
Intangible assets subject to amortization acquired during the Intangible assets subject to amortization acquired during
year ended December 31, 2018, including those recorded the year ended December 31, 2017, including those recorded
from businesses acquired, totaled ¥48,004 million, which pri- from businesses acquired, totaled ¥35,112 million, which
marily consist of software of ¥36,859 million, and patent and primarily consist of software of ¥33,437 million and customer
developed technology of ¥6,109 million. The weighted aver- relationships of ¥1,203 million. The weighted average amorti-
age amortization periods for intangible assets in total acquired zation periods for intangible assets in total acquired during the
during the year ended December 31, 2018 are approximately year ended December 31, 2017 are approximately 5 years. The
6 years. The weighted average amortization periods for soft- weighted average amortization periods for software and cus-
ware, and patent and developed technology acquired during tomer relationships acquired during the year ended December
the year ended December 31, 2018 are approximately 5 years 31, 2017 are approximately 5 years and 8 years, respectively.
and 11 years, respectively.

BUSINESS SEGMENT/
CORPORATE STRUCTURE
The components of intangible assets subject to amortization at December 31, 2018 and 2017 were as follows:
December 31 2018 2017

Gross carrying Accumulated Gross carrying Accumulated
Millions of yen amount amortization amount amortization
Software 362,130 244,188 342,322 217,654
Customer relationships 156,679 27,263 162,832 22,463
Patents and developed technology 123,831 36,029 121,886 27,085
Trademarks 44,449 12,062 48,823 9,890
License fees 16,071 6,461 13,565 6,375
Other 19,319 9,859 18,592 8,136
722,479 335,862 708,020 291,603
Aggregate amortization expense for the years ended million in 2022, and ¥31,202 million in 2023.
December 31, 2018, 2017 and 2016 was ¥75,783 million, Intangible assets not subject to amortization other than
¥72,169 million and ¥50,963 million, respectively. Estimated goodwill at December 31, 2018 and 2017 were not significant.
amortization expense for intangible assets currently held for the For management reporting purposes, goodwill is not al-
next five years ending December 31 is ¥68,730 million in 2019, located to the segments. Goodwill has been allocated to its
¥54,115 million in 2020, ¥46,067 million in 2021, ¥37,158 respective segment for impairment testing.
The changes in the carrying amount of goodwill by segment for the years ended December 31, 2018 and 2017 were as follows:
Years ended December 31 Imaging Medical Industry and

Millions of yen Office System System Others Unallocated Total
2018: Goodwill -gross 135,125 52,561 499,915 283,577 — 971,178
Accumulated impairment losses (22,069) — — (12,387) — (34,456)
Balance at beginning of year 113,056 52,561 499,915 271,190 — 936,722
Goodwill acquired during the year — — 1,521 6,106 — 7,627
Translation adjustments and other (5,966) (3,891) (540) (25,441) — (35,838)
Goodwill -gross 127,860 48,670 500,896 263,513 — 940,939
Accumulated impairment losses (20,770) — — (11,658) — (32,428)
Balance at end of year 107,090 48,670 500,896 251,855 — 908,511
Years ended December 31 Imaging Medical Industry and

Millions of yen Office System System Others Unallocated*1 Total
2017: Balance at beginning of year* 3
124,993 49,034 — 269,719 492,678 936,424
Goodwill acquired during the year 857 236 — 2,394 — 3,487
Transfer*1 — — 499,855 (7,177) (492,678) —
Impairment loss*2,3 (21,721) — — (12,191) — (33,912)
Translation adjustments and other*3 8,927 3,291 60 18,445 — 30,723
Balance at end of year 113,056 52,561 499,915 271,190 — 936,722
*1 C anon did not complete the allocation of goodwill to the segments for impairment testing which was attributable to the acquisition of CMSC as of December
31, 2016. Based on the realignment of Canon’s internal reporting and management structure, Canon newly established Medical System Business Unit effec-
tive at the beginning of the second quarter of 2017. Goodwill related to CMSC as well as goodwill related to certain medical business which was previously
included in Industry and Others Business Unit have been transferred to Medical System Business Unit.
*2 After entering the commercial printing business through the acquisition of Océ N.V. in 2010, the market environment surrounding this business has become
significantly competitive and rapid technological changes have required increasing investments into R&D. These factors resulted in lower operating margin
than expected, which led to the decline in the estimated fair value of this business which was determined based on the income approach. As the result of the
annual goodwill impairment test as of October 1, 2017, it was determined that the estimated fair value of commercial printing business was less than its carry-
ing value of the reporting unit. Based on the accounting policy described in Note 1, Canon recognized an impairment charge of ¥33,912 million representing
the excess of the carrying amount over the reporting unit’s fair value.
*3 Based on the realignment of Canon’s internal reporting and management structure, from the beginning of the third quarter of 2018, Canon has reclassified
certain businesses from Office Business Unit to Industry and Others Business Unit. The goodwill balance at the beginning of the year ended December 31, 2017
has been restated to reflect the transfer of ¥11,263 million in goodwill between the segments. Impairment loss of ¥12,191 million and translation adjustments
and other of ¥928 million for the year ended December 31, 2017 related to the reclassified business were restated from Office Business Unit to Industry and
Others Business Unit, accordingly.

9. SHORT-TERM LOANS AND LONG-TERM DEBT
Short-term loans consisting of bank borrowings at December 31, 2018 and 2017 were ¥35,887 million and ¥33,398 million,
respectively. The weighted average interest rate on short-term borrowings outstanding at December 31, 2018 and 2017 were
0.43% and 0.52%, respectively.
Long-term debt consisted of the following:

2018 2017
Loan from the banks; bearing interest of 0.07% at December 31, 2018 and
0.06% at December 31, 2017*1 360,000 490,000
Other debt*2 4,602 9,168
364,602 499,168
Less current portion (2,640) (5,930)
361,962 493,238
*1 C
anon entered into the unsecured revolving credit facility contracts expiring in December 2021. Canon prepaid ¥130,000 million of the loan with cash flows
generated during the year ended December 31, 2018. The outstanding loans under the credit facilities are ¥360,000 million at a floating interest of 0.07% and
Canon has no unused credit facilities as of December 31, 2018.
*2 The other debt consisted of term-loans and capital lease obligations as of December 31, 2018 and 2017.
The aggregate annual maturities of long-term debt outstanding at December 31, 2018 were as follows:

2019 2,640
2020 638
2021 360,805
2022 427
2023 82
Thereafter 10
364,602
Both short-term and long-term bank loans are primarily made request of the bank, and that the bank shall have the right to
under general agreements which provide that security and guar- offset cash deposits against obligations that have become due or,
antees for present and future indebtedness will be given upon in the event of default, against all obligations due to the bank.
10. TRADE PAYABLES
Trade payables are summarized as follows:

2018 2017
Notes 68,140 81,002
Accounts 284,349 299,652
352,489 380,654
11. EMPLOYEE RETIREMENT AND SEVERANCE BENEFITS
The Company and certain of its subsidiaries have contribu- under the plans are based on employee earnings and years of
tory and noncontributory defined benefit pension plans service. The Company and certain of its subsidiaries also have
covering substantially all of their employees. Benefits payable defined contribution pension plans covering substantially all

BUSINESS SEGMENT/
CORPORATE STRUCTURE
of their employees. CMSC temporarily participated in Toshiba provision. Participants who have not transferred are still part
Corporate Pension Funds (“Toshiba Funds”) after CMSC was of Toshiba Funds as of December 31, 2018. Canon calculated
acquired by Canon in 2016. In April 2018, CMSC established a the projected benefit obligations for the participants with
new pension provision which provides participants an equiva- Toshiba Funds based on the benefit level of Toshiba Funds and
lent level of benefits as compared to the Toshiba Funds. As included the proportional share of the plan assets of CMSC to
of December 31, 2018, a majority of plan participants have which they have legal right in the following tables.
been transferred from the Toshiba Funds into the new pension
Obligations and funded status

Reconciliations of beginning and ending balances of the projected benefit obligations and the fair value of the plan assets are as follows:
December 31 Japanese plans Foreign plans

Millions of yen Millions of yen
2018 2017 2018 2017
Change in benefit obligations:
Projected benefit obligations at beginning of year 929,630 906,007 423,579 392,086
Service cost 31,241 30,889 7,982 6,962
Interest cost 5,419 5,689 8,691 8,691
Plan participants’ contributions — — 1,535 1,644
Actuarial (gain) loss (1,844) 11,112 (24,297) (1,760)
Benefits paid (33,477) (29,020) (10,135) (7,884)
Acquisition — 4,239 — —
Plan amendments (3,963) 1,149 3,257 (1,069)
Curtailments and settlements — (435) (1,149) —
Foreign currency exchange rate changes — — (23,514) 24,909
Projected benefit obligations at end of year 927,006 929,630 385,949 423,579
Change in plan assets:
Fair value of plan assets at beginning of year 735,513 667,436 254,020 224,939
Actual return on plan assets (38,010) 47,376 (6,042) 14,262
Employer contributions 12,651 43,468 22,393 7,160
Plan participants’ contributions — — 1,535 1,644
Benefits paid (27,459) (23,967) (10,135) (7,884)
Acquisition — 1,223 — —
Settlements — (23) (1,150) —
Foreign currency exchange rate changes — — (11,979) 13,899
Fair value of plan assets at end of year 682,695 735,513 248,642 254,020
Funded status at end of year (244,311) (194,117) (137,307) (169,559)
Employer contributions for the year ended December 31, 2017 include contribution of equity securities to a retirement benefit
trust. The fair value of those securities at the time of contribution was ¥30,473 million.
Amounts recognized in the consolidated balance sheets at December 31, 2018 and 2017 are as follows:
2018 2017 2018 2017

Other assets 1,536 1,695 1,306 1,215
Accrued expenses (679) — (992) (1,004)
Accrued pension and severance cost (245,168) (195,812) (137,621) (169,770)
(244,311) (194,117) (137,307) (169,559)

