UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

OR

For the fiscal year ended December 31, 20122014

OR

For the transition period from                    to                    

OR

Date of event requiring this shell company report                    

Commission file number 001-15122

CANON KABUSHIKI KAISHA

(Exact name of Registrant in Japanese as specified in its charter)

CANON INC.

(Exact name of Registrant in English as specified in its charter)

JAPAN

(Jurisdiction of incorporation or organization)

30-2, Shimomaruko 3-chome, Ohta-ku, Tokyo 146-8501, Japan (Address

(Address of principal executive offices)

Toshihide Aoki,Shinichi Aoyama, +81-3-3758-2111, +81-3-5482-9680, 30-2, Shimomaruko 3-chome, Ohta-ku, Tokyo 146-8501, Japan

(Name, Telephone, Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act.

Securities registered or to be registered pursuant to Section 12(g) of the Act.

None

(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

None

(Title of Class)

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

As of December 31, 2012, 1,152,791,2912014, 1,091,831,827 shares of common stock, including 23,359,22426,472,812 ADSs, were outstanding.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  þ    No  ¨

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    Yes  ¨    No  þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  þ            Accelerated filer  ¨            Non-accelerated filer  ¨

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.    Item 17  ¨    Item 18  ¨

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  þ

TABLE OF CONTENTS

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CERTAIN DEFINED TERMS, CONVENTIONS AND PRESENTATION OF FINANCIAL INFORMATION

All information contained in this Annual Report is as of December 31, 20122014 unless otherwise specified.

References in this discussion to the “Company” are to Canon Inc. and, unless otherwise indicated, references to the financial condition or operating results of “Canon” refer to Canon Inc. and its consolidated subsidiaries.

On March 15, 2013,13, 2015, the noon buying rate for yen in New York City as reported by the Federal Reserve Bank of New York was ¥95.26 =¥121.17= U.S.$1.

The Company’s fiscal year end is December 31. In this Annual Report “fiscal 2012”“2014” refers to the Company’s fiscal year ended December 31, 2012,2014, and other fiscal years of the Company are referred to in a corresponding manner.

FORWARD-LOOKING INFORMATION

This Annual Report contains forward-looking statements and information relating to Canon that are based on beliefs of its management as well as assumptions made by and information currently available to Canon Inc. When used in this Annual Report, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “project” and “should” and similar expressions, as they relate to Canon or its management, are intended to identify forward-looking statements. Such statements, which include, but are not limited to, statements contained in “Item 3. Key Information-Risk Factors”, “Item 4. Information on the Company “,“Item 5. Operating and Financial Review and Prospects” and “Item 11. Quantitative and Qualitative Disclosures about Market Risk”, reflect the current views and assumptions of the Company with respect to future events and are subject to risks and uncertainties. Many factors could cause the actual results, performance or achievements of Canon to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements, including, among others, changes in general economic and business conditions, changes in currency exchange rates and interest rates, introduction of competing products by other companies, lack of acceptance of new products or services by Canon’s targeted customers, inability to meet efficiency and cost reduction objectives, changes in business strategy and various other factors, both referenced and not referenced in this Annual Report. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected, intended, planned or projected. Canon Inc. does not intend or assume any obligation to update these forward-looking statements.

PART I

Item 1. Identity of Directors, Senior Management and Advisers

Not applicable.

Item 2. Offer Statistics and Expected Timetable

Not applicable.

Item  3. Key Information

A. Selected financial data

The following information should be read in conjunction with and qualified in its entirety by reference to the Consolidated Financial Statements of Canon Inc. and subsidiaries, including the notes thereto, included in this Annual Report.

Notes:

The following table provides the noon buying rates for Japanese yen in New York City as reported by the Federal Reserve Bank of New York expressed in Japanese yen per U.S.$1 during the periods indicated and the high and low noon buying rates for Japanese yen per U.S.$1 during the months indicated. On March 15, 2013,13, 2015, the noon buying rate for yen in New York City as reported by the Federal Reserve Bank of New York was ¥95.26¥121.17 = U.S.$1.

B. Capitalization and indebtedness

Not applicable.

C. Reasons for the offer and use of proceeds

Not applicable.

D. Risk factors

Canon is one of the world’s leading manufacturers of office multifunction devices (“MFDs”), plain paper copying machines, laser printers, inkjet printers, cameras and lithography equipment.

