Canon Annual Report

Canon

1 Canon Plaza Lake Success, NY 11042 1 Canon Plaza Lake Success, NY 11042

Phone: (516) 328-5000 Phone: (516) 328-5000 Fax: (516) 345-9876 Fax: (516) 345-9876 www.canon.com 2011 Annual Report | 1

2011 2011 Annual Report Annual Report

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think more about Canon 5

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Corporate Message

Net Growth

Canon History

Lens Reviews

Corporate Interview

2011 Sales

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Environment Retirement

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Canon Envirothon

Educate Canon

Board of Directors

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Canon Maintains Sound Corporate Governance

CEO Message

Our Philosophy

Basic Policy and Corporate Governance Structure

Canon recognizes that management supervision functions and management transparency are vital to strengthening its corporate governance and further raising corporate value. Canon’s basic governance structure comprises the General Meeting of Shareholders, the Board of Directors and the Board of Corporate Auditors. Furthermore, the Executive Committee and management committees are dedicated to addressing key issues. All of these bodies work together to ensure the appropriate management of the Group through an internal auditing structure underpinned by the independent Corporate Audit Center and an information disclosure system for management activities.

Our Mission is to exceed the expectations of our customers with our original technology and our commitment to superior service while building an excellent company that is admired by local communities and staff. At Canon our Vision is to be Number One in everything we do not only in terms of product and market share but also in terms of meeting the needs of our staff and our business partners. We believe in and promote the concept of a supportive work environment where every staff member is valued for their contribution and their dedication to helping us realize our goals as a team. At Canon, we are committed to providing products and technologies that help explore new frontiers, and enhance the way we live and work. We are proud to be part of a diversified global corporation with core competencies in optics, information processing and imaging technology. We are dedicated to providing solutions through innovation and recognize the importance of creating and managing information faster, better and more efficiently. It is no surprise therefore, that we understand how Internet technologies are expanding the boundaries of human communication and interaction.

Board of Directors

Important business matters are discussed and ratified during meetings of the Board of Directors and Executive Committee.

As of December 31, 2010, the board consisted of 17 directors.

In order to facilitate more practical and efficient decision making, the board is entirely composed of internal directors who have well-developed knowledge of the Company’s affairs.

Also, the board is supported by various management committees that address important management issues in their specific fields. These committees complement the Company’s management system by business unit, facilitate efficient decision making and realize a mutual supervisory function for such matters as compliance and ethics.

The corporate philosophy of Canon is kyosei. A concise definition of this word would be “Living and working together for the common good,” but our definition is broader: “All people, regardless of race, religion or culture, harmoniously living and working together into the future.”

True global companies must foster good relations, not only with their customers and the communities in which they operate, but also with nations and the environment. They must also bear the responsibility for the impact of their activities on society. For this reason, Canon’s goal is to contribute to the prosperity of the world and the happiness of humanity, which will lead to continuing growth.

Executive Officer System

Canon is endeavoring to realize more flexible and efficient management operations by maintaining an appropriately sized organization of directors and promoting capable human resources with accumulated executive knowledge across specific business areas. Executive officers are appointed and dismissed by the Board of Directors and have a term of office of one year. The number of executive officers was 13 in December.

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oward becoming a truly excellent corporation In the first year of Phase IV, we will work to further solidify our business foundation.

Meanwhile, we will bolster efforts to develop human resources to ensure that Canon employees will be able to function as key players in the global market. We will train employees entrusted with the future of Canon by making use of practical settings, including local sales and production operations worldwide, particularly in rapidly growing Asian markets. We will further expand our field of corporate activities. Accordingly, the need for us to fulfill our social responsibilities will become more important than ever. Under our corporate philosophy of kyosei, we will continue to promote activities to reduce the environmental burden of our corporate activities and products. At the same time, we aim to further bolster our compliance and internal controls. Toward the achievement of our 2015 net sales target of more than ¥5 trillion, we are amassing our Groupwide strengths. Capitalizing on the sound financial constitution that we have realized to date, with the courage and conviction to change, we will continue to implement initiatives that will empower us to realize additional, sustainable growth. We ask for your continued support and understanding.

Product quality is the lifeline of all manufacturers. Even a single minor product defect could potentially undermine the credibility—indeed, the very foundations—of a corporation. Therefore, we must remain committed to maintaining and improving the quality of our products across the Canon Group. Canon has established a comprehensive quality information management system.

Our corporate is the best image in the world. We are proud to be a part of a strong image. Let us grow together to develope a better tomorrow for Canon.

2010 Performance Results The average value of the yen during the year was ¥87.40 against the U.S. dollar, a year-on-year appreciation of approximately ¥6.00, and ¥114.97 against the euro, a yearon year increase of approximately ¥15.00. The strong yen against these and other currencies put downward pressure on our performance, reducing net sales and operating profit by ¥193.9 billion and ¥127.4 billion, respectively.

Despite the yen’s sharp appreciation in the second half, Canon aggressively introduced new products and continued to reduce costs while improving production turnover in line with increased production.

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Chairman & CEO Fujio Mitarai

Fujio Mitarai CEO Canon Inc.

President & COO Tsuneji Uchida

Executive Vice President & CFO Toshizo Tanaka

Senior Managing Directors

Kunio Watanabe Group Executive, Corporate Planning Development Headquarters

Managing Directors

Tomonori Iwashita Group Executive, Environment Headquarters

Shigeyuki Matsumoto Group Executive, Katsuichi Shimizu Chief Executive, Inkjet Products Operations

CIO

Robert Davis, Corporate Technology

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Building the Next Engine of Growth

Net income attributable to Canon Inc. In 2010, consolidated net sales increased 15.5% year on year to ¥3,706.9 billion, and the gross profit ratio rose 3.6 points to 48.1%.