Amounts recognized in accumulated other comprehensive income (loss) at December 31, 2018 and 2017 before the effect of
income taxes are as follows:
2018 2017 2018 2017

Actuarial loss 267,355 221,106 95,121 105,883
Prior service credit (48,392) (57,430) (227) (3,638)
218,963 163,676 94,894 102,245
The accumulated benefit obligation for all defined benefit plans was as follows:
2018 2017 2018 2017

Accumulated benefit obligation 893,154 894,329 371,653 402,390
The projected benefit obligations and the fair value of plan assets for the pension plans with projected benefit obligations in
excess of plan assets, and the accumulated benefit obligations and the fair value of plan assets for the pension plans with accu-
mulated benefit obligations in excess of plan assets are as follows:
2018 2017 2018 2017

Plans with projected benefit obligations in excess of plan assets:
Projected benefit obligations 918,736 924,536 384,167 420,383
Fair value of plan assets 672,889 728,724 245,554 249,609
Plans with accumulated benefit obligations in excess of plan assets:
Accumulated benefit obligations 891,204 889,652 369,215 394,840
Fair value of plan assets 670,826 728,724 244,826 245,247
Components of net periodic benefit cost and other amounts recognized in other comprehensive income (loss)
Net periodic benefit cost for Canon’s employee retirement and severance defined benefit plans for the years ended December 31,
2018, 2017 and 2016 consisted of the following components:
Years ended December 31 Japanese plans Foreign plans
2018 2017 2016 2018 2017 2016

Service cost 31,241 30,889 29,367 7,982 6,962 6,816
Interest cost 5,419 5,689 8,238 8,691 8,691 8,792
Expected return on plan assets (21,983) (20,493) (19,443) (12,601) (10,722) (10,012)
Amortization of prior service credit (13,001) (12,860) (13,230) (217) (83) 85
Amortization of actuarial loss 11,900 14,220 10,944 5,108 5,747 2,185
(Gain) loss on curtailments and settlements — (63) — — — —
13,576 17,382 15,876 8,963 10,595 7,866
Service cost component of net periodic benefit cost for consolidated statements of income. The components other than
Canon’s employee retirement and severance defined benefit the service cost component are included in other, net of other
plans is included in cost of sales and operating expenses in the income (deductions) in the consolidated statements of income.

BUSINESS SEGMENT/
CORPORATE STRUCTURE
Other changes in plan assets and benefit obligations recognized in other comprehensive income (loss) for the years ended
December 31, 2018, 2017 and 2016 are summarized as follows:
2018 2017 2016 2018 2017 2016

Current year actuarial (gain) loss 58,149 (15,771) 53,076 (5,654) (5,300) 47,365
Current year prior service credit (3,963) 1,149 (4,734) 3,257 (1,069) —
Amortization of actuarial loss (11,900) (14,220) (10,944) (5,108) (5,747) (2,185)
Amortization of prior service credit 13,001 12,860 13,230 217 83 (85)
Curtailments and settlements — 19 — (63) — —
55,287 (15,963) 50,628 (7,351) (12,033) 45,095
The estimated prior service credit and actuarial loss for the defined benefit pension plans that will be amortized from accumu-
lated other comprehensive income (loss) into net periodic benefit cost over the next year are summarized as follows:
Japanese plans Foreign plans
Prior service credit (11,887) (57)

Actuarial loss 15,230 4,852
Assumptions
Weighted-average assumptions used to determine benefit obligations are as follows:
2018 2017 2018 2017

Discount rate 0.6% 0.6% 2.4% 2.2%
Assumed rate of increase in future compensation levels 2.6% 2.6% 1.9% 1.8%
Weighted-average assumptions used to determine net periodic benefit cost are as follows:
2018 2017 2016 2018 2017 2016

Discount rate 0.6% 0.7% 1.1% 2.2% 2.2% 3.0%
Assumed rate of increase in future compensation levels 2.6% 2.6% 3.0% 1.8% 2.1% 2.0%
Expected long-term rate of return on plan assets 2.9% 3.1% 3.1% 4.4% 4.2% 4.4%
Canon determines the expected long-term rate of return “model” portfolio in order to produce a total return that will
based on the expected long-term return of the various asset match the expected return on a mid-term to long-term basis.
categories in which it invests. Canon considers the current Canon evaluates the gap between expected return and actual
expectations for future returns and the actual historical returns return of invested plan assets on an annual basis to determine
of each plan asset category. if such differences necessitate a revision in the formulation of
the “model” portfolio. Canon revises the “model” portfolio
Plan assets when and to the extent considered necessary to achieve the
Canon’s investment policies are designed to ensure adequate expected long-term rate of return on plan assets.
plan assets are available to provide future payments of pension Canon’s model portfolio for Japanese plans consists of three
benefits to eligible participants. Taking into account the expect- major components: approximately 25% is invested in equity
ed long-term rate of return on plan assets, Canon formulates securities, approximately 50% is invested in debt securities,
a “model” portfolio comprised of the optimal combination of and approximately 25% is invested in other investment ve-
equity securities and debt securities. Plan assets are invested in hicles, primarily consisting of investments in life insurance
individual equity and debt securities using the guidelines of the company general accounts.

Outside Japan, investment policies vary by country, but the instruments, and corporate bonds. Prior to investing, Canon
long-term investment objectives and strategies remain con- has investigated the quality of the issue, including rating, inter-
sistent. Canon’s model portfolio for foreign plans has been est rate, and repayment dates, and has appropriately diversified
developed as follows: approximately 35% is invested in equity the investments. Pooled funds are selected using strategies
securities, approximately 25% is invested in debt securities, consistent with the equity and debt securities described above.
and approximately 40% is invested in other investment ve- As for investments in life insurance company general accounts,
hicles, primarily consisting of investments in real estate assets. the contracts with the insurance companies include a guaran-
The equity securities are selected primarily from stocks teed interest rate and return of capital. With respect to invest-
that are listed on the securities exchanges. Prior to investing, ments in foreign investment vehicles, Canon has investigated
Canon has investigated the business condition of the investee the stability of the underlying governments and economies, the
companies, and appropriately diversified investments by type market characteristics such as settlement systems and the taxa-
of industry and other relevant factors. The debt securities tion systems. For each such investment, Canon has selected the
are selected primarily from government bonds, public debt appropriate investment country and currency.
The three levels of input used to measure fair value are more fully described in Note 21. The fair values of Canon’s pension
plan assets at December 31, 2018 and 2017, by asset category, are as follows:
December 31, 2018 Millions of yen

Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
Equity securities:
Japanese companies (a) 67,283 — — 67,283 — — — —
Foreign companies 5,451 — — 5,451 8,567 — — 8,567
Pooled funds (b) — 137,712 — 137,712 — 49,312 — 49,312
Debt securities:
Government bonds (c) 137,858 — — 137,858 — — — —
Municipal bonds — 1,483 — 1,483 — 2,642 — 2,642
Corporate bonds — 12,595 — 12,595 — 6,318 — 6,318
Pooled funds (d) — 140,712 — 140,712 — 59,419 — 59,419
Mortgage backed securities
(and other asset backed securities) — 8,489 — 8,489 — — — —
Life insurance company
general accounts — 123,747 — 123,747 — 9,019 — 9,019
Other assets — 30,009 1,451 31,460 — 95,844 — 95,844
Investment measured at net asset value — — — 15,905 — — — 17,521
210,592 454,747 1,451 682,695 8,567 222,554 — 248,642
December 31, 2017 Millions of yen

Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
Equity securities:
Japanese companies (e) 83,765 — — 83,765 — — — —
Foreign companies 8,261 — — 8,261 32,240 — — 32,240
Pooled funds (f) — 164,946 — 164,946 — 73,968 — 73,968
Debt securities:
Government bonds (g) 138,092 — — 138,092 9,343 — — 9,343
Municipal bonds — 1,166 — 1,166 — 2,901 — 2,901
Corporate bonds — 15,246 — 15,246 — 22,045 — 22,045
Pooled funds (h) — 130,507 — 130,507 — 25,821 — 25,821
Mortgage backed securities
— 8,076 — 8,076 — 3 — 3
(and other asset backed securities)
Life insurance company
— 126,985 — 126,985 — 8,683 — 8,683
general accounts
Other assets — 43,070 — 43,070 — 73,320 — 73,320
Investment measured at net asset value — — — 15,399 — — — 5,696
230,118 489,996 — 735,513 41,583 206,741 — 254,020

BUSINESS SEGMENT/
CORPORATE STRUCTURE
(a) The plan’s equity securities include common stock of the government bonds, 45% foreign government bonds, 5%
Company and certain of its subsidiaries in the amounts of Japanese municipal bonds, and 20% corporate bonds for
¥147 million. Japanese plans. These funds invest in approximately 70%
(b) These funds invest in listed equity securities consisting of foreign government bonds and 30% corporate bonds for
approximately 30% Japanese companies and 70% foreign foreign plans.
companies for Japanese plans, and mainly foreign compa-
nies for foreign plans. Each level into which assets are categorized is based on
(c) This class includes approximately 90% Japanese govern- inputs used to measure the fair value of the assets, and does
ment bonds and 10% foreign government bonds for not necessarily indicate the risks or ratings of the assets.
Japanese plans, and mainly foreign government bonds for Level 1 assets are comprised principally of equity securities
foreign plans. and government bonds, which are valued using unadjusted
(d) These funds invest in approximately 30% Japanese gov- quoted market prices in active markets with sufficient volume
ernment bonds, 50% foreign government bonds, 5% and frequency of transactions. Level 2 assets are comprised
Japanese municipal bonds, and 15% corporate bonds for principally of pooled funds that invest in equity and debt secu-
Japanese plans. These funds invest in approximately 35% rities, corporate bonds, investments in life insurance company
foreign government bonds and 65% corporate bonds for general accounts and other assets. Pooled funds are valued
foreign plans. at their net asset values that are calculated by the sponsor of
(e) The plan’s equity securities include common stock of the the fund and have daily liquidity. Corporate bonds are valued
Company and certain of its subsidiaries in the amounts of using quoted prices for identical assets in markets that are not
¥381 million. active. Investments in life insurance company general accounts
(f) These funds invest in listed equity securities consisting of are valued at conversion value. Other assets are comprised
approximately 30% Japanese companies and 70% foreign principally of interest bearing cash and hedge funds.
companies for Japanese plans, and mainly foreign compa- The fair value of Level 3 asset, consisting of hedge funds,
nies for foreign plans. was ¥1,451 million at December 31, 2018. Amounts of actual
(g) This class includes approximately 90% Japanese govern- returns on, purchases and sales of these assets during the year
ment bonds and 10% foreign government bonds for ended December 31, 2018 were not significant.
Japanese plans, and mainly foreign government bonds for The fair values of plan assets for the participants with
foreign plans. Toshiba Funds by each asset category are calculated based on
(h) These funds invest in approximately 30% Japanese a pro-rata basis of total plan assets of Toshiba Funds.
Contributions
Canon expects to contribute ¥13,089 million to its Japanese defined benefit pension plans and ¥19,311 million to its foreign
defined benefit pension plans for the year ending December 31, 2019.
Estimated future benefit payments