Primarily because of the nature of the business and geographic areas in which Canon operates and the highly competitive nature of the industries to which it belongs, Canon is subject to a variety of risks and uncertainties, including, but not limited to, the following:

Risks Related to Economic Environment

Economic trends in Canon’s major markets may adversely affect its operating results.

Canon’s business activities are deployed globally in Japan, the United States, Europe, Asia, and in other regions. Declines in consumption and restrained investment due to economic downturn in these major markets may affect Canon’s operating results. The operating results for products such as office and industrial equipment are affected by the financial results of its corporate customers, and deterioration of their financial results has caused and may continue to cause customers to limit capital investments. Demand for Canon’s consumer products, such as cameras and inkjet printers, is discretionary. Rapid price declines owing to intensifying competition and declines in levels of consumer spending and corporate investment could adversely affect Canon’s operating results and financial position.

Canon’s operating and financing activities expose it to foreign currency exchange and interest rate risks that may adversely affect its revenues and profitability.

Canon derives a significant portion of its revenue from its international operations. As a result, Canon’s operating results and financial position have been and may continue to be significantly affected by changes in the value of the yen versus foreign currencies. Sales of Canon’s products denominated in foreign currencies have been and may continue to be adversely affected by the strength of the yen against foreign currencies. Conversely, a strengthening of foreign currencies against the yen will generally be favorable to Canon’s foreign currency sales. Canon’s consolidated financial statements are presented in yen. As such, the yen value of Canon’s assets and liabilities arising from foreign currency transactions have fluctuated and may continue to fluctuate. Unpredictable fluctuations may have certain effects on Canon’s consolidated financial statements. Although Canon strives to mitigate the effects of foreign currency fluctuations arising from its international business activities, Canon’s consolidated financial statements have been and may continue to be affected by currency translations from the financial statements of Canon’s foreign subsidiaries and affiliates, which are denominated in various foreign currencies. Canon is also exposed to the risk of interest rate fluctuations, which may affect the value of Canon’s financial assets and liabilities.

Canon may be adversely affected by fluctuations in the stock and bond markets.

Canon’s assets include investments in publicly traded securities. As a result, Canon’s operating results and general financial position may be affected by price fluctuations in the stock and bond markets. Volatility in financial markets and overall economic uncertainty create the risk that the actual amounts realized in the future on Canon’s investments could differ significantly from the fair values currently assigned to them. In addition, if valuations of investment assets decrease because of conditions in stock or bond markets, for example, additional funding and accruals with respect to Canon’s pension and other obligations may be required, and such funding and accruals may adversely affect Canon’s operating results and consolidated financial condition.

High prices of raw materials could negatively impact Canon’s profitability.

Increases in prices for raw materials that Canon uses in manufacturing such as steel, non-ferrous metals and petrochemical products may lead to higher production costs and Canon may not be able to pass these increased production costs onto the sales prices of its products. Such increases in prices for raw materials could adversely affect Canon’s operating results.

Risks Related to Canon’s Industries and Business Operations

A substantial portion of Canon’s business activity is conducted outside Japan, exposing Canon to the risks of international operations.

A substantial portion of Canon’s business activity is conducted outside Japan. There are a number of risks inherent in doing business in international markets, including the following:

Any inability to manage the risks inherent in Canon’s international activities could adversely affect its business and operating results.

Canon has invested and will continue to invest actively in next-generation technologies. If the marketmarkets for these technologies doesdo not develop as Canon expects, or if its competitors produce these or competing technologies in a more timely or effective manner, there could be a material adverse effect on Canon’s operating results.results may be materially adversely affected.

Canon has made and will continue to make investments in next-generation technology research and development initiatives. Canon’s competitors may achieve research and development breakthroughs in these technologies more quickly than Canon, or may achieve advances in competing technologies that render products

under development by Canon uncompetitive. For several years, Canon has continued its investments in development and manufacturing in order to keep pace with technological evolution. If Canon’s business strategies diverge from market demands, Canon may not recover some or all of its investments, or may lose business opportunities, or both, which may have a material adverse effect on Canon’s operating results.

In addition, Canon has sought to develop production technology and equipment to accelerate the automation of its manufacturing processes and in-house production of key devices. If Canon cannot effectively implement these techniques, it may fail to realize cost advantages or product differentiation, and consequently lose business opportunities, which may adversely affect Canon’s operating results. While differentiation in technology and product development is an important part of Canon’s strategy, Canon must also accurately assess the demand for and commercial acceptance of new technologies and products that it develops. If Canon pursues technologies or develops products that are not well received by the market, its operating results could be adversely affected.