Operating profit jumped 78.6% to ¥387.6 billion. By segment, in the Office Business Unit, sales grew 20.8% to ¥1,987.3 billion while operating profit surged 27.9% to ¥293.3 billion. In the Consumer Business Unit, sales edged up 6.9% to ¥1,391.3 billion while operating profit climbed 29.7% to ¥238.1 billion. As for the Industry and Others Business Unit, sales totaled ¥433.0 billion, up 20.9% year on year, and operating loss totaled ¥9.8 billion, an improvement of ¥66.1 billion. By geographic region, sales in the Americas grew 14.4% to ¥1,023.3 billion; sales in Europe increased 17.8% to ¥1,172.5 billion; in Japan, sales dipped 0.9% to ¥695.7 billion; and in Asia and Oceania (excluding Japan), sales grew 32.0% to ¥815.4 billion. Selling, general and administrative expenses increased 19.2% to ¥1,079.7 billion while R&D expenses rose 3.7% to ¥315.8 billion. Net income attributable

to Canon Inc. leapt 87.3% to ¥246.6 billion, while net income attributable to Canon Inc. stockholders per share amounted to ¥199.71 and ¥199.70 in basic and diluted terms, respectively. The average value of the yen during the year was ¥87.40 against the U.S. dollar, a year-on-year appreciation of approximately ¥6.00, and ¥114.97 against the euro, a yearon- year increase of approximately ¥15.00. The strong yen against these and other currencies put downward pressure on our performance, reducing net sales and operating profit by ¥193.9 billion and ¥127.4 billion, respectively. Despite the yen’s sharp appreciation in the second half, Canon aggressively introduced new products and continued to reduce costs while improving production turnover in line with increased production. These activities enabled us to expand our profits substantially. Also, comprehensive cash flow management allowed us to enhance management efficiency and accumulate ample cash. Efficiency brought to the business units is always a plus.

Canon’s net profit for the January-March quarter slipped 2.4 percent to 55.5 billion yen ($676 million) from 56.8 billion yen a year earlier.

Costs related to Canon’s March 2010 acquisition of Dutch printer and scanner company Oce NV increased operating expenses by 42 billion yen ($512 million), which took a bite out of profits. Sales increased 11.1 percent to 839.2 billion yen ($10.2 billion), with the economic recovery in the United States and parts of Europe sustaining demand for laser printers and other office equipment. Demand was also brisk for point-and-shoot digital cameras in emerging markets such as India and China, the company said. However, with last month’s disasters dimming the company’s outlook, Canon lowered its forecasts for the full fiscal year through Dec. 31. Canon suffered damage to buildings and inventory and experienced production holdups due to electricity restrictions and other factors. “Shortages in the supply capacity for certain products are expected to continue,” it said.

Canon now expects to book a net profit of 220 billion yen ($2.7 billion) on sales of 3.75 trillion yen ($45.7 billion). Back in January it estimated net profit of 310 billion yen and 4.1 trillion yen in sales.

The company’s net profit for 2010 was 246.6 billion yen on 3.7 trillion in sales. Unlike many Japanese companies, Canon’s fiscal year matches the calendar year. Canon bases its earnings on U.S. accounting standards. Ahead of its first quarter results, Canon shares declined 0.9 percent to 3,495 yen, close to the Nikkei 225 index’s 1.2 percent fall According to Canon Inc. President Toshizo Tanaka, “The entire world economy will recover moderately in 2011. From the second half and onward, industrial countries including the United States will accelerate their recovery.” On the other hand, the financial report concedes that the “engine of growth” has shifted from developed countries to the emerging markets, such as India and China. Consequently, the company is already making plans for the “transformations”.

Thousands of U.S. dollars (except per share amounts)

2009

% Change

3,706,901

+15.5

3,706,901

Operating Profit

387,552

+78.6

387,552

Income before income taxes

392,863

+79.1

392,863

Net income attributable to Canon Inc.

246,603

+87.3

246,603

Net income attributable to Canon Inc. stockholders per share:

199.71

–Basic

199.70

+87.3

199.70

–Diluted

199.71

+87.3

199.71

Total assets

3,983,820

+3.5

3,983,820

Canon Inc. stockholders’ equity

2,645,782

-1.6

2,645,782

Net Sales

2010

199.71

profit increase since 2012 Net income more than quadrupled to 67.6 billion yen ($779 million) in the three months ended June 30 from a year earlier, the Tokyo-based company said today. That exceeded the 58 billion yen median of three analyst estimates compiled by Bloomberg. That is an 18% increase over the past few years. Operating profit, or sales minus the cost of goods sold and administrative expenses, more than doubled to 113.4 billion yen in the quarter as revenue increased 22 percent.

+18%

Industry and Other Business Unit Medical equipment Components Document scanners CIS systems

Consumer Business Unit Digital SLR cameras Compact digital cameras Interchangeable lenses Digital video camcorders

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Office Business Unit

The Products

Office network MFD’s Color network digital MFD’s Office copying machines Personal user copying machines Full color copying machines Laser printers Large format printers

revenues in N. America Canon has generated a revenue of 1.2M in 2011 and is targeting 4M crore revenue in 2012. As Bharadwaj said, “We experienced growth of 23 %. Driving positive quarterly earnings to a large degree were strong performances by its U.S. core business values. The last earnings call, some thought Canon was a little bit ahead of the curve with its economic outlook. However during the last few months we did witness the impact of economic slowing and continue to see the near-term outlook pointing to slow but steady growth.

+23%

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Canon Past and Present

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EOS-1Ds digital SLR camera introduced

PowerShot S100 DIGITAL ELPH (DIGITAL IXUS) compact digital camera introduced

Soon after its founding, Canon was hard at work in 1941 on diversifying itself with the introduction of Japan’s first indirect X-ray camera and other products. In the 1960s, the company took further steps toward diversification by adding electrical, physical and chemical technologies to its optical and precision technologies.

In 1964, Canon entered the office equipment market with the debut of the world’s first 10-key electronic calculator. In 1967, the management slogan “cameras in the right hand, business machines in the left” was unveiled and in 1969 the company changed its name from Canon Camera Co., Inc. to Canon Inc. Canon took on the challenge of developing Japan’s first plain paper copying machine, which it introduced in 1970.