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:
Year ending December 31: Japanese plans Foreign plans

2019 35,604 12,077
2020 36,896 12,214
2021 38,524 13,221
2022 41,775 13,927
2023 43,119 14,562
2024 – 2028 226,704 87,006
Multiemployer pension plans Canon is not liable for other participating employers’ obliga-
The amounts of cost recognized for the multiemployer pen- tions under the terms and conditions of the agreements.
sion plans primarily in the Netherlands for the years ended
December 31, 2018, 2017 and 2016 were ¥4,452 million, Defined contribution plans
¥4,165 million and ¥3,482 million, respectively. The multiem- The amounts of cost recognized for the defined contribution pen-
ployer pension plan in which the subsidiaries in the Netherlands sion plans of the Company and certain of its subsidiaries for the
participated was 102% funded as of December 31, 2017. years ended December 31, 2018, 2017 and 2016 were ¥19,570
The collective bargaining agreements have no expiration date. million, ¥18,979 million and ¥17,603 million, respectively.

12. INCOME TAXES
Domestic and foreign components of income before income taxes and the current and deferred income tax expense attributable
to such income are summarized as follows:

Japanese Foreign Total
2018: Income before income taxes 241,474 121,418 362,892
Income taxes:
Current 75,556 32,443 107,999
Deferred (6,552) (5,297) (11,849)
69,004 27,146 96,150

Income taxes:
Current 80,225 35,402 115,627
Deferred (7,453) (10,150) (17,603)
72,772 25,252 98,024

Income taxes:
Current 47,687 27,806 75,493
Deferred 4,126 3,062 7,188
51,813 30,868 82,681
The Company and its domestic subsidiaries are subject to a statements of income for the years ended December 31, 2016
number of income taxes, which, in the aggregate, represent were ¥3,498 million.
a statutory income tax rate of approximately 31%, 31% and The United States enacted tax reform legislation (the “Tax
33% for the years ended December 31, 2018, 2017 and Reform Legislation”) on December 22, 2017. Due to the Tax
2016, respectively. Reform Legislation, the federal corporate income tax rate in
The statutory income tax rate utilized for deferred tax assets the U.S. is reduced from 35% to 21% from the fiscal year
and liabilities which are expected to be settled or realized in commencing on January 1, 2018. The adjustment to deferred
the future period is approximately 31%. The adjustments tax assets and liabilities for the tax rate change was tax benefit
of deferred tax assets and liabilities for amendments to the of ¥14,563 million for the year ended December 31, 2017.
Japanese tax regulations enacted on March 29, 2016 which The impacts related to other changes from the Tax Reform
have been reflected in income taxes in the consolidated Legislation are not material.
A reconciliation of the Japanese statutory income tax rate and the effective income tax rate as a percentage of income before
income taxes is as follows:
Years ended December 31 2018 2017 2016

Japanese statutory income tax rate 31.0% 31.0% 33.0%
Increase (reduction) in income taxes resulting from:
Expenses not deductible for tax purposes* 0.7 3.7 0.8
Income of foreign subsidiaries taxed at lower
(3.0) (2.1) (3.0)
than Japanese statutory tax rate
Tax credit for research and development expenses (3.4) (4.8) (3.0)
Change in valuation allowance 0.4 1.7 (0.8)
Effect of enacted changes in tax laws and rates on Japanese tax — — 1.4
Effect of enacted changes in U.S. tax laws — (3.6) —
Other 0.8 1.8 5.4
Effective income tax rate 26.5% 27.7% 33.8%
* Expenses not deductible for tax purposes for the year ended December 31, 2017 primarily consist of impairment losses on goodwill.

BUSINESS SEGMENT/
CORPORATE STRUCTURE
Net deferred income tax assets and liabilities are included in the accompanying consolidated balance sheets under the follow-
ing captions:
2018 2017
Other assets 160,541 150,854
Other noncurrent liabilities (70,336) (90,010)
90,205 60,844
The tax effects of temporary differences that give rise to the deferred tax assets and deferred tax liabilities at December 31,
2018 and 2017 are presented below:

2018 2017
Deferred tax assets:
Inventories 10,739 11,921
Accrued business tax 2,361 4,705
Accrued pension and severance cost 105,933 98,114
Research and development – costs capitalized for tax purposes 4,690 5,383
Property, plant and equipment 33,738 33,488
Accrued expenses 28,015 30,126
Net operating losses carried forward 28,549 29,006
Other 38,683 38,526
252,708 251,269
Less valuation allowance (30,734) (30,783)
Total deferred tax assets 221,974 220,486
Deferred tax liabilities:

Undistributed earnings of foreign subsidiaries (7,615) (9,859)
Tax deductible reserve (4,050) (4,396)
Financing lease revenue (26,441) (38,287)
Intangible assets (66,189) (74,377)
Other (27,474) (32,723)
Total deferred tax liabilities (131,769) (159,642)
Net deferred tax assets 90,205 60,844
The net changes in the total valuation allowance were a projections for future taxable income over the periods which
decrease of ¥49 million, an increase of ¥4,096 million and a the net deductible temporary differences are expected to
decrease of ¥6,244 million for the years ended December 31, reverse, management believes it is more likely than not that
2018, 2017 and 2016, respectively. Canon will realize the benefits of these deferred tax assets, net
Based on the level of historical taxable income and of the valuation allowance, at December 31, 2018.
At December 31, 2018, Canon had net operating losses which can be carried forward for income tax purposes of ¥186,114
million to reduce future taxable income. Periods available to reduce future taxable income vary in each tax jurisdiction and gener-
ally range from one year to an indefinite period as follows:
Millions of yen
Within one year 5,854
After one year through five years 26,802
After five years through ten years 38,687
After ten years through twenty years 48,642
Indefinite period 66,129
Total 186,114

Income taxes have not been accrued on undistributed earn- because Canon currently does not expect to have such
ings of domestic subsidiaries as the tax law provides a means amounts distributed or paid as dividends to the Company in
by which the dividends from a domestic subsidiary can be the foreseeable future. Deferred tax liabilities will be recog-
received tax free. nized when Canon expects that it will realize those undistrib-
Canon has not recognized deferred tax liabilities of ¥27,278 uted earnings in a taxable manner, such as through receipt of
million for a portion of undistributed earnings of foreign dividends or sale of the investments.
subsidiaries of ¥1,001,310 million as of December 31, 2018
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

2018 2017 2016
Balance at beginning of year 10,282 7,318 6,056
Additions for tax positions of the current year 45 2,956 2,741
Additions for tax positions of prior years 178 250 —
Reductions for tax positions of prior years (17) (915) (665)
Settlements with tax authorities (1,286) — (370)
Other (553) 673 (444)
Balance at end of year* 8,649 10,282 7,318
* T he total amounts of unrecognized tax benefits presented in other noncurrent liabilities in the consolidated balance sheets were offset by deferred tax assets in
the amount of ¥2,043 million, ¥124 million and ¥32 million as of December 31, 2018, 2017 and 2016.
The total amounts of unrecognized tax benefits that and penalties included in income taxes for the years ended
would reduce the effective tax rate, if recognized, were December 31, 2018, 2017 and 2016 were not significant.
¥8,649 million and ¥10,282 million at December 31, 2018 Canon files income tax returns in Japan and various for-
and 2017, respectively. eign tax jurisdictions. In Japan, Canon is no longer subject to
Although Canon believes its estimates and assumptions of regular income tax examinations by the tax authority for years
unrecognized tax benefits are reasonable, uncertainty regarding before 2017 with few exceptions. Canon is also no longer
the final determination of tax examination settlements and any subject to a transfer pricing examination by the tax author-
related litigation could affect the effective tax rate in a future ity for years before 2017 with few exceptions. In other major
period. Based on each of the items of which Canon is aware foreign tax jurisdictions, including the United States and the
at December 31, 2018, no significant changes to the unrecog- Netherlands, Canon is no longer subject to income tax exami-
nized tax benefits are expected within the next twelve months. nations by tax authorities for years before 2009 with few ex-
Canon recognizes interest and penalties accrued related to ceptions. The tax authorities are currently conducting income
unrecognized tax benefits in income taxes. Both interest and tax examinations of Canon’s income tax returns for years after
penalties accrued at December 31, 2018 and 2017, and interest 2008 in some foreign tax jurisdictions.