Entering new business areas through the development of next-generation technologies is a focal point of Canon’s corporate strategy. To the extent that Canon enters into such new business areas, Canon may not be able to establish a successful business model or may face severe competition with new competitors. If such events occur, Canon’s operating results may be adversely affected.

If Canon does not effectively manage transitions in its products and services, its operating results may decline.

Many of the business areas in which Canon competes are characterized by rapid technological advances in hardware performance, software functionality and product features; frequent introduction of new products; short product life cycles; and continued qualitative improvements to current products at stable price levels. If Canon does not make effective transitions from existing productshas sought to invest substantial resources into introducing appealing, innovative and services tocost-competitive new offerings, its revenue and profits may decline. Among theproducts. There are several risks associated with theinherent in introduction of new products and services, aresuch as delays in development or manufacturing, low marketability due to unsuitable product quality during the introductory period, variations in manufacturing costs, delaysnegative impact on sales of customer purchasing decisions in anticipation of further introductions,current products, uncertainty in predicting customer demand for new offerings and difficulty in effectively managing inventory levels in line with anticipated demand.levels. Moreover, if Canon is unable to respond quickly to unexpected technological innovations with respect to information systems and networks, Canon’s revenue may be significantly affected as a result of delays associated with the incorporation into its products of such new information technologies into existing products and services as well as new offerings.technologies.

Canon’s revenuerevenues and gross marginmargins also may suffer adverse effects because of the timing of product or service introductions by its competitors. This risk is exacerbated when a product has a short life cycle or when a competitor introduces a new product immediately prior to Canon’s introduction of a similar product. Furthermore, sales of Canon’s new products and services may replace sales of, or result in discounting of, some of its current products and services, potentially offsetting the benefits derived from the introduction of a successful new product or service. Canon must also ensure that its new products are not wholly or partially duplicative of existing products and operations. Given the competitive nature of Canon’s businesses, ifIf any of these risks materialize, future demand for itsCanon’s products and services could be reduced, and its operating results could decline.

Changes in the print environment may affect Canon’s businessbusiness.

In the business machines market for such products as MFDs, copying machines and printers, customers are increasingly looking for ways to cut costs while protecting the environment. From this perspective, Managed Print Services (MPS)(“MPS”), which aim to optimize printing efficiencies in the office, have become popular in recent years. This trend could lead to a decrease in business machine print volumes.

In addition, the popularity of tablet PCs could also lead to a decrease in customer print opportunities. If Canon is unable to supply products and services that respond to these types of market trends, it could result in adverse effects on its operating results.results may be adversely affected.

Canon’s digital camera business operates in a highly competitive environment.

“Mirrorless” cameras are interchangeable lens cameras which, because they do not incorporate a mirror mechanism, are more compact and lightweight than digital single-lens-reflex (“SLR”) cameras. The growth of the mirrorless camera market has the potential to adversely affect the market for digital SLR cameras, in which Canon boasts top market share. If the mirrorless camera market continues to grow and Canon fails to gain a leading share of that market or the digital SLR camera market shrinks relative to that market, our revenues and our overall presence in the camera market may be adversely affected.

Meanwhile, the smartphone market has been growing dramatically on a global scale.scale in recent years. Smartphones allow users not only to take photos, but also to retouchshare them instantly on SNSs and to upload them to SNSs (“Social networking services”).it changed people’s photo taking behavior. If Canon’s compact digital cameras become less appealing compared to smartphones,cannot clearly state their advantages over smartphones’ cameras, Canon could suffer from an erosion of the compact digital camera market, with a resulting adverse effect on operating results.

Because the semiconductor lithography equipment and flat-panel-display (“FPD”) industry is highly cyclical, Canon may be adversely affected by any downturn in the industry.demand for semiconductor devices and FPD panels.