Corporate philosophy of kyosei introduced with company’s second inauguration

EOS650 AF SLR camera introduced

In 1950, Canon’s first president, Takeshi Mitarai, went to America for the first time to attend an international trade fair. Having seen modern factories and a high standard of living first hand, upon his return, he built a fireproof factory of steel-reinforced concrete in the Shimomaruko area of Tokyo, which he saw as essential for Canon to succeed in doing business with the world at large. Mitarai also made clear his respect for humanity by stressing the importance of the San-ji, or Three Selfs spirit, the guiding principle for Canon employees. In 1955, Canon made its first step into the global market with the opening of a U.S. office in New York City. In 1957, Canon set up its sole European distributor, Canon Europa, in Geneva, Switzerland. By 1967 exports already topped 50%.

Company name changed to Canon Inc.

Company name changed to Canon Camera Co., Inc.

Canon camera introduced Rita Canon 35mm shutter camera

Kwanon camera prototype developed

In 1933, a small laboratory dedicated to making high-quality cameras was set up in a simple apartment room in the Roppongi area of Tokyo. At the time, all high-quality cameras were European with the majority coming from Germany. It was in this small room that young people with a big dream earnestly began their work on producing a high-quality Japanese camera, marking the beginning of Canon.

Through hard work and with an enterprising spirit, they eventually succeeded in building a prototype, which was named Kwanon after the Buddhist goddess of mercy. The following year, in 1935, Japan’s first-ever 35mm focal-plane-shutter camera, the Hansa Canon, was born, along with the Canon brand.

Hansa Canon camera introduced Hansa Canon 35mm focal-plan shutter camera

What is the future outlook of Canon?

2002

By 1970, Canon grew to 44.8 billion yen in sales and more than 5,000 employees. But hit by dollar and oil shocks, followed by problems with a defective electronic calculator display component in 1974, Canon fell on hard times. In the first half of 1975, it failed to pay a dividend for the first time since becoming a public company.

In 1976, Canon unveiled its Premier Company Plan, an ambitious strategy to transform Canon into an “excellent global company” through such means as introducing a vertical business group constitution and establishing a horizontal development, production and sales system. The plan proposed high ideals and pooled the strength of its employees, enabling the company to promptly recover.

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Through a concerted effort across the entire Canon Group, we aim to realize a rapid change that will astonish the world over the next few years to come.”

Fujio Mitarai Chairman and CEO

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Canon Lens Reviews Canon EFEF 200mm ISUSM USM Canon 200mmf/2.0 f/2.0 LL IS In 1933, a small laboratory dedicated to making high-quality cameras was set up in a simple apartment room in the Roppongi area of Tokyo. At the time, all high-quality cameras were European with the majority coming from Germany. It was in this small room that young people with a big dream earnestly began their work on producing a high-quality Japanese camera, marking the beginning of Canon. Through hard work and with an enterprising spirit, they eventually succeeded in building a prototype, which was named Kwanon after the Buddhist goddess of mercy. The following year, in 1935, Japan’s first-ever 35mm focal-plane-shutter camera, the Hansa Canon, was born, along with the Canon brand. The Canon EF 300mm f/2.8 L IS USM Lens and Canon EF 400mm f/2.8 L IS USM Lens have been the two Canon lenses that have impressed me the most to date. I use both very frequently. I can count on them to deliver the ultimate shots in the most challenging conditions. And the Canon EF 200mm f/2.0 L IS USM Lens now joins them in my regard. Color and contrast are very nice. Thanks in part to an 8-blade circular aperture, bokeh (foreground and background blur quality) rates very highly. Flare is well controlled.

CA (Chromatic Aberration) and distortion are basically absent. The Canon EF 200mm f/2.0 L IS USM Lens’ Ring USM (Ultrasonic Motor) driven AF is extremely fast and very accurate. AI Servo tracking of in-motion subjects is definitely a strength of this lens. The internal focusing lens does not extend and does not rotate the front element - which does not matter in regards to filter use as this lens does not accept front-mount filters (even if they could be attached, they would cost a fortune). A fixed-size lens is nicer to use than one that changes size most fixed focal length lenses do not extend. FTM (Full Time Manual) focusing is enabled.

Canon EF 85mm f/1.2 L II USM Wow is all I can say. After getting over that I spent so much on a lens, this new machine is absolutely amazing. The image quality is top notch. 100% crops can be printed large and I can see every detail.

I was in Miami and took some pictures of the big hotels, and was wondering what the names were. I looked at some of the pictures, zoomed in, and saw everything. Even small signs hundreds and hundreds of feet away. The IS adds a new feeling of confidence. No longer do you have to worry about shaking a tiny bit and the shot being out of focus or a bit blurry. This is quite a stunning lens which will continue to be one of or the best in Canon’s lineup of pro lenses.

If you want it and can afford it without selling your house, I would get it haha but as always, research extensively and weigh your options before buying something at these price levels. At all apertures, this thing is sharp. If you are an IQ aficionado, this lens is quite a big step up from Mark 1 especially at f/2.8. For me, sharpness is my big thing, so I wanted the best out there. I did not want to step back in terms of technology and get the first generation of the lens even if it is still very good. In a few years if you decide that you want to sell the lens or change to something else, I can assure you that this will retain its resale value very well.

Susan Rocker Sr. Photographer - National Geographic

David Rais Sr. Photographer - Gucci International

Advance Technical Specifications Aperture (max-min) f/1.2-f/16 Construction 7 groups / 8 elements CFD 3.1ft / 0.95m Max. magnification 0.11x (1:9.1) Horizontal viewing angle 24° Diagonal viewing angle 28°30’ Vertical viewing angle 16° Weight 2.25lb Maximum diameter 3.6in Length 3.3in Filter diameter 72mm

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This is no amateur lens, at least not when used wide open (which is one of the main reasons to buy this lens in the first place). With a depth of field measured in mere millimeters, the lens is unforgiving of both the camera it’s attached to (the focus has to be dead on), and the photographer. The worse one’s technique is, the fewer good shots will come out of the camera, and this at a much higher ratio than nearly all other lenses. However, the shots that are spot-on are some of the most rewarding possible with a modern camera, with amazing sharpness. It costs fortune! ...but it worth every cent. Simple awesome picture and build quality so there is no concurrence nowadays.