BUSINESS SEGMENT/
CORPORATE STRUCTURE
13. LEGAL RESERVE AND RETAINED EARNINGS
The Corporation Law of Japan provides that an amount equal 31, 2018, 2017 and 2016 represent dividends paid out during
to 10% of distributions from retained earnings paid by the those years and the related appropriations to the legal re-
Company and its Japanese subsidiaries be appropriated as a serve. Retained earnings at December 31, 2018 did not reflect
legal reserve. No further appropriations are required when the current year-end dividends in the amount of ¥86,380 million
total amount of the additional paid-in capital and the legal which were approved by the shareholders in March 2019.
reserve equals 25% of their respective stated capital. The The amount available for dividends under the Corporation
Corporation Law of Japan also provides that additional paid- Law of Japan is based on the amount recorded in the
in capital and legal reserve are available for appropriations by Company’s nonconsolidated books of account in accordance
resolution of the shareholders. Certain foreign subsidiaries are with financial accounting standards of Japan. Such amount
also required to appropriate their earnings to legal reserves was ¥984,692 million at December 31, 2018.
under the laws of their respective countries. Retained earnings at December 31, 2018 included Canon’s
Cash dividends and appropriations to the legal reserve equity in undistributed earnings of affiliated companies account-
charged to retained earnings for the years ended December ed for by the equity method in the amount of ¥18,265 million.
14. OTHER COMPREHENSIVE INCOME (LOSS)
Changes in accumulated other comprehensive income (loss) for the years ended December 31, 2018, 2017 and 2016 are as follows:
Foreign Unrealized gains Gains and Pension

currency translation and losses losses on liability
Millions of yen adjustments on securities derivative instruments adjustments Total
Balance at December 31, 2015 87,038 14,055 182 (131,017) (29,742)

Equity transactions with
noncontrolling interests and other 259 — — (1) 258
Other comprehensive
income (loss) before reclassifications (101,350) 814 938 (67,511) (167,109)
Amounts reclassified from accumulated
other comprehensive income (loss) 93 382 (3,862) 99 (3,288)
Net change during the year (100,998) 1,196 (2,924) (67,413) (170,139)
Balance at December 31, 2016 (13,960) 15,251 (2,742) (198,430) (199,881)
noncontrolling interests and other — — — — —
Other comprehensive
income (loss) before reclassifications 44,184 2,813 (1,452) 14,785 60,330
other comprehensive income (loss) (16) (12,580) 4,014 4,905 (3,677)
Net change during the year 44,168 (9,767) 2,562 19,690 56,653
Balance at December 31, 2017 30,208 5,484 (180) (178,740) (143,228)
update—adoption of ASU No. 2016-01* — (5,343) — — (5,343)
noncontrolling interests and other (4,200) — — — (4,200)
Other comprehensive
income (loss) before reclassifications (89,823) — (457) (29,909) (120,189)
other comprehensive income (loss) — (141) 945 3,085 3,889
Net change during the year (94,023) (5,484) 488 (26,824) (125,843)
Balance at December 31, 2018 (63,815) — 308 (205,564) (269,071)
* Represents the impact of adopting the new accounting standard related to financial instruments. Please refer to Note 1(w) for more detailed information.

Reclassifications out of accumulated other comprehensive income (loss) for the years ended December 31, 2018, 2017 and
2016 are as follows:
Years ended December 31 Amount reclassified from accumulated

other comprehensive income (loss) *1
Millions of yen Affected line items in consolidated
2018 2017 2016 statements of income
Foreign currency translation adjustments — (39) 139 Other, net

— 12 (46) Income taxes
— (27) 93 Consolidated net income
Net income attributable to
— 11 — noncontrolling interests
— (16) 93 Net income attributable to Canon Inc.
Unrealized gains and losses on securities (178) (18,472) 282 Other, net
37 5,727 (94) Income taxes
(141) (12,745) 188 Consolidated net income
— 165 194 noncontrolling interests
(141) (12,580) 382 Net income attributable to Canon Inc.
Gains and losses on derivative instruments 1,341 5,772 (5,890) Other, net
(392) (1,732) 2,049 Income taxes
949 4,040 (3,841) Consolidated net income
(4) (26) (21) noncontrolling interests
945 4,014 (3,862) Net income attributable to Canon Inc.
Pension liability adjustments 3,853 7,005 (16) Other, net
(699) (1,832) 164 Income taxes
3,154 5,173 148 Consolidated net income
(69) (268) (49) noncontrolling interests
3,085 4,905 99 Net income attributable to Canon Inc.
Total amount reclassified, net of
tax and noncontrolling interests 3,889 (3,677) (3,288)
*1 Amounts in parentheses indicate gains in consolidated statements of income.

BUSINESS SEGMENT/
CORPORATE STRUCTURE
Tax effects allocated to each component of other comprehensive income (loss) and reclassification adjustments, including
amounts attributable to noncontrolling interests, are as follows:
Before-tax Tax (expense) Net-of-tax
amount or benefit amount
2018:
Foreign currency translation adjustments:
Amount arising during the year (93,955) 809 (93,146)
Reclassification adjustments for gains and losses realized in net income — — —
Net change during the year (93,955) 809 (93,146)
Net unrealized gains and losses on securities:
Amount arising during the year — — —
Reclassification adjustments for gains and losses realized in net income (178) 37 (141)
Net change during the year (178) 37 (141)
Net gains and losses on derivative instruments:
Amount arising during the year (586) 125 (461)
Reclassification adjustments for gains and losses realized in net income 1,341 (392) 949
Net change during the year 755 (267) 488
Pension liability adjustments:
Amount arising during the year (51,789) 18,065 (33,724)
Reclassification adjustments for gains and losses realized in net income 3,853 (699) 3,154
Net change during the year (47,936) 17,366 (30,570)
Other comprehensive income (loss) (141,314) 17,945 (123,369)
2017:
Amount arising during the year 47,825 (708) 47,117
Reclassification adjustments for gains and losses realized in net income (39) 12 (27)
Net change during the year 47,786 (696) 47,090
Amount arising during the year 5,100 (1,717) 3,383
Reclassification adjustments for gains and losses realized in net income (18,472) 5,727 (12,745)
Reclassification adjustments for gains and losses realized in net income 5,772 (1,732) 4,040
Net change during the year 3,692 (1,104) 2,588
Amount arising during the year 20,991 (4,957) 16,034
Reclassification adjustments for gains and losses realized in net income 7,005 (1,832) 5,173
Net change during the year 27,996 (6,789) 21,207
Other comprehensive income (loss) 66,102 (4,579) 61,523
2016:
Reclassification adjustments for gains and losses realized in net income 139 (46) 93
Net change during the year (108,141) 475 (107,666)
Amount arising during the year 1,184 (375) 809
Reclassification adjustments for gains and losses realized in net income 282 (94) 188
Net change during the year 1,466 (469) 997
Amount arising during the year 1,619 (726) 893
Reclassification adjustments for gains and losses realized in net income (5,890) 2,049 (3,841)
Amount arising during the year (95,707) 25,204 (70,503)
Reclassification adjustments for gains and losses realized in net income (16) 164 148
Other comprehensive income (loss) (206,669) 26,697 (179,972)

15. REVENUE
Revenue from sales of office products, such as office MFDs incremental costs of obtaining a contract as an expense when
and laser printers, and imaging system products, such as related office products are sold.
digital cameras and inkjet printers, is recognized upon ship- Canon also provides leasing arrangement to the customers
ment or delivery, depending upon when the customer obtains primarily for the sales of office products. Approximately 4%
controls of these products. of total revenue is generated from these leasing arrangements
Revenue from sales of equipment that are sold with custom- for the year ended December 31, 2018. Revenue from the sale
er acceptance provisions related to their functionality including of these products under sales-type leases is recognized at the
optical equipment such as semiconductor lithography equip- inception of the lease. Interest income on sales-type leases and
ment and FPD lithography equipment, and certain medical direct-financing leases is recognized over the life of each re-
equipment such as CT systems and MRI systems, is recognized spective lease using the interest method. Leases not qualifying
when the equipment is installed at the customer site and the as sales-type leases or direct-financing leases are accounted for
agreed-upon specifications are objectively satisfied. as operating leases and related revenue is recognized ratably
Most of Canon’s service revenue is generated from office over the lease term. When product leases are bundled with
and medical system products which is recognized over time. maintenance contracts, revenue is allocated based upon the
For the service contracts of office products, the customer typi- estimated standalone selling prices of the lease and non-lease
cally pays a variable amount based on usage, a stated fixed fee components. Lease components generally include product,
or a stated base fee plus a variable amount which frequently financing and executory costs, while non-lease components
include the provision of consumables as well as break fix ac- generally consist of maintenance contracts and supplies.
tivities. The majority portion of service revenue from the office The transaction prices that Canon is entitled to receive in
products is recognized as billed since invoiced amount directly exchange for transferring goods or services to the customer
correlates with the value to the customer of the underlying include certain forms of variable consideration, including
performance obligation to date. For the service contracts of product discounts, customer promotions and volume-based
medical system products, the customer typically pays a stated rebates mainly for imaging system products, which are sold
fixed fee for the stand ready maintenance service and revenue predominantly through distributors and retailers. Canon
is recognized ratably over the contract period. includes estimated amounts in the transaction price only to
The majority of service arrangements for office products are the extent it is probable that a significant reversal of cumula-
executed in combination with related products. Transaction tive revenue recognized will not occur when the uncertainty
prices for products and services need to be allocated to associated with the variable consideration is resolved. Variable
each performance obligation on a relative standalone sell- considerations are estimated based upon historical trends and
ing price basis where significant judgements are required. other known factors at the time of sale, and are subsequently
Canon estimates the standalone selling price using a range of adjusted in each period based on current information. In ad-
prices that would meet the allocation objective based on all dition, Canon may provide a right of return on our products
the information that is reasonably available including market for a short time period after a sale. These rights are accounted
conditions and other observable inputs. If transaction prices for as variable consideration when determining the transaction
of the product or service contracts are not within the accept- price, and accordingly Canon recognizes revenue based on the
able range then the revenue is subject to allocation based on estimated amount to which Canon expects to be entitled after
the estimated standalone selling prices. Canon recognizes the considering expected returns.