The semiconductor lithography equipment and FPD lithography equipment industry is characterized by fluctuating business cycles, the timing, length and volatility of which are difficult to predict. Recurring periods of oversupply of semiconductor devices and FPD panels have at times led to significantly reduced demand for capital equipment, including the semiconductor lithography equipment and FPD lithography equipment that Canon produces. Despite this cyclicality, Canon must maintain significant levels of research and development expenditures to remain competitive. A future cyclical downturn in the lithography equipment industry and related fluctuations in the demand for capital equipment could cause cash flow from sales to fall below the level necessary to offset Canon’s expenditures, including those arising from research and development, and could consequently have a material adverse effect on Canon’s operating results and financial condition.

Risks RelatedCanon’s business is subject to Canon’s Businesschanges in the sales environment.

Economic trendsA substantial portion of Canon’s market share is concentrated in a relatively small number of large distributors, particularly in Europe and the United States. Canon’s major markets mayproduct sales to these distributors constitute a significant percentage of its overall sales. As a result, any disruptions in its relationships with these large distributors in specific sales territories could adversely affect Canon’s ability to meet its sales targets. Any increase in the concentration of sales to these large distributors could result in a reduction of Canon’s pricing power and adversely affect its operating results.

As a resultprofits. In addition, the rapid proliferation of the economic downturn in recent periods, declines in consumptionInternet-based businesses may render conventional distribution channels obsolete. These, and restrained investmentother changes in Canon’s major markets, including Japan, the United States, Europe and Asia, have affected both individual consumer and corporate sales and if economic conditions do not improve, these trends may continue. Canon’s operating results for products such as office and industrial equipment are affected by the financial results of its corporate customers, and deterioration of their financial results has caused and may continue to cause customers to limit capital investments. Demand for Canon’s consumer products, such as cameras and inkjet printers, is discretionary. Fluctuating inventory levels, rapid price declines owing to intensifying competition and the recent decline in the level of consumer spending and corporate investment driven by the economic downturnenvironment, could adversely affect Canon’s operating results and financial position.results.

Canon derives a significant percentage of its revenues from Hewlett-Packard.

In addition, Canon depends on Hewlett-Packard for a significant part of its business. During fiscal 2012, 17.0% of Canon’s net sales were to Hewlett-Packard. As a result, Canon’s business and operating results may be affected by the policies, business and operating results of Hewlett-Packard. Any decision by Hewlett-Packard management to limit or reduce the scope of its relationship with Canon would adversely affect Canon’s business and operating results.

A substantial portion of Canon’s business activity is conducted outside Japan, exposing Canon to the risks of international operations.

A substantial portion of Canon’s business activity is conducted outside Japan, including in developing and emerging markets in Asia. There are a number of risks inherent in doing business in such markets, including the following:

Any inability to manage the risks inherent in Canon’s international activities could adversely affect its business and operating results. In order to reduce costs and produce Canon’s products competitively, Canon maintains several production facilities and more than ten sales bases in Asia, including China, Thailand and Vietnam, and is vigorously conducting significant production and sales activities in Asia. Under such circumstances, unexpected events may occur, including political or legal change, labor shortages or strikes, increased personnel costs or changes in economic conditions. In particular, a large revaluation of local currencies, or a sudden significant change in the tax system or other regulatory regimes could adversely affect Canon’s overall performance. Given the importance of Canon’s research and development, production and sales activities in Asia, Canon’s business may be more acutely exposed to such risks than to the global economy in general.

The outbreak, prevalence or spread of an epidemic disease, such as a new strain of influenza, in any region around the globe could also have a negative effect on Canon’s business operations, including its research and development, production and sales activities, along with the disruption of markets for Canon’s products.

In addition, unexpected changes in import taxes imposed by foreign governments could adversely affect Canon’s business and operating results.

Canon may unintentionally infringe international trade laws and regulations, and any such infringement may lead to an adverse effect on its business. The extent of the effect on Canon’s business will depend upon the nature of the infringement and the severity of fines or other sanctions potentially imposed upon Canon. A major infringement could result in a temporary or permanent suspension of Canon’s trading rights in one or more jurisdictions. In addition to any sanctions prescribed by law, adverse publicity regarding an alleged infringement of trade laws and regulations by Canon may also have a negative effect on the Canon brand and image.

Any of the above factors regarding international operations could have an adverse effect on Canon’s operating results.

Canon depends on specific outside suppliers for certain key components.