You can try Sigma but results are different. I love Zeiss lenses but unfortunately they are just manual focus. And others are different level. You can read something about slow auto-focus it’s a bit true if I compare it with my 50/1.2 or 135/2 or 35/1.4 but nothing horrible.

It comes with USM so it isn’t slow at all. Incredible bokeh at wide apertures: I am simply amazed at the background blur created wide open to f2.8. It’s been argued, why shoot at 1.8 or 2.8 when other lenses can do that at a fraction of the price? It’s the WAY this lens renders out-of-focus elements at wide apertures that sets it apart.

The biggest downside to the original Canon EF 85mm f/1.2 L USM Lens was the very slow focusing speed. If you were shooting portraits, it didn’t matter. But, a lens this fast begs to be used for indoor action sports. Canon has utilized the latest USM (Ultrasonic Motor) in this lens for faster (though I wouldn’t give it a “fast” rating yet) and near-silent auto focus. The Canon EF 85mm f/1.2 L II USM Lens’ improved focus mechanism is about 1.6x faster than the original lens - noticeably faster and a very nice improvement, but not as fast as Canon’s fastest auto focusing lenses. While this lens certainly has the aperture and image quality to be an excellent indoor action sports lens, the AF performance is only “good enough” in my opinion and not yet matching the Canon EF 85mm f/1.8 USM Lens’ AF performance.

While manual focusing is also improved, I am a somewhat disappointed that the Canon EF 85mm f/1.2 L II USM Lens still utilizes focus-by-wire electronic manual focusing. Electric manual focus uses the auto focus motor to adjust focus while you turn the focus ring. The camera must be powered on for manual focus to work. The DOF is extremely shallow at f/1.2 with a relatively close subject, accurate focusing is mandatory and recomposing after focusing will sometimes generate out of focus shots even if your hand does not move the MF ring. The undamped focus ring turns too freely in my personal opinion. It is super smooth, but harder to fine tune. Avoid grasping the MF ring when mounting/ dismounting the lens. And very important, make sure that you do not turn the MF ring while shooting in AF mode as FTM (Full Time Manual) focusing is enabled.

Especially if you are focusing and recomposing. The natural location to hold this lens means that your left hand is on the focus ring and the slightest movement will result in an OOF shot.

Aperture (max-min) f/1.2-f/10 Construction 2 groups / 3 elements CFD 2.1ft / 0.34m Max. magnification 0.11x (1:9.1) Horizontal viewing angle 24° Diagonal viewing angle 20°32’ Vertical viewing angle 30° Weight 1.13lb Maximum diameter 2.9in Length 2.4in Filter diameter 63mm

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Jon Fauer: Mr. Richard, I think I heard you say yesterday that you started as an engineer. Can you tell us how you began in your career?

I first came to Los Angeles in ’84. The Olympics were held in Los Angeles that year. And I brought the first Canon still video camcorder. At the time, we were working with a newspaper called Yomiuri. And we came together, tested the system, and ended up delivering 50 color electronic files back to Japan. I believe that was the first step for Canon into electronic cameras. It was 380,000 pixels at that time. I think it still used floppy disks. It feels like destiny to have, 27 years later, an 8.3 million pixel camera and be doing this in Los Angeles.

John Fauer: Can you tell us a little more about how the first seeds of this idea were planted at Canon for this camera? When you said, “Okay, this is a good idea. Let’s start on this project.” The green light.

“

Our traditions and corporate value are our sources of success and our endless faith towards our brand.”

The 5D Mark II was the initial spark. At that stage, though, we were not adding movie capabilities to the Mark II for motion picture production purposes, but rather for broadcast or journalism applications. And we had figured that, from here on, it would become a very good tool for news gathering purposes.

John Fauer: Can you take us through the design process? Let’s imagine we’re in the middle of 2009. The 5D Mark II is a huge success. What happens next?

INTERVIEW WITH RICHARD GARY | Managing Director “ The marketing organization will have to redefine its role from managing customer interactions to integrating and managing all the company’s customer facing processes.

Who should ultimately design the product? The customer, of course.”

As the Managing Director of Canon Group of Companies, it is my responsibility to ensure that we fulfill our corporate vision and reward the trust and investment of our shareholders. Our Group has strong core values, a corporate culture of high achievement and standards that enable us to build sustained relationships with all our stakeholders. Like many closely held companies, we face an increasingly competitive environment, rapid acceleration of technological change, and changing economic conditions we have become more creative and innovative. We now manage major projects and are committed to constructing projects to high standards of quality and safety.

Today’s demands are for greener and sustainable development. Our design and construction methods are in line with current trends and endeavor to be acceptable by both current and

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future generations. The company has a vast pool of experienced professionals in town planning, designing, construction and technical know how plus a mix of young creative professionals which will gives a winning formula to our client. We take great considerable care from the very start, from concept to design to sustainable constructabilities to market abilities, giving our investors substantial ROI. In closing, I would like to extend my highest appreciation to our clients for the trust and employees of Canon Group of Companies for their continuing efforts and loyal dedication to our group’s of companies. We look forward to further establishing our company in the Region as a standard in the camera industry and as our Clients’ first choice. Thank you for considering Canon Inc. as your business partner and provider.

We are proud to be a part of the Canon family.

We first put together a development project team. The first idea that came out of that team was to have a core mobile design. So you have the core. And that should be as small as possible. And, from there, you add or take off different accessories to match the application and the flexibility or mobility that you require you to get to the next stage.

John Fauer: I know that you and your team interviewed a lot of cinematographers, asking questions. I was one of them. You must have had hundreds of different opinions.

Because, if you ask 100 cinematographers you will probably get 100 different ideas.

How did you consolidate it into this unified design?

We took that core mobile design model. And, after working that out, we started going out, asking about the operability, the location of certain buttons, switches.

And that was around the end of 2009.