BUSINESS SEGMENT/
CORPORATE STRUCTURE
Disaggregated revenue by timing is as follows. Disaggregated revenue by business unit, product and geographic area are
described in Note 22.
Millions of yen
Imaging Medical Industry and Corporate and
Office Consolidated
System System Others eliminations
2018:
Revenue recognized at a point in time 1,286,100 993,658 305,457 599,766 (106,318) 3,078,663
Revenue recognized over time 521,201 14,507 132,121 205,445 — 873,274
Total 1,807,301 1,008,165 437,578 805,211 (106,318) 3,951,937
Revenue recognized over time includes primarily revenue into products and services in the consolidated statements of
from maintenance service in the office and medical system income starting from the quarter beginning January 1, 2018,
products and sales of certain industrial equipment which do including prior period’s presentation. However, prior period’s
not have alternative use and for which Canon has enforceable presentation is not retrospectively adjusted and is presented in
right to payment to the customers for the performance com- accordance with the historical accounting policy. In addition, in
pleted to date. conjunction with the application of the new standard, Canon
The adoption of the new revenue standard required the re- has reclassified certain expenses related to service revenues
consideration of the scope of performance obligations related from operating expenses to cost of sales in the accompanying
to service contracts, which has resulted in a change in classi- consolidated statement of income. The amount reclassified
fication of revenues between the products and service rev- for the year ended December 31, 2018 was ¥115,700 million.
enues. Specifically, certain revenue historically classified within The reconsideration of the scope of performance obligations
products revenues, including consumables provided under the did not materially affect the timing of revenue recognition.
service contracts and certain outsourcing business, is currently The impacts of adoption of new revenue standard on Canon’s
classified within service revenues and cost of sales in the con- consolidated balance sheet as of December 31, 2018 and
solidated statement of income under the new revenue stan- the consolidated statement of income for the year ended
dard. Canon has started separating revenues and cost of sales December 31, 2018 were as follows.

Consolidated Balance Sheet

2018
Balance under historical Effect of
ASSETS As reported accounting policy change
Trade receivables, net 612,953 657,419 (44,466)

Inventories 611,281 614,243 (2,962)
Prepaid expenses and other current assets 304,346 253,547 50,799
Other assets 397,974 397,949 25
Total assets 4,899,465 4,896,069 3,396
LIABILITIES AND EQUITY

Accrued expenses 321,137 319,416 1,721
Other current liabilities 276,237 274,741 1,496
Total liabilities 1,881,552 1,878,335 3,217
Retained earnings 3,508,908 3,508,704 204

Noncontrolling interests 190,311 190,336 (25)
Total equity 3,017,913 3,017,734 179

BUSINESS SEGMENT/
CORPORATE STRUCTURE
Consolidated Statement of Income
For the year ended December 31 Millions of yen

2018
Amount under historical Effect of
As reported accounting policy change
Net sales
Products and Equipment 3,194,724 3,383,566 (188,842)
Services 757,213 567,582 189,631
3,951,937 3,951,148 789
Cost of sales
Products and Equipment 1,762,171 1,783,798 (21,627)
Services 354,212 216,513 137,699
2,116,383 2,000,311 116,072
Gross profit 1,835,554 1,950,837 (115,283)
Selling, general and administrative expenses 1,176,760 1,292,460 (115,700)
Operating profit 342,952 342,535 417
Income before income taxes 362,892 362,475 417
Income taxes 96,150 96,094 56
Consolidated net income 266,742 266,381 361
Less: Net income attributable to noncontrolling interests 13,987 13,936 51
Net income attributable to Canon Inc. 252,755 252,445 310
Canon recognized contract assets primarily for unbilled 2018, which had been included in the deferred revenue bal-
receivables mainly arising from services contracts for office ance at December 31, 2017, was ¥104,678 million.
products totaled to ¥42,915 million at the adoption date Remaining performance obligations for products and equip-
and included in prepaid expenses and other current assets in ment at December 31, 2018 primarily arise from the sales of
the consolidated balance sheet with an offsetting impact to certain industrial equipment, amounting to ¥72,708 million,
trade receivables. Contract assets at December 31, 2018 were 75% of which is expected to be recognized as revenue within
¥50,799 million. one year and remaining 25% is within two years. Disclosure
Canon typically bills to the customer when performance of remaining performance obligations is not required for the
obligation is satisfied and collects the payment in relatively majority of service since the revenue is recognized as billed
short term except for certain maintenance service of office and basis applying the right to invoice practical expedient or is
medical products and certain industrial equipment for which generated from the contracts with original expected duration
Canon occasionally receives the payment in advance from cus- of less than one year. The portion of fixed maintenance service
tomers. The amount received in excess of revenue recognized contract for office and medical products with original expected
is recognized as deferred revenue until the performance obli- duration of more than one year is approximately 11% of total
gation for distinct goods or services are satisfied. Deferred rev- service revenue and the average remaining period for these
enue at December 31, 2018 and 2017 were ¥123,686 million fixed contracts as of December 31, 2018 is about 2 years.
and ¥125,965 million, respectively, and are included in other Taxes collected from customers and remitted to governmen-
current liabilities in the accompanying consolidated balance tal authorities are excluded from revenues in the consolidated
sheets. Revenue recognized for the year ended December 31, statements of income.

16. STOCK-BASED COMPENSATION
On May 2, 2018, based on the approval of the shareholders, year exercisable period. The grant-date fair value per share of
the Company granted stock options to its directors and execu- the stock options granted during the year ended December
tive officers to acquire 74,000 shares of common stock. Those 31, 2011 was ¥772.
to whom stock acquisition rights are granted (the “Holder(s)”) On May 1, 2010, based on the approval of the sharehold-
shall be entitled to exercise all the stock acquisition rights ers, the Company granted stock options to its directors, execu-
together within 10 days (in case the last day is not a business tive officers and certain employees to acquire 890,000 shares
day, the following business day) from after the date when they of common stock. These option awards vest after two years of
cease to hold any position as a director or an executive officer continued service beginning on the grant date and have a four
of the Company. These option awards have a 30 year exercis- year exercisable period. The grant-date fair value per share of
able period. The grant-date fair value per share of the stock the stock options granted during the year ended December
options granted during the year ended December 31, 2018 31, 2010 was ¥988.
was ¥2,948. The compensation cost recognized for these stock options
On May 1, 2011, based on the approval of the sharehold- for the years ended December 31, 2018 was ¥218 million
ers, the Company granted stock options to its directors, execu- and 2017 and 2016 was nil, and it is included in selling,
tive officers and certain employees to acquire 912,000 shares general and administrative expenses in the consolidated
of common stock. These option awards vest after two years of statements of income.
continued service beginning on the grant date and have a four
The fair value of the option award was estimated on the date of grant using the Black-Sholes option pricing model that incor-
porates the assumptions presented below:
Year ended December 31 2018

Expected term of option (in years) 6.0
Expected volatility 23.02%
Dividend yield 4.14%
Risk-free interest rate (0.07%)
A summary of option activity under the stock option plans as of and for the years ended December 31, 2018, 2017 and 2016
is presented below:
Weighted-average
Weighted- remaining
average contractual Aggregate
Shares exercise price term intrinsic value
Yen Year Millions of yen
Outstanding at January 1, 2016 1,296,000 4,263 0.4 —

Exercised — —
Forfeited/Expired (693,000) 4,500
Outstanding at December 31, 2016 603,000 3,990 0.2 —
Exercised — —
Forfeited/Expired (603,000) 3,990
Outstanding at December 31, 2017 — — —
Granted 74,000 1
Exercised — —
Forfeited/Expired — —
Outstanding at December 31, 2018 74,000 1 29.3 222
Exercisable at December 31, 2018 74,000 1 29.3 222
The total fair value of shares vested during the years ended December 31, 2018 was ¥218 million and 2017 and 2016 was nil.
Cash received from the exercise of stock options for the years ended December 31, 2018, 2017 and 2016 was nil.

BUSINESS SEGMENT/
CORPORATE STRUCTURE
17. NET INCOME ATTRIBUTABLE TO CANON INC. SHAREHOLDERS PER SHARE
A reconciliation of the numerators and denominators of basic and diluted net income attributable to Canon Inc. shareholders per
share computations is as follows:
2018 2017 2016
Net income attributable to Canon Inc. 252,755 241,923 150,650
Number of shares
Average common shares outstanding 1,079,753,008 1,085,439,370 1,092,070,680

Effect of dilutive securities:
Stock options 49,319 — —
Diluted common shares outstanding 1,079,802,327 1,085,439,370 1,092,070,680
Yen
Net income attributable to Canon Inc. shareholders per share:

Basic 234.09 222.88 137.95
Diluted 234.08 222.88 137.95
The computation of diluted net income attributable to Canon Inc. shareholders per share for the years ended December 31,
2017 and 2016 excludes outstanding stock options because the effect would be anti-dilutive.
18. DERIVATIVES AND HEDGING ACTIVITIES
Risk management policy Foreign currency exchange rate risk management

Canon operates internationally, exposing it to the risk of Canon’s international operations expose Canon to the risk
changes in foreign currency exchange rates. Derivative fi- of changes in foreign currency exchange rates. Canon uses
nancial instruments are comprised principally of foreign ex- foreign exchange contracts to manage certain foreign currency
change contracts utilized by the Company and certain of its exchange exposures principally from the exchange of U.S. dol-
subsidiaries to reduce the risk. Canon assesses foreign cur- lars and euros into Japanese yen. These contracts are primarily
rency exchange rate risk by continually monitoring changes used to hedge the foreign currency exposure of forecasted
in the exposures and by evaluating hedging opportunities. intercompany sales and intercompany trade receivables that
Canon does not hold or issue derivative financial instruments are denominated in foreign currencies. In accordance with
for trading purposes. Canon is also exposed to credit-related Canon’s policy, a specific portion of foreign currency exposure
losses in the event of non-performance by counterparties to resulting from forecasted intercompany sales are hedged using
derivative financial instruments, but it is not expected that any foreign exchange contracts which principally mature within
counterparties will fail to meet their obligations. Most of the three months.
counterparties are internationally recognized financial institu-
tions and selected by Canon taking into account their financial
condition, and contracts are diversified across a number of
major financial institutions.