Canon relies on specific outside suppliers that meet Canon’s strict criteria for quality, efficiency and environmental friendliness for critical components and special materials used in its products. In some cases, Canon may be forced to discontinue production of some or all of its products if the specific outside suppliers that supply key components and special materials across Canon’s product lines experience unforeseen difficulties, or if such parts and special materials suffer from quality problems or are in short supply. Further, the prices of components and special materials purchased from specific outside suppliers may surge,rise, triggered by the imbalance of supply and demand along with other factors. If such risksevents occur as an outcome of the dependency on such specific outside vendors, Canon’s operating results may be adversely affected.

Although competition is increasing in the market for supplies and services following initial product placement, Canon maintains a high market share in such sales. As a result, Canon may be subject to antitrust-related lawsuits, investigations or proceedings, which may adversely affect its operating results or reputation.

A portion of Canon’s net sales consists of sales of supplies and the provision of services after the initial equipment placement. As these supplies and services have become more commoditized, the number of competitors in these markets has increased. Canon’s success in maintaining these post-placement sales will depend on its ability to compete successfully with these competitors, some of which may offer lower-priced products or services. Despite the increase in competitors, Canon currently maintains a high market share in the market for supplies. Accordingly, Canon may be subject to lawsuits, investigations or proceedings under relevant antitrust laws and regulations. Any such lawsuits, investigations or proceedings may lead to substantial costs and have an adverse effect on Canon’s operating results or reputation.

Increases in counterfeit Canon products may adversely affect Canon’s brand image and its operating results.

In recent years, counterfeiting of Canon products has increased worldwide. Counterfeit products may diminish Canon’s brand image, particularly if purchasers of such products mistakenly attribute the counterfeit products’ poor quality to Canon. Canon has been taking measures to halt the spread of counterfeit products. However, there can be no assurance that such measures will be successful, and the continued manufacture and sale of such products could adversely affect Canon’s brand image as well as its operating results.

Canon is subject to financial and reputational risks owing to product quality and liability issues.

Although Canon works to minimize risks that may arise from product quality and liability issues, such as those triggered by the individual functionality and also from the combination of hardware and software that make up Canon’s products, there can be no assurance that Canon will be able to eliminate or limit these issues and the resulting damages. If such factors adversely affect Canon’s operating activities, generate additional expenses such as those related to product recalls, service and compensation, or otherwise hurt its brand image, Canon’s operating results or reputation for quality may be adversely affected.

Per unit production costs are highest when a new product is introduced, and if such new products are not successful or if Canon fails to achieve cost reductions over time, Canon’s gross profits may be adversely affected.

The unit costs of Canon’s products have historically been highest when products are newly introduced into production. The introduction of new products has at times had a negative impact on gross profit, operating results and cash flow. Cost reductions and enhancements are typically achieved over time through:

Initial shipments of new products adversely affect Canon’s profit and cash flow, and if new products do not achieve sufficient sales volumes, Canon’s gross profit, operating results and cash flow may be adversely affected.

Cyclical patterns in sales of Canon’s products make planning and inventory management difficult and future financial results less predictable.

Canon generally experiences seasonal trends in the sales of its consumer-oriented products. Canon has little control over the various factors that produce these seasonal trends. Accordingly, it is difficult to predict short-term demand, placing pressure on Canon’s inventory management and logistics systems. If product supply

from Canon exceeds actual demand, excess inventory will put downward pressure on selling prices and raise inefficiency in cash management, potentially reducing Canon’s revenue. Alternatively, if actual demand exceeds the supply of products, Canon’s ability to fulfill orders may be limited, which could adversely affect market share and net sales and increase the risk of unanticipated variations in its operating results.

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

A substantial portion of Canon’s market share is concentrated in a relatively small number of large distributors, particularly in Europe and the United States. Canon’s product sales to these distributors constitute a significant percentage of its overall sales. As a result, any disruptions in its relationships with these large distributors in specific sales territories could adversely affect Canon’s ability to meet its sales targets. Any increase in the concentration of sales to these large distributors could result in a reduction of Canon’s pricing power and adversely affect its profits. In addition, the rapid proliferation of Internet-based businesses may render conventional distribution channels obsolete. These and other changes in Canon’s sales environment could adversely affect Canon’s operating results.

Canon’s success depends in part on the value of its brand name, and if the value of the brand is diminished, Canon’s operating results and prospects will be adversely affected.