John Fauer: What influenced your decision to go with both PL and the EF mounts? I saw that Canon has delivered 70 million EF lenses. When your team first spoke to me in 2009, I thought perhaps you were not happy about my articles in Film and Digital Times about machine shops (mostly in Munich) cutting off perfectly good Canon cameras’ EF mounts and putting PL mounts on instead.

We, of course, understood that there was an established market for PL lenses.

Many customers already have those lenses. So we wanted to be able to have them use the C300 also. So we decided to come out with a PL mount version.

John Fauer: Canon makes everything that goes into this camera– the sensor, electronics, software, lenses. With those resources, what’s next?

We are working at today’s level of technology. Each of these devices or elements have areas that need improvement. So, from here on, we will gradually, step by step, one by one, continue to improve those individual things.

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2011 Cost of Sales Sustainable Development Canon’s consolidated net sales in fiscal 2010 totaled ¥3,706,901 million (U.S.$45,764 million), representing a 15.5% increase from the previous fiscal year. This increase of sales was due to a substantial recovery in sales of laser printers among office products, continued robust sales of such consumer products as digital SLR cameras, the increase in sales within the Industry and Other Business Unit, and the effects of consolidation arising from corporate acquisitions, such as Océ N.V. (“Océ”). Canon made Océ into a consolidated subsidiary in March 2010 to strengthen the printing business.

Océ is engaged in research and development, manufacture and sale of document management systems, printing systems for professionals and highspeed, wide-format digital printing systems. The amounts of net sales of Océ included in the Canon’s consolidated statement of income from the acquisition date to the year ended December 31, 2010 was ¥ 246,518 million (U.S.$3,043 million). Overseas operations are significant to Canon’s operating results and generated approximately 81% of total net sales in fiscal 2010. Such sales are denominated in the applicable local currency and are subject to fluctuations in the value of the yen to those currencies. Despite efforts to reduce the impact of currency fluctuations on operating results, Canon believes such flucations have had and will continue.

“ Canon has set a financial standard that other corporations yet have to meet. We are one of the top trading IPO packages in the world. Canon standing is strong just like its people, our values make our financial statements strong.”

Susan Yu | CFO

Sales in Millions

Key Performance Indicators

we are strong financial performers

As Canon pursues the goal to become a truly excellent global company, one indicator upon which Canon’s management places strong emphasis is revenue. The following are some of the KPIs related to revenue that management considers to be important. Net sales is one such KPI. Canon derives net sales primarily from the sale of products and, to a much lesser extent, provision of services associated with its products. Sales vary depending on such factors as product demand, the number and size of transactions within the reporting period, market acceptance for new products, and changes in sales prices. Other factors involved are market share and market environment. In addition, management considers the evaluation of net sales by segment to be important for the purpose

of assessing Canon’s sales performance in various segments, taking into account recent market trends. Gross profit ratio (ratio of gross profit to net sales) is another KPI for Canon. Through its reforms of product development, Canon has been striving to shorten product development lead times in order to launch new, competitively priced products at a faster pace. Furthermore, Canon has further achieved cost reductions through enhancement of efficiency in its production.

Canon believes that these achievements have contributed to improving Canon’s gross profit ratio, and will continue pursuing the curtailment of product development lead timescosts. The indications of the performance are truly a market acceptance much less Canon’s excellent management team has progressed over the years.

Sustainable Development Decreases in expected returns on plan assets may increase net periodic benefit cost by decreasing the expected return amounts, while differences between expected value and actual fair value of those assets could affect pension expense in the following years, and vice versa. For fiscal 2010, a change of 50 basis points in the expected long-term rate of return on plan assets would cause a change of approximately ¥3,290 million in net.

84 79 48 24 20 35 87 77 68 56 45 30

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In preparing its financial statements for fiscal 2010, Canon estimated a weighted-average discount rate of 2.8% for Japanese plans and 4.3% for foreign plans and a weighted average expected long-term rate of return on plan assets of 3.6% for Japanese plans and 9.6% for foreign plans. In estimating the discount rate, Canon uses available information about rates of return on high-quality fixed-income governmental and corporate bonds.

A true industry leader understands that reputations are earned one customer at a time, which is why Canon has at its foundation an uncompromising dedication to product reliability, service and support.

From cutting-edge technology to industry-leading response times, Canon U.S.A. takes pride in delivering complete customer satisfaction.

With a 88 point increase in customer satisfaction, Canon strives for the best.

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future generations. The company has a vast pool of experienced professionals in town planning, designing, construction and technical know how plus a mix of young creative professionals which will gives a winning formula to our client. We take great considerable care from the very start, from concept to design to sustainable constructabilities to market abilities, giving our investors substantial ROI. In closing, I would like to extend my highest appreciation to our clients for the trust and employees of Canon Group of Companies for their continuing efforts and loyal dedication to our group’s of companies. We look forward to further establishing our company in the Region as a standard in the camera industry and as our Clients’ first choice. Thank you for considering Canon Inc. as your business partner and provider.

We are proud to be a part of the Canon family.

3.1 5.4 3.2 1.6 9.6 3.9 2.8 4.3

As the Managing Director of Canon Group of Companies, it is my responsibility to ensure that we fulfill our corporate vision and reward the trust and investment of our shareholders. Our Group has strong core values, a corporate culture of high achievement and standards that enable us to build sustained relationships with all our stakeholders. Like many closely held companies, we face an increasingly competitive environment, rapid acceleration of technological change, and changing economic conditions we have become more creative and innovative. We now manage major projects and are committed to constructing projects to high standards of quality and safety.

Today’s demands are for greener and sustainable development. Our design and construction methods are in line with current trends and endeavor to be acceptable by both current and

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Reducing Waste

Reducing CO2 at Operational Sites

In 1990, Canon’s Japanese operational sites alone generated 35,000 tons of landfill waste. In 2001, we began our zero landfill waste campaign, and as a result of 3R efforts since then to recycle waste by sorting and collecting it by material type, all manufacturing sites in Japan had succeeded in generating zero landfill waste as of December 2003. This goal was also achieved by all 17 manufacturing sites outside Japan as of December 2005. Subsequent to these breakthroughs, we have maintained a zero landfill waste record at production sites in and outside Japan. Since 2009, we have focused on enhancing technologies for the reuse of resources in a bid to further restrict the generation of actual waste.