Cash flow hedge between the date that the forecasted intercompany sales oc-
Changes in the fair value of derivative financial instruments cur and its maturity date are recognized in earnings and not
designated as cash flow hedges, including foreign exchange considered hedge ineffectiveness.
contracts associated with forecasted intercompany sales, are
reported in accumulated other comprehensive income (loss). Derivatives not designated as hedges
These amounts are subsequently reclassified into earnings Canon has entered into certain foreign exchange contracts to
through other income (deductions) in the same period as the primarily offset the earnings impact related to fluctuations in
hedged items affect earnings. Substantially all amounts re- foreign currency exchange rates associated with certain assets
corded in accumulated other comprehensive income (loss) at denominated in foreign currencies. Although these foreign
year-end are expected to be recognized in earnings over the exchange contracts have not been designated as hedges as
next twelve months. Canon excludes the time value compo- required in order to apply hedge accounting, the contracts are
nent from the assessment of hedge effectiveness. Changes in effective from an economic perspective. The changes in the fair
the fair value of a foreign exchange contract for the period value of these contracts are recorded in earnings immediately.
Contract amounts of foreign exchange contracts at December 31, 2018 and 2017 are set forth below:
2018 2017
To sell foreign currencies 230,505 272,563
To buy foreign currencies 30,816 46,168
Fair value of derivative instruments in the consolidated balance sheets

The following tables present Canon’s derivative instruments measured at gross fair value as reflected in the consolidated balance
sheets at December 31, 2018 and 2017.
Derivatives designated as hedging instruments

December 31 Fair value
Millions of yen
Balance sheet location 2018 2017

Assets:
Foreign exchange contracts Prepaid expenses and other current assets 521 255
Liabilities:
Foreign exchange contracts Other current liabilities 323 367
Derivatives not designated as hedging instruments

December 31 Fair value
Millions of yen
Balance sheet location 2018 2017

Assets:
Foreign exchange contracts Prepaid expenses and other current assets 2,622 289
Liabilities:
Foreign exchange contracts Other current liabilities 443 2,892

BUSINESS SEGMENT/
CORPORATE STRUCTURE
Effect of derivative instruments in the consolidated statements of income

The following tables present the effect of Canon’s derivative instruments in the consolidated statements of income for the years
ended December 31, 2018, 2017 and 2016.
Derivatives in cash flow hedging relationships
Years ended December 31 Gain (loss) reclassified from Gain (loss) recognized in income
Gain (loss) recognized accumulated OCI into income (ineffective portion and amount excluded
in OCI (effective portion) (effective portion) from effectiveness testing)
Millions of yen Amount Location Amount Location Amount
2018: Foreign exchange contracts (586) Other, net (1,341) Other, net (682)
2017: Foreign exchange contracts (2,080) Other, net (5,772) Other, net (332)
2016: Foreign exchange contracts 1,619 Other, net 5,890 Other, net (311)
Derivatives not designated as hedging instruments

Years ended December 31 Gain (loss) recognized in income on derivative
Millions of yen
Location 2018 2017 2016
Foreign exchange contracts Other, net 5,284 (7,932) 7,018
19. COMMITMENTS AND CONTINGENT LIABILITIES
Commitments made under such arrangements aggregated ¥12,728 mil-

At December 31, 2018, commitments outstanding for the pur- lion and ¥13,740 million at December 31, 2018 and 2017,
chase of property, plant and equipment approximated ¥54,905 respectively, and are included in noncurrent receivables in the
million, and commitments outstanding for the purchase of accompanying consolidated balance sheets. Rental expenses of
parts and raw materials approximated ¥120,344 million. cancelable and noncancelable operating leases amounted to
Canon occupies sales offices and other facilities under lease ¥49,394 million, ¥47,619 million and ¥42,714 million for the
arrangements accounted for as operating leases. Deposits years ended December 31, 2018, 2017 and 2016, respectively.
Future minimum lease payments required under noncancelable operating leases that have initial or remaining lease terms in
excess of one year at December 31, 2018 are as follows:
2019 29,817
2020 23,402
2021 17,837
2022 13,565
2023 10,165
Thereafter 20,298
Total future minimum lease payments 115,084

Guarantees The contract terms are 1 year to 30 years in case of employ-

Canon provides guarantees for its employees, affiliates and ees with housing loans, and 1 year to 7 years in case of af-
other companies. The guarantees for the employees are princi- filiates and other companies with lease obligations and bank
pally made for their housing loans. The guarantees for affili- loans. The maximum amount of undiscounted payments
ates and other companies are made for their lease obligations Canon would have had to make in the event of default is
and bank loans to ensure that those companies operate with ¥4,458 million at December 31, 2018. The carrying amounts
less financial risk. of the liabilities recognized for Canon’s obligations as a guar-
Canon would have to perform under a guarantee if the antor under those guarantees at December 31, 2018 were
borrower defaults on a payment within the contract terms. not significant.
Canon also issues contractual product warranties under which it generally guarantees the performance of products delivered
and services rendered for a certain period or term. Changes in accrued product warranty costs for the years ended December 31,
2018 and 2017 are summarized as follows:
2018 2017
Balance at beginning of year 17,452 13,168
Additions 18,870 18,893
Utilization (14,707) (12,957)
Other (4,297) (1,652)
Balance at end of year 17,318 17,452
Legal proceedings information and events pertaining to a particular case. Based

Canon is involved in various claims and legal actions arising on its experience, although litigation is inherently unpredict-
in the ordinary course of business. Canon has recorded provi- able, Canon believes that any damage amounts claimed in
sions for liabilities when it is probable that liabilities have been outstanding matters are not a meaningful indicator of Canon’s
incurred and the amount of loss can be reasonably estimated. potential liability. In the opinion of management, any reason-
Canon reviews these provisions at least quarterly and ad- ably possible range of losses from outstanding matters would
justs these provisions to reflect the impact of the negotia- not have a material adverse effect on Canon’s consolidated
tions, settlements, rulings, advice of legal counsel and other financial position, results of operations, or cash flows.

BUSINESS SEGMENT/
CORPORATE STRUCTURE
20. D
ISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATIONS OF
CREDIT RISK
Fair value of financial instruments

The estimated fair values of Canon’s financial instruments at December 31, 2018 and 2017 are set forth below. The following
summary excludes cash and cash equivalents, trade receivables, finance receivables, noncurrent receivables, short-term loans,
trade payables and accrued expenses for which fair values approximate their carrying amounts. The summary also excludes
investments and derivative instruments which are disclosed in Note 2 and Note 21, and Note 18, respectively.
2018 2017
Carrying Estimated Carrying Estimated
amount fair value amount fair value
Long-term debt, including current installments (364,602) (364,570) (499,168) (499,126)
The following methods and assumptions are used to esti- on relevant market information and information about the
mate the fair value in the above table. financial instruments. These estimates are subjective in nature
and involve uncertainties and matters of significant judgment
Long-term debt and therefore cannot be determined with precision. Changes
Canon’s long-term debt instruments are classified as Level 2 in assumptions could significantly affect the estimates.
instruments and valued based on the present value of future
cash flows associated with each instrument discounted using Concentrations of credit risk
current market borrowing rates for similar debt instruments At December 31, 2018 and 2017, one customer accounted
of comparable maturity. The levels are more fully described in for approximately 12% and 8% of consolidated trade receiv-
Note 21. ables, respectively. Although Canon does not expect that the
customer will fail to meet its obligations, Canon is potentially
Limitations of fair value estimates exposed to concentrations of credit risk if the customer failed
Fair value estimates are made at a specific point in time, based to perform according to the terms of the contracts.
21. FAIR VALUE MEASUREMENTS
Fair value is the price that would be received to sell an asset or similar assets or liabilities in markets that are not
paid to transfer a liability (an exit price) in the principal or most active, inputs other than quoted prices that are
advantageous market for the asset or liability in an orderly observable, and inputs that are derived principally
transaction between market participants at the measurement from or corroborated by observable market data by
date. A three-level fair value hierarchy that prioritizes the correlation or other means.
inputs used to measure fair value is as follows: Level 3— Inputs are derived from valuation techniques in
which one or more significant inputs or value drivers
Level 1— Inputs are quoted prices in active markets for identi- are unobservable, which reflect the reporting entity’s
cal assets or liabilities. own assumptions about the assumptions that mar-
Level 2— Inputs are quoted prices for similar assets or liabili- ket participants would use in establishing a price.
ties in active markets, quoted prices for identical or

Assets and liabilities measured at fair value on a recurring basis

The following tables present Canon’s assets and liabilities that are measured at fair value on a recurring basis consistent with the
fair value hierarchy at December 31, 2018 and 2017.
December 31
Millions of yen Level 1 Level 2 Level 3 Total
2018: Assets:
Cash and cash equivalents — 70,500 — 70,500
Short-term investments:
Available-for-sale:
Corporate bonds 630 — — 630
Investments:
Available-for-sale:
Government bonds — — — —
Corporate bonds — — — —
Fund trusts and others 630 408 — 1,038
Equity securities 13,787 — — 13,787
Prepaid expenses and other current assets:
Derivatives — 3,143 — 3,143
Total assets 15,047 74,051 — 89,098
Liabilities:
Other current liabilities:
Derivatives — 766 — 766
Total liabilities — 766 — 766
Millions of yen Level 1 Level 2 Level 3 Total

2017: Assets:
Cash and cash equivalents — 70,500 — 70,500
Short-term investments:
Available-for-sale:
Corporate bonds 1,222 — — 1,222
Investments:
Available-for-sale:
Government bonds 289 — — 289
Corporate bonds 605 217 — 822
Fund trusts 13 111 — 124
Equity securities 20,901 — — 20,901
Prepaid expenses and other current assets:
Derivatives — 544 — 544
Total assets 23,030 71,372 — 94,402
Liabilities:
Other current liabilities:
Derivatives — 3,259 — 3,259
Total liabilities — 3,259 — 3,259
Level 1 investments are comprised principally of Japanese Derivative financial instruments are comprised of foreign
equity securities, which are valued using an unadjusted quoted exchange contracts. Level 2 derivatives are valued using
market price in active markets with sufficient volume and quotes obtained from counterparties or third parties, which
frequency of transactions. Level 2 cash and cash equivalents are periodically validated by pricing models using observable
are valued based on market approach, using quoted prices for market inputs, such as foreign currency exchange rates and
identical assets in markets that are not active. interest rates, based on market approach.