Canon’s success depends in part on the value of its brand name. Any negative publicity regarding the quality of Canon’s products could have an adverse impact on operations, especially negative publicity involving consumer products. There can be no assurance that such adverse publicity will not occur or that such claims will not be made in the future. Furthermore, Canon cannot predict the impact of such adverse publicity on its business and operating results. If Canon fails to maintain its overall compliance regime, especially legal or regulatory compliance, this also could result in damage to Canon’s credibility and brand value.

Canon’s cooperation and alliances with, strategic investments in, and acquisitions of, third parties may not produce successful results. The unexpected emergence of strong competitors through mergers and acquisitions may affect Canon’s business environment.

Canon is engaged in alliances, joint ventures, and strategic investments with other companies. Canon also makes strategic acquisitions of other companies. These activities can help to promote Canon’s technological development process and expand its customer base. However, weak business trends or disappointing performance by partners or targetsacquired companies may adversely affect the success of such activities. In addition, the success of such activities may be adversely affected by the inability of Canon and its partners or targetsacquired companies to successfully define and reach common objectives. Even if Canon and its partners or targetsacquired companies succeed in designing a structure that allows for the definition and achievement of common objectives, synergies may not be created between the businesses of Canon and its partners or targets.acquired companies. Integration of operations may take more time than expected. An unexpected cancellation of a major business alliance may disrupt Canon’s overall business plans and may also result in a delayed return on, or reduced recoverability of, the investment, adversely affecting Canon’s operating results and financial position.

In addition, the unexpected emergence of strong competitors through mergers and acquisitions or the formation of competitive business alliances may change the competitive environment of the business areas in which Canon participates, thereby affecting Canon’s future operating results.

Canon’s operating and financing activities expose it to foreign currency exchange and interest rate risks that may adversely affect its revenues and profitability.

Canon derives a significant portion of its revenue from its international operations. As a result, Canon’s operating results and financial position have been and may continue to be significantly affected by changes in the value of the yen versus foreign currencies. Sales of Canon’s products denominated in foreign currencies, as well

as its margins have been and may continue to be adversely affected by the strength of the yen against foreign currencies. Conversely, a strengthening of foreign currencies against the yen will generally be favorable to Canon’s foreign currency sales. Canon’s consolidated financial statements are presented in yen. As such, the yen value of Canon’s assets and liabilities arising from foreign currency business transactions and the yen value of Canon’s foreign currency-denominated equity investments have fluctuated and may continue to fluctuate. Unpredictable fluctuations may have certain effects on Canon’s consolidated financial statements. Moreover, Canon’s consolidated financial statements have been and may continue to be affected by currency translations from the financial statements of Canon’s foreign subsidiaries and affiliates, which are denominated in various foreign currencies. Furthermore, if the values of certain foreign currencies, such as the U.S. dollar and the euro, weaken significantly against the yen, Canon’s operating results and financial position would be negatively affected. Although Canon strives to mitigate the effects of foreign currency fluctuations arising from its international business activities, Canon’s operating results and financial position could be adversely affected by a strong yen environment. Canon is also exposed to the risk of interest rate fluctuations, which may affect the value of Canon’s financial assets and liabilities.

Canon depends on efficient logistics services to distribute its products worldwide.

Canon depends on efficient logistics services to distribute its products worldwide. Problems with Canon’s computerized logistics systems, an outbreak of war or strife within Canon’s operating regions or regional labor disputes, such as a dockworkers’ strike, could lead to a disruption of Canon’s operations and result not only in increased logistical costs, but also in the loss of sales opportunities owing to delays in delivery. Moreover, because demand for Canon’s consumer products may fluctuate throughout the year, transportation means, such as cargo vessels or air freight, and warehouse space must be appropriately managed to take such fluctuations into account. Failure to do so could result in either a loss of sales opportunities or the incurrence of unnecessary costs.

In addition, the increasing levels of precision required of semiconductor lithography equipment and FPD lithography equipment and the resulting increase in the value and size of such equipment in recent years have resulted in a concurrent increase in the need for sensitive handling and transportation of these products. Because of their precise nature, even a minor shock during the handling and transportation process can potentially cause irreparable damage to such products. If unforeseen accidents during the handling and transportation process render a significant portion of Canon’s high-end precision products unmarketable, costs will increase, and Canon may lose sales opportunities and customer confidence.

Substantially higher crude oil prices and the supply-and-demand balance of transportation means could lead to increases in the cost of freight, which could adversely affect Canon’s operating results.