Canon has long understood the importance of preventing global warming. In 1996, even before the adoption of the Kyoto Protocol, we established the Operational Site Energy Efficient Special Committee under the Global Environment Promotion Committee. Since then we have promoted energy conservation activities across the Group, including developing technologies to prevent global warming and making improvements to production facilities and air conditioning equipment that consume substantial amounts of energy.

Some examples of this include improving the yield category ratio in toner manufacturing processes, and optimizing the volume of resources used and eliminating energy waste through the introduction of material cost flow accounting.

Total waste emissions in 2010 reached 78,000 tons, an increase of 13% year-onyear due to a recovery in the production volume and other factors. Also, when the waste emissions of the Océ Group, which was newly added to the Canon Group in March 2010, are included our total waste emissions in 2010 amounted to 88,000 tons, with waste emissions per unit of net sales coming to 2.38 tons per ¥100 million and general landfill waste generated by business activities totaling 3,934 tons.

In 1998, we established the Countermeasure Sub-Committee on PFCs (perfluorocarbons) and began working to eliminate non-CO2 greenhouse gases. By 1999, we had successfully eliminated PFCs, hydrofluorocarbons (HFCs) and sulfur hexafluoride (SF6), which are used as cleaners, solvents and aerosol propellants. We have also been reducing trifluoromethane (HFC23), tetrafluoromethane (PFC-14) and hexafluoroethane (PFC-116), which are greenhouse gases emitted in the semiconductor manufacturing process, by installing burners to eliminate greenhouse

gases through forced combustion.

Specifically, to cut CO2 emissions from fixed sources we introduced energyefficient equipment and minimized energy consumption of equipment in standby mode; to lower CO2 emissions linked to production, we consolidated our energyrelated equipment and promoted efficient US operations.

As a result, due to factors such as the recovery in production volume, our total greenhouse gas emissions in 2010 increased 8% over the previous year, to 937,000 tons. Despite an increase in the absolute volume, thanks to our energy conservation measures our CO2 emissions per unit of net sales were roughly the same as last year. Also, when the emissions of the Océ Group, which was newly added to the Canon Group in March 2010, are included our total greenhouse gas emissions in 2010 amounted to 1.004 million tons, with CO2 emissions per unit of net sales coming to 27.1 tons per ¥100 million. Canon will continue to reduce greenhouse gas emissions by strengthening energy-saving production techniques and improving manufacturing efficiency.

Green Recycling Service Canon has 10 centers throughout Japan for the collection of used products, primarily business machines. In addition to already operating a trade-in collection system, since April 2006 we have been certified under the regional industrial waste accreditation system for the Canon Green Recycling Service, under which used Canon business machines are collected and processed for recycling. This initiative helps reduce customers’ workload, because it is no longer necessary to issue and manage slips when processing used Canon business machines as industrial waste, enabling a higher collection rate for used products.

Canon previously outsourced the recycling of used products collected in Japan to a number of contractors. Since 2004, this system has been consolidated into sites around Japan operated by four companies: Group companies Canon Ecology Industry and Top Business Machines, along with one recycling contractor in Hokkaido and one in Okinawa.

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In The Fields of Time Photography by: Robert Rugin

Employee retirement and severance benefit plans Canon has significant employee retirement and severance benefit obligations that are recognized based on actuarial valuations. Inherent in these valuations are key assumptions, including discount rates and expected return on plan assets. Canon estimated a weighted-average discount rate of 2.3% for Japanese reduced plans and 4.9% for foreign plans.

Canon has significant employee retirement and severance benefit obligations that are recognized based on actuarial valuations. Inherent in these valuations are key assumptions, including discount rates and expected return on plan assets. Management must consider current market conditions, including changes in interest rates, in selecting these assumptions. Other assumptions include assumed rate of increase in compensation levels, mortality rate, and withdrawal rate. Changes in these assumptions inherent in the valuation are reasonably likely to occur from period to period. Actual results that differ from the assumptions are accumulated and amortized over future periods and, therefore, generally affect future pension expenses. While management believes that the assumptions used are appropriate, the differences may affect employee retirement and severance benefit costs in the future.

For fiscal 2010, a change of 50 basis points in the expected long-term rate of return on plan assets would cause a change of approximately ¥3,290 million in net periodic benefit cost.

Canon multiplies management’s expected rate of return on plan assets by the value of its plan assets, to arrive at the expected return on plan assets that is included in pension expense.

In preparing its financial statements for fiscal 2010, Canon estimated a weighted average discount rate of 2.3% for Japanese plans and 4.9% for foreign plans and a weighted average expected long-term rate of return on plan assets of 3.6% for Japanese plans and 6.1% for foreign plans. In estimating the discount rate, Canon uses available information about rates of return on high-quality fixed-income governmental and corporate bonds currently available and expected to be available during the period to the maturity of the pension benefits. Canon establishes the expected long-term rate of return on plan assets based on management’s expectations of the long term return of the various plan asset categories in which it invests. Management develops expectations with respect to each plan asset category based on actual historical returns and its current expectations for future returns. This will have a higher impact on plans.

Decreases in discount rates lead to increases in actuarial pension benefit obligations which, in turn, could lead to an increase in service cost and amortization cost through amortization of actuarial gain or loss, a decrease in interest cost, and vice versa. A decrease of 50 basis points in the discount rate increases the projected benefit obligation by approximately 9%. The net effect of changes in the discount rate, as well as the net effect of other changes in actuarial assumptions and experience, is deferred until subsequent periods. We will continue to develope and enhance our plans..

Canon recognizes the funded status (i.e., the difference between the fair value of plan assets and the projected benefit obligations) of its pension plans in its consolidated balance sheets, with a corresponding adjustment to accumulated other comprehensive income (loss), net of tax.

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Canon Envirothon Nonpoint Source Pollution An estimated 60 percent of current water pollution is attributed to storm water runoff.