BUSINESS SEGMENT/
CORPORATE STRUCTURE
Assets and liabilities measured at fair value on a nonrecurring basis

There were no assets or liabilities to be measured at fair value on a nonrecurring basis during the year ended December 31, 2018.
The following table presents the Canon’s asset that was measured at fair value on a nonrecurring basis consistent with the fair
value hierarchy and related impairment charge recognized during the year ended December 31, 2017.
Year ended December 31

Millions of yen Total loss Level 1 Level 2 Level 3 Total
2017: Asset:
Goodwill (33,912) — — 29,370 29,370
Goodwill was classified as Level 3 items and valued fair value. The fair value for the reporting unit was mea-
based on an income approach using unobservable inputs. sured based on the discounted cash flow method with 6.0%
Canon performed the annual goodwill impairment test as of of weighted average cost of capital and estimated future
October 1, 2017, which indicated that the fair value of the cash flows. Future cash flows are based on management’s
reporting unit was less than its carrying value. Canon recog- estimates of projected revenues, gross profits, operating
nized the impairment charge for the amount representing expenses, a long-term growth rate, taking into consideration
the excess of the carrying amount over the reporting unit’s industry trends and market conditions.
22. SEGMENT INFORMATION
Canon operates its business in four segments: the Office Medical System Business Unit:
Business Unit, the Imaging System Business Unit, the Medical Digital radiography systems / Diagnostic X-ray systems /
System Business Unit, and the Industry and Others Business Computed tomography (CT) systems /
Unit, which are based on the organizational structure and Magnetic resonance imaging (MRI) systems /
information reviewed by Canon’s management to evaluate Diagnostic ultrasound systems / Clinical chemistry analyzers /
results and allocate resources. Ophthalmic equipment
Based on the realignment of Canon’s internal reporting
and management structure, from the beginning of the third Industry and Others Business Unit:
quarter of 2018, Canon has reclassified certain businesses Semiconductor lithography equipment / FPD (Flat panel
from Office Business Unit to Industry and Others Business display) lithography equipment / Vacuum thin-film deposition
Unit. Segment information for the year ended December 31, equipment / Organic LED (OLED) panel manufacturing
2018 have reflected this change. Prior period amounts also equipment / Die bonders / Micromotors / Network cameras /
have been restated. Canon newly established Medical System Handy terminals / Document scanners
Business Unit effective at the beginning of the second quar-
ter of 2017, and certain businesses included in Industry and The accounting policies of the segments are substantially the
Others Business Unit have been reclassified. Operating results same as those described in the significant accounting policies
for the year ended December 31, 2017 have been reclassified in Note 1. While Canon previously disclosed operating profit as
and for the year ended December 31, 2016 have not been segment profit, Canon has newly adopted income before in-
restated since they have not been material. Total assets as of come taxes as segment profit for the year ended December 31,
December 31, 2016 have been restated. 2018. Due to the increase of other income (deductions) from
the adoption of ASU No. 2017-07, Compensation – Retirement
The primary products included in each segment are as follows: Benefits (Topic 715): Improving the Presentation of Net Periodic
Pension Cost and Net Periodic Postretirement Benefit Cost,
Office Business Unit: Canon has changed its business performance measure. Please
Office multifunction devices (MFDs) / Laser multifunction refer to Note 1 (w) for more detailed information about the
printers (MFPs) / Laser printers / Digital continuous feed change in the accounting standard.
presses / Digital sheet-fed presses / Wide-format printers /
Document solutions
Imaging System Business Unit:

Interchangeable-lens digital cameras / Digital compact cameras
/ Digital camcorders / Digital cinema cameras / Interchangeable
lenses / Compact photo printers /Inkjet printers / Large format
inkjet printers / Commercial photo printers / Image scanners /
Multimedia projectors / Broadcast equipment / Calculators

Information about operating results and assets for each segment as of and for the years ended December 31, 2018, 2017 and
2016 is as follows:
Imaging Medical Industry and Corporate and

Millions of yen Office System System Others eliminations Consolidated
2018: Net sales:
External customers 1,804,002 1,007,365 437,305 703,265 — 3,951,937
Intersegment 3,299 800 273 101,946 (106,318) —
Total 1,807,301 1,008,165 437,578 805,211 (106,318) 3,951,937
Operating cost and expenses 1,586,497 891,210 408,739 739,665 (17,126) 3,608,985
Operating profit 220,804 116,955 28,839 65,546 (89,192) 342,952
Other income (deductions) 8,383 4,299 640 2,061 4,557 19,940
Income before income taxes 229,187 121,254 29,479 67,607 (84,635) 362,892
Total assets 923,261 393,004 247,282 383,568 2,952,350 4,899,465
Depreciation and amortization 64,964 40,541 9,365 38,582 98,102 251,554
Capital expenditures 48,127 25,796 7,454 24,091 95,036 200,504
2017: Net sales:

External customers 1,802,542 1,135,584 434,985 706,904 — 4,080,015
Intersegment 2,240 604 1,202 85,946 (89,992) —
Total 1,804,782 1,136,188 436,187 792,850 (89,992) 4,080,015
Operating cost and expenses 1,615,521 962,663 414,246 752,122 13,858 3,758,410
Operating profit 189,261 173,525 21,941 40,728 (103,850) 321,605
Other income (deductions) 6,108 2,388 564 1,339 21,880 32,279
Income before income taxes 195,369 175,913 22,505 42,067 (81,970) 353,884
Total assets 946,213 387,088 238,824 376,064 3,250,102 5,198,291
Depreciation and amortization 72,346 41,695 5,212 39,736 102,892 261,881
Impairment losses on goodwill 21,721 — — 12,191 — 33,912
Capital expenditures 46,769 28,508 8,963 16,620 80,529 181,389
2016: Net sales:

External customers 1,743,039 1,094,291 — 564,157 — 3,401,487
Intersegment 2,957 998 — 82,326 (86,281) —
Total 1,745,996 1,095,289 — 646,483 (86,281) 3,401,487
Operating cost and expenses 1,583,588 953,567 — 641,082 6,825 3,185,062
Operating profit 162,408 141,722 — 5,401 (93,106) 216,425
Other income (deductions) 7,467 2,691 — 1,658 16,410 28,226
Income before income taxes 169,875 144,413 — 7,059 (76,696) 244,651
Total assets 947,602 391,661 204,755 354,602 3,239,909 5,138,529
Depreciation and amortization 76,500 47,386 — 42,872 83,338 250,096
Capital expenditures 71,841 25,564 — 29,694 81,280 208,379
Intersegment sales are recorded at the same prices used in corporate expenses. Segment assets are based on those di-
in transactions with third parties. Expenses not directly as- rectly associated with each segment. Corporate assets primar-
sociated with specific segments are allocated based on the ily consist of cash and cash equivalents, investments, deferred
most reasonable measures applicable. Corporate expenses tax assets, goodwill, identified intangible assets from acquisi-
include certain corporate research and development expenses. tions and corporate properties. Capital expenditures represent
Amortization costs of identified intangible assets resulting the additions to property, plant and equipment and intangible
from the purchase price allocation of CMSC are also included assets measured on an accrual basis.

BUSINESS SEGMENT/
CORPORATE STRUCTURE
Information about sales by product to external customers for each segment for the years ended December 31, 2018, 2017 and
2016 is as follows:

2018 2017 2016
Office
Monochrome copiers 280,035 287,823 289,532
Color copiers 403,522 405,576 386,193
Printers 702,378 702,491 664,846
Others 418,067 406,652 402,468
Total 1,804,002 1,802,542 1,743,039
Imaging System
Cameras 599,578 702,598 666,868
Inkjet printers 318,382 333,721 329,066
Others 89,405 99,265 98,357
Total 1,007,365 1,135,584 1,094,291
Medical System
Diagnostic equipment 437,305 434,985 —
Industry and Others
Lithography equipment 199,722 193,113 121,090
Others 503,543 513,791 443,067
Total 703,265 706,904 564,157
Consolidated 3,951,937 4,080,015 3,401,487
Information by major geographic area as of and for the years ended December 31, 2018, 2017 and 2016 is as follows:
Millions of yen
2018 2017 2016
Net sales:
Japan 869,577 884,828 706,979
Americas 1,076,402 1,107,515 963,544
Europe 1,015,428 1,028,415 913,523
Asia and Oceania 990,530 1,059,257 817,441
Total 3,951,937 4,080,015 3,401,487
Long-lived assets:
Japan 1,046,065 1,081,522 1,163,374
Americas 129,989 141,937 147,129
Europe 169,357 174,889 166,734
Asia and Oceania 136,602 149,244 164,007
Total 1,482,013 1,547,592 1,641,244
Net sales are attributed to areas based on the location sales. Net sales in the United States were ¥995,245 million,
where the product is shipped and the service is performed to ¥1,022,305 million and ¥884,083 million for the years ended
the customers. Other than in Japan and the United States, December 31, 2018, 2017 and 2016, respectively.
Canon does not conduct business in any individual country in Long-lived assets represent property, plant and equipment
which its sales in that country exceed 10% of consolidated net and intangible assets for each geographic area.