Furthermore, earthquakes or volcanic eruptions may cause a breakdown of transportation facilities, such as ports or airports, or otherwise interrupt critical logistics services, which may have an adverse effect on production or sales activities.

Other Risks

Canon’s facilities, information systems and information security systems are subject to damage as a result of disasters, outages or similar events.

Canon’s headquarters functions, information systems and research and development centers are located in or near Tokyo, Japan, where the possibility of damage from earthquakes is generally higher than in other parts of the world. In addition, Canon’s facilities or offices, including those for research and development, materials procurement, manufacturing, logistics, sales and services are located throughout the world and subject to the possibility of outage or similar disruption as a result of a variety of events, including natural disasters such as earthquake, flood computer viruses, cyber attacks and terrorist attacks. Although Canon continues to establish appropriate backup structures for its facilities and information systems, there can be no assurance that Canon will

be able to prevent or mitigate the effect of suchdisruptive events or developments such as the leakage of harmful substances and shutdowns of information systems, and leakage, falsification and loss of internal databases.systems. Although Canon has implemented backup plans to permit the manufacture of its products at multiple production facilities, such plans do not cover all product models. In addition, such backup arrangements may not be adequate to maintain production quantity at sufficient levels. Such factors may adversely affect Canon’s operating activities, generate expenses relating to physical or personal damage, or hurt Canon’s brand image, and its operating results may consequently be adversely affected.

Canon’s success depends in part on the value of its brand name, and if the value of the brand is diminished, Canon’s operating results and prospects will be adversely affected.

Canon’s success depends in part on maintenance and development of the value of its brand name. The main factors which could damage its brand value are defective product quality, circulation of counterfeit and failures of its compliance regime. Although Canon works to minimize risks that may arise from product quality and liability issues, such as those triggered by the individual functionality and also from the combination of hardware and software that make up Canon’s products, there can be no assurance that Canon will be able to eliminate or limit these issues and the resulting damages. If such factors adversely affect Canon’s operating activities, generate additional expenses such as those related to product recalls, service and compensation, or otherwise hurt its brand image, Canon’s operating results or reputation for quality may be adversely affected. Canon has been implementing measures to halt the spread of counterfeit products. However, the continued manufacture and sale of such products could adversely affect Canon’s brand image as well as its operating results.

If Canon fails to maintain its overall compliance regime, especially legal and regulatory compliance, this also could result in damage to Canon’s credibility and brand value.

Canon’s business is subject to environmental laws and regulations.

Canon is subject to certain Japanese and foreign environmental laws and regulations in areas such as energy resource conservation, reduction of hazardous substances, product recycling, clean air, clean water and waste disposal.

In particular outlays required to address climate change could vary widely depending on circumstances of the Kyoto Protocol extension and corresponding measures.

In other cases, such as the “Directive Establishing a Framework for the Setting of EcoDesign Requirements for Energy-related Products across the European Union”, detailed implementation standards responsive to environmental requirements remain under review. Canon strives to comply with such standards Due to the extent possible in advance of official adoption. If, however, Canon’s current measures are deemed insufficient to satisfy such standards when adopted,laws and regulations, Canon may be required to take further actionface liability for additional costs and incur additional compliance costs.

Furthermore, Canon may incur rework or repair expenses if non-qualifying products are shipped in violation of the “European Union Directive on the Restriction of the Use of Certain Hazardous Substances in Electricalalleged damages. Such costs and Electronic Equipment” (“RoHS Directive 2011/65/EU”) or if other legal regulations are not fully followed by parts suppliers. Such extra costs may exceed compensation from parts suppliers or coverage from insurance contracts anddamages could have an adverse effect onadversely affect Canon’s overall business and operating results.

Environmental cleanup and remediation costs relating to Canon’s properties and associated litigation could decrease Canon’s net cash flow, adversely affect its operating results and impair its financial condition.

Canon is subject to potential liability for the investigation and cleanup of environmental contamination at each of the properties that it owns or operates and at certain properties Canon formerly owned or operated. If Canon is held responsible for such costs in any future litigation or proceedings, such costs may not be covered by insurance and may be material.

In addition, Canon may face liability for alleged personal injury or property damage because of exposureis subject to chemicals or other hazardous substances from its facilities. risks relating to legal proceedings.