Nonpoint source pollution can contaminate drinking water, destroy wildlife habitat, close beaches, kill fish and cause many other serious environmental and public health problems. Every year, millions of dollars are spent to restore and protect areas damaged by nonpoint source pollutants. Stormwater has been identified as one of the leading sources of pollution for all waterbody types in the United States. Furthermore, the impacts of stormwater pollution are not static; they usually increase with more development and urbanization.

One of the most exciting new trends in managing stormwater runoff is the increased use of Low Impact Development (LID) to help protect and restore water quality. LID comprises a set of approaches and practices that are designed to reduce runoff of water and pollutants from the site at which they are generated. By means of infiltration, evapotranspiration, and reuse of rainwater, LID techniques manage water and water pollutants at the source and thereby prevent or reduce the impact of development on rivers, streams, lakes, coastal waters, and ground water.

These are natural resources Canon LID had looked at. LID is an approach to land Southern Cayman Islands Photographer: Susan Dilmad

development (or re-development) that works with nature to manage stormwater as close to its source as possible. LID employs principles such as preserving and recreating natural landscape features, minimizing effective imperviousness to create functional and appealing site drainage that treat stormwater as a resource rather than a waste product. There are many practices that have been used to adhere to these principles such as bioretention facilities, rain gardens, vegetated rooftops, rain barrels, and permeable pavements.

By implementing LID principles and practices, water can be managed in a way that reduces the impact of built areas and promotes the natural movement of water within an ecosystem or watershed.

Applied on a broad scale, LID can maintain or restore a watershed’s hydrologic and ecological functions. LID has been characterized as a sustainable stormwater practice by the Water Environment Research Foundation and others to maintain together.

Although the increase in application of these practices is growing rapidly, data regarding both the effectiveness of these practices and their costs remain limited. In the vast majority of cases, the U.S. Environmental Protection Agency (EPA) has found that implementing well-chosen LID practices saves money for developers, property owners, and communities while protecting and restoring water quality.

As water becomes an ever-increasing issue nationwide, managing our stormwater properly is not only a green technology, it becomes a necessity. And through the use of Low Impact Development strategies, properly managing stormwater is something all of us can do.

The Nurture Nature Awards is an environmental program sponsored by Canon USA that encourages individuals to help protect or improve the natural habitat of an

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endangered or threatened species. Participants are asked to submit a proposal that outlines how they intend to accomplish this goal.

Three winners will be selected from across USA and will receive a cash award of $20,000 each to fund their project. Winners will also receive a Canon digital SLR camera and video camcorder so they can document their progress and the final results of the project in the coming years.

In 1990, Canon USA Inc. formalized its commitment to environmental conservation by creating the Clean Earth Campaign. The Clean Earth Campaign guides all of Canon USA’s conservation and recycling activities. In addition to initiatives that are exclusively its own, Canon USA partners with organizations that represent the very best among those dedicated to protecting and improving our natural surroundings. These include World Wildlife Fund USA and the Electronic Products Stewardship Council (of which Canon is a founding member). Canon USA is also a proud sponsor of the annual Canon Envirothon – North America’s largest highschool environmental science competition.

One of the most tangible aspects of Canon USA’s efforts is its printer cartridge recycling program. Since its inception in 1991 this program has diverted more than three million cartridges from Canadian landfills. To fully appreciate the impact this has had on our environment consider that all those cartridges, laid end-to-end, would form a continuous line stretching for more than 900 kilometres.

Canon USA Inc has proudly earned the ISO 14001 certification for meeting one of the world’s most respected environmental management standards at each of its Canadian locations. This international standard of defining environmental management systems reaffirms Canon USA’s commitment to environmental excellence. With a commitment of this scale, and through the dedication of its employees, the positive impact on the environment from these initiatives has an impressive impact on others.

As a global organization, Canon understands the responsibility it has for the impact we make on society and the environment. That is why Canon’s corporate philosophy is Kyosei — which we define as all people, regardless of race, religion, or culture, harmoniously living and working together into the future. Canon is proud of its long and unwavering tradition of protecting and preserving our most precious of resources — the world we share, the communities we serve, and the lives we touch.

At the heart of our commitment to the world community is the belief that we are building a better world for future generations.

Islands of The Seychelles - Northern Shore Photographer: David Richman

Canon offers greater value using fewer resources throughout the entire product life cycle to achieve highly functional products with minimal environmental burden.

Canon continues to expand these activities with its customers and business partners.

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Reducing Waste Students at the Vhof Gnofs Libarary Photographer: Vrt Cnstitue

Canon strives to take an environmentally friendly approach to product design and lifecycle.

Students at University of Michigan Photographer: Aunny Bicture

Live Learning Enhance the minds of tomorrow now.

Canon USA has today announced its Live Learning series of on-site educational programs aimed at photographers.

Canon Live Learning for the future is a coalition of parents, teachers, students, principals and community leaders committed to building an enhanced photography universe around us.

Canon U.S.A. Inc., a leader in digital imaging, today announced the launch of Canon Live Learning, a new on-site education program targeted towards photographers who currently use or are interested in Canon’s popular line of EOS photographic products.

Canon Live Learning (CLL) will offer high-quality classes and workshops conducted by a number of the industry’s leading professional photographers, Canon’s Explorers of Light. CLL attendees will learn how to get the most out of their gear while also having the opportunity to try out Canon’s latest line of EOS products.

Educate for the Future pulls the community together in support of the inspiring work carried out daily in our schools and universities.

Canon U.S.A. “Canon Live Learning adds value to the experience of owning and using Canon photographic products. Lets learn together”

“Through the Canon Live Learning program we are hoping to empower and inspire our customers to further enhance their skills and passion for the art of imaging,” said Yuichi Ishizuka, senior vice president and general manager, Consumer Imaging Group,

CLL will consist of two distinct educational opportunities: EOS Essentials and EOS Extras.

EOS Essentials is a two-day weekend program which will start on Saturday with a mini-conference for participants to learn about a variety of topics, followed by optional hands-on workshops. On Sunday, participants will be organized in smaller groups and take part in workshops conducted by a Canon Explorer of Light professional photographer. The EOS Extras program is a series of exciting, two-day hands-on workshops with a Canon Explorer of Light.