S C H E D U LE II VALUATIO N AND QUALIFYING ACCOUN T S
Years ended December 31

Balance at Addition-charged Deduction bad debts Translation Balance at
Millions of yen beginning of period to income written off adjustments and other end of period
2018: Allowance for doubtful receivables
Trade receivables 13,378 1,347 (2,789) (459) 11,477
Finance receivables 2,681 938 (1,284) 340 2,675
Trade receivables 11,075 3,574 (1,787) 516 13,378
Finance receivables 2,325 1,436 (1,523) 443 2,681
Trade receivables 12,077 1,460 (1,824) (638) 11,075
Finance receivables 2,878 398 (978) 27 2,325

M A N A G E MENT’S R EPOR T ON
I N T E R N AL CONTR OL OVER FINANCIAL REPOR TING
The management of Canon is responsible for establishing and maintaining adequate internal control over financial reporting.
Internal control over financial reporting is defined in Rule 13a-15(f) promulgated under the Securities Exchange Act of 1934, as
amended, as a process designed by, or under the supervision of, the company’s principal executive and principal financial officers
and effected by the company’s board of directors, management and other personnel, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with gener-
ally accepted accounting principles and includes those policies and procedures that (1) pertain to the maintenance of records that
in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide rea-
sonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance
with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, pro-
jections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Canon’s management assessed the effectiveness of internal control over financial reporting as of December 31, 2018. In making
this assessment, management used the criteria established in internal Control –Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (2013 framework) (the “COSO criteria”).
Based on its assessment, management concluded that, as of December 31, 2018, Canon’s internal control over financial report-
ing was effective based on the COSO criteria.
Canon’s independent registered public accounting firm, Ernst & Young ShinNihon LLC, has issued an audit report on the effec-
tiveness of Canon’s internal control over financial reporting. This report appears in Item 18 of FORM 20-F.

R E P O R T OF INDEPENDENT REGISTERED
P U B L I C ACCOUNTING FIRM
Ernst & Young ShinNihon LLC Tel: +81 3 3503 1100

Hibiya Mitsui Tower, Tokyo Midtown Hibiya Fax: +81 3 3503 1197
1-1-2 Yurakucho, Chiyoda-ku ey.com
Tokyo 100-0006, Japan
To the Shareholders and the Board of Directors of

Canon Inc.
Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Canon Inc. and subsidiaries (the Company) as of December 31, 2018 and
2017, the related consolidated statements of income, comprehensive income, equity and cash flows for each of the three years in the period
ended December 31, 2018, and the related notes and schedule of valuation and qualifying accounts (collectively referred to as the “consolidated
financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the
Company at December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended
December 31, 2018, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the
Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March
28, 2019 expressed an unqualified opinion thereon.
Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with re-
spect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included
performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing pro-
cedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company’s auditor for SEC reporting purposes since 2004, and as its Japanese statutory auditor since 1978.
March 28, 2019

R E P O R T OF INDEPENDENT REGISTERED
P U B L I C ACCOUNTING FIRM
Ernst & Young ShinNihon LLC Tel: +81 3 3503 1100

Hibiya Mitsui Tower, Tokyo Midtown Hibiya Fax: +81 3 3503 1197
1-1-2 Yurakucho, Chiyoda-ku ey.com
Tokyo 100-0006, Japan
To the Shareholders and the Board of Directors of

Canon Inc.
Opinion on Internal Control over Financial Reporting

We have audited Canon Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2018, based on criteria established in
Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework)
(the COSO criteria). In our opinion, Canon Inc. and subsidiaries (the Company) maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2018, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the
consolidated balance sheets of the Company as of December 31, 2018 and 2017, the related consolidated statements of income, comprehensive
income, equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes and schedule of valuation
and qualifying accounts and our report dated March 28, 2019 expressed an unqualified opinion thereon.
Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the ef-
fectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a
public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, test-
ing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as
we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial re-
porting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s
internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transac-
tions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets
that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
March 28, 2019

T R A N S F ER AND SHAREHOLDER
R E G I S T R AR’S OFFICE INFORMATION
Canon Inc. Stock Exchange Listings:

30-2, Shimomaruko 3-chome, Ohta-ku, Tokyo 146-8501, Japan Tokyo, Nagoya, Fukuoka, Sapporo and New York
stock exchanges
Manager of the Register of Shareholders
Mizuho Trust & Banking Co., Ltd. American Depositary Receipts are traded on the New York
2-1, Yaesu 1-chome, Chuo-ku, Tokyo 103-8670, Japan Stock Exchange (CAJ).
Depositary and Agent with Respect to American Ordinary General Meeting of Shareholders:
Depositary Receipts for Common Shares March 28, 2019, in Tokyo
JPMorgan Chase Bank, N.A.
Further Information:
4 New York Plaza Floor 12, New York, NY 10004, USA
For publications or information, please contact the
Public Affairs Headquarters, Canon Inc., Tokyo,
or access Canon’s Website at
global.canon/en

MAJOR CONSOLIDATED SUBSIDIARIES
(As of December 31, 2018)
Manufacturing Marketing & Other

Canon Precision Inc. Canon Marketing Japan Inc.
Canon Tokki Corporation Canon System and Support Inc.
Fukushima Canon Inc. Canon IT Solutions Inc.
Canon Medical Systems Corporation Canon Medical Finance Co., Ltd.
Canon Electron Tubes & Devices Co., Ltd. Canon U.S.A., Inc.
Canon Components, Inc. Canon Canada Inc.
Canon Semiconductor Equipment Inc. Canon Solutions America, Inc.
Canon Chemicals Inc. Canon Financial Services, Inc.
Canon Electronics Inc. Canon Medical Systems USA, Inc.
Canon Finetech Nisca Inc. Axis AB
Canon ANELVA Corporation Canon Europa N.V.
Nagahama Canon Inc. Canon Europe Ltd.
Canon Machinery Inc. Canon Ru LLC
Oita Canon Materials Inc. Canon (UK) Ltd.
Oita Canon Inc. Canon Deutschland GmbH
Nagasaki Canon Inc. Canon (Schweiz) AG
Miyazaki Canon Inc. Canon Nederland N.V.
Canon Virginia, Inc. Canon France S.A.S.
Canon Bretagne S.A.S. Canon Middle East FZ-LLC
Océ-Technologies B.V. Canon Italia S.p.A.
Océ Printing Systems G.m.b.H. & Co. KG Canon Medical Systems Europe B.V.
Axis Communications AB Milestone Systems A/S
Canon Dalian Business Machines, Inc. Canon (China) Co., Ltd.
Canon (Suzhou) Inc. Canon Hongkong Co., Ltd.
Canon Zhongshan Business Machines Co., Ltd. Canon Singapore Pte. Ltd.
Canon Zhuhai, Inc. Canon India Pvt. Ltd.
Canon Inc., Taiwan Canon Australia Pty. Ltd.
Canon Vietnam Co., Ltd.
Canon Hi-Tech (Thailand) Ltd.
Canon Prachinburi (Thailand) Ltd.
Canon Business Machines (Philippines), Inc.
Canon Opto (Malaysia) Sdn. Bhd.
Canon Medical Systems Manufacturing Asia Sdn. Bhd.
Research & Development

Canon Research Centre France S.A.S.
Canon Information Systems Research Australia Pty. Ltd.

CANON ANNUAL REPORT 2018
CANON INC.
30-2, Shimomaruko 3-chome, Ohta-ku, Tokyo 146-8501, Japan ©Canon Inc. 2019 PUB.BEP028-01 0419

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CANON ANNUAL REPORT 2018

Fiscal Year Ended December 31, 2018

Strategy 1 Financial Highlights

Business Segment/ 18 At a Glance

24 Sales & Marketing

Financial Section 34 Financial Overview

48 Ten-Year Financial Summary

50 Consolidated Balance Sheets

51 Consolidated Statements of Income

52 Consolidated Statements of Equity

53 Consolidated Statements of Cash Flows

54 Notes to Consolidated Financial

90 Schedule II Valuation and

Corporate Data 94 Transfer and Registrar’s Office

95 Major Consolidated Subsidiaries

Millions of yen Thousands of U.S. dollars

2018 2017 Change (%) 2018

Net sales ¥ 3,951,937 ¥ 4,080,015 -3.1 $ 35,603,036

Net income attributable to Canon Inc.

Total assets ¥ 4,899,465 ¥ 5,198,291 -5.7 $ 44,139,324

Canon Inc. shareholders’ equity ¥ 2,827,602 ¥ 2,870,630 -1.5 $ 25,473,892

Net Income Attributable to Canon Inc. ROE/ROA (%)

Basic Diluted ROE ROA

CANON ANNUAL REPORT 2018 1

Canon will further promote a grand strategic

2 CANON ANNUAL REPORT 2018

Cash Dividend (Yen)

CANON ANNUAL REPORT 2018 3

Phase I Phase II Phase III Phase IV Phase V

4 CANON ANNUAL REPORT 2018

1 Establish a new production

CANON ANNUAL REPORT 2018 5

2 Reinforce and expand new businesses

6 CANON ANNUAL REPORT 2018

4 Enhance R&D capabilities

CANON ANNUAL REPORT 2018 7

8 CANON ANNUAL REPORT 2018

MEDICAL ...................... ...... 12

NETWORK CAMERAS ..... ...... 14

COMMERCIAL PRINTING ....... 16

INDUSTRIAL EQUIPMENT ..... 17

CANON ANNUAL REPORT 2018 9

We seek to further expand market share and

10 CANON ANNUAL REPORT 2018

CANON ANNUAL REPORT 2018 11

Aiming to Expand Business Domains to Healthcare IT and

12 CANON ANNUAL REPORT 2018

CANON ANNUAL REPORT 2018 13

Aiming to be the Global Leader in

14 CANON ANNUAL REPORT 2018

A. F ukuoka City Subway assures transportation of over 160 mil-

CANON ANNUAL REPORT 2018 15

Expanding Business Areas in the Commercial Printing Market,

Commercial Printing Market Entering a Expanding Beyond Commercial Printing to

16 CANON ANNUAL REPORT 2018

Supporting Cutting-Edge Manufacturing of the IoT Era with

CANON ANNUAL REPORT 2018 17

OFFICE BUSINESS UNIT Composition of Sales (%)

Digital sheet-fed presses (Inkjet) Digital sheet-fed presses (Electrophotographic)

IMAGING SYSTEM BUSINESS UNIT Composition of Sales (%)

A. F ukuoka City Subway assures transportation of over 160 mil-