Canon may also face liability for personal injury, property damage or natural resource damage,is involved in various claims and decontamination costs for alleged pollution from its facilities. A significant increaselegal actions arising in the number, successordinary course of its business. Results of actual and cost of these claimspotential litigation are inherently uncertain. An unfavorable result in a legal proceeding could adversely affect Canon’s businessreputation, financial condition and operating results.

Canon may be subject to intellectual property litigation and infringement claims, which could cause it to incur significant expenses or prevent it from selling its products.

Because of the emphasis on product innovation in the markets for Canon’s products, many of which are subject to frequent technological innovations, patents and other intellectual property are an important competitive factor. Canon relies primarily on internally developed technology, and seeks to protect such technology through a combination of patents, trademarks and other intellectual property rights.

In relation to protection of its technologies, Canon faces risks that:

To the extent that Canon is unaware of actual or potential infringements of, or adverse claimsIn relation to its rights in such technologies, any interference with Canon’s rights to use such technologies could adversely affect its operating results.

In addition, Canon may need to litigate in order to enforce its patents, copyrights or otherthird party intellectual property rights, to protect its trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement, which can be expensive and time-consuming. Ifif any government agency or third party is adjudicated to have a valid infringement claim against Canon, Canon could be required to:

Canon may need to litigate in order to enforce its intellectual property rights or in order to defend against claims of infringement, which can be expensive and time-consuming.

Canon also licenses its patents to third parties in exchange for payment or cross-licensing.licensing. The terms and conditions of such licensing or changes in the renewal conditions of such licenses could affect Canon’s business.

Canon’s businesses, corporate image and operating results could be adversely affected by any of these developments.

Disputes involving payment of remuneration forWith respect to employee inventions, may adversely affect Canon’s brand image as well as its business.

Canon may face disputes involving payment of remuneration for employee inventions, the rights to which have been assigned to Canon. This risk is particularly relevant in countries such as Japan and Germany, where patent laws require companies to remunerate employees for the assignment of employee invention rights to the company. Canon maintains company rules and an evaluation system for employee inventions. Canon believes itand has been making adequate payments to employees for the assignment of invention rights based on these rules. However, there can be no assurance that disputes will not arise with respect to the amount of these payments to employees. Such disputes may

Canon’s businesses, corporate image and operating results could be adversely affect Canon’s brand image as well as its business.affected by any of these developments.

Canon must attract and retain highly qualified professionals.

Canon’s future operating results depend in significant part upon the continued contributions of its employees. In addition, Canon’s future operating results depend in part on its ability to attract, train and retain qualified personnel in development, production, sales and management. The competition for human resources in the high-tech industries in which Canon operates has intensified in recent years. Moreover, owing to the accelerating pace of technological change, the importance of training new personnel in a timely manner to meet product research and development requirements will increase. Failure by Canon to recruit and train qualified

personnel or the loss of key employees could delay development or slow production and could increase the risks of outflow of technologies and know-how. These factors may adversely affect Canon’s business and operating results.

Maintaining a high level of expertise in Canon’s manufacturing technology is critical to Canon’s business. However, it is difficult to secure the requisite expertise for specialized skill areas, such as lens processing, in a

short time period. While Canon engages in advance planning to obtain the expertise needed for each skill area, Canon cannot guarantee that such expertise will be acquired in a timely manner and retained, and failure to do so may adversely affect Canon’s business and operating results.

Canon may be adversely affected by fluctuations in the stock and bond markets.is subject to risks arising from dependency on electronic data.

Canon’s assets include investments in publicly traded securities. As a result, Canon’s operating resultsCanon possesses confidential electronic data relating to manufacturing, research and general financial position may be affected by price fluctuations in the stockdevelopment, procurement, and bond markets. The current volatility in financial markets and overall economic uncertainty increase the risk that the actual amounts realized in the future on Canon’s investments could differ significantly from the fair values currently assigned to them. In addition, if valuations of investment assets decrease because of conditions in stock or bond markets, for example, additional funding and accruals with respect to Canon’s pension and other obligations may be required, and such funding and accruals may adversely affect Canon’s operating results and consolidated financial condition.

Confidential information may be inadvertently disclosed, which could lead to damage claims or harm Canon’s reputation, and may have an adverse effect on Canon’s business.

In connection with certain projects, Canon may receive confidential orproduction, as well as sensitive information (such as personal information)obtained from its customers relating to thesethe customers orand to other affected individuals orand parties. In addition,This electronic data is used by Canon uses computerand third party managed systems and networks. Electronic