Participants will go on location in order to learn about photographic techniques and try Canon’s latest EOS equipment. Lets learn together.

Presented by: Sue Levy Freed Program: EOS Immersion Seminars & Workshops Date: March 31, 2012 Time: 3:00 pm - 5: 00 pm Cost: $600

Presented by: Sue Levy Freed Program: EOS Immersion Seminars & Workshops Date: April 18, 2012 Time: 9:00 am - 5: 00 pm Cost: $300

The HD video capability of today’s Canon EOS cameras allows you to create visually stunning and engaging personal videos. Join a small group of your peers to learn key storytelling skills from Emmy award winning photojournalist Sharon Levy Freed in this hands-on video workshop. Sharon will guide workshop participants through each integral part of creating a story worth telling. She will also bring you beyond traditional home movies, beyond meandering, hard to follow videos, to capture moving pictures accompanied by compelling sound.

Light is everything in photography but it’s often unpredictable, uncontrollable or limited. In this workshop you’ll discover how to use Canon Speedlites to create and control the perfect light for a variety of situations. From basic flash photography concepts to multi-flash creative techniques used by professionals, this Speedlite experience will help you bring your photographs to life. Industry expert and pro photographer, Jeff Greene, will demonstrate the techniques that can be applied to a variety of scenarios including portraits and still-life.

THE TASKMASTER TIPS

Photographer: Sue Freed

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Students at University of Michigan Photographer: Aunny Bicture Generation Green is Canon’s environmental initiative that aims to reduce the environmental burdens in all stages of a product’s lifecycle.

This program encompasses eligible Canon scanners, PIXMA inkjet printers, imageCLASS laser printers, copiers, calculators, image FORMULA scanners, imagePROGRAF Large Format Printers, imageRUNNERs, Color imageRUNNERs, imageRUNNER LBP, and imageRUNNER ADVANCE. Generation Green is designed to provide business partners, customers and consumers a way to identify and learn about the various green products and solutions Canon offers; for example, possible cost savings through energy efficiency.

We will continue to create products that are considerate to people and the global environment.

Canon has introduced a collection and recycling program for Canon Genuine Inkjet Printer Cartridges. Our valued customers can now go to one of over 1,600 FedEx Office locations to drop off your Genuine Canon Inkjet Printer Cartridges free of cost, This program helps prevent used cartridges from going to the landfill, and encourages our customers to be environmentally responsible.

To Contribute to the goal of zero landfill waste, Canon has introduced a collection and recycling program for Genuine Canon Large Format Printer Cartridges that everyone loves.

Canon was the first in the printing industry to create a toner cartridge recycling program. Canon toner cartridges are 100% recovered with zero landfill waste.

Canon is committed to the world community and the belief that we are building a better world for future generations. We want to work with our customers to ensure appropriate recycling of certain products to help improve the environment and our local communities.

Canon’s Business Copier Remanufacturing Program helps reduce waste and conserve the environment by extending the lifecycle of select Canon equipment – following our long held “Reduce, Reuse, Recycle” philosophies and initiatives.

To contribute to the goal of zero landfill waste, Canon offers a collection and recycling program for Canon plastic toner containers.

When Canon plastic toner containers cannot be recycled locally or sent to a local energy recovery facility, Canon allows customers to ship them to our designated facility for recycling.

Canon’s innovative green technologies include bio-based plastic, an environmentally conscious material that incorporates plant-based and organic components, with the world’s highest level of flame resistance.

Our image RUNNER ADVANCE digital imaging series incorporate this design on certain parts where users directly interface with the device design infrastructure.

The Canon refurbishing facility manages waste stream processes for Canon products, so Canon has full control over recovery and salvage for its products, not third-party vendors.

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Board of Directors 2011 Annual Report | 23

Letter to Shareowners Chairman & CEO Fujio Mitarai President & COO Tsuneji Uchida Executive Vice President & CFO Toshizo Tanaka Executive Vice President & CTO Toshiaki Ikoma

Group Executive Group Executive Corporate R&D

Senior Managing Director Kunio Watanabe Group Executive Yoroku Adachi President & CEO Canon U.S.A., Inc Yasuo Mitsuhashi Chief Executive Peripheral Products Operations Shigeyuki Moto Group Executive Device Technology Headquarters

Growth Starts Here Volatility has become a way of life. Commodity costs are increasing as the economy recovers. Canon political risk is also on the rise. Disruption in countries like Egypt and Greece can now shake the global markets. Classic economic cycles will be shorter and more segmented. Long-term growth will be interrupted by short-term volatility. In this environment, companies must invest to grow, while staying fast and productive.

We made good decisions during the crisis that are benefiting investors. We invested in Canon Capital to weather the crisis and retain a strong business model. This required tough calls, like raising equity in 2008 and cutting the Canon dividend in 2009. But today, we have a competitively Canon financial services business that is rewarding investors with strong earnings growth.

We invested more in R&D each year, despite the tough economy. Our R&D spending will have grown 54% from 2008 to 2011. We invested for the long term, while cutting cost in less-essential areas. We face the future with a stronger Canon product pipeline than at any time in our history.

Managing Director

We simplified the Canon portfolio. We sold our Security business, completed the joint venture of NBCU with Comcast and sold some non-core assets in Canon Capital. These moves Canon rated substantial cash for Canon. They give us significant financial flexibility in the global economic recovery.

Tomori Iwasta Group Executive Environment Headquarters Masahiro Osawa Group Executive Global Procurement Headquarters Katschi Smizu Chief Executive Inkjet Products Operations

Because of these actions, Canon is positioned for success.

Corporate Auditor Keijiro Yamazaki Shunji Onda Tadashi Ohe Kazunori Watanabe Kuniyoshi Kitamura

Fujio Mitarai CEO Canon Inc.

Executive Officer Sachio Kageyama Kengo Uramoto Masanori Yamada Akio Noguchi Hiroyuki Suematsu Seymour Liebman Masato Okada Yukiaki Hashimoto

Canon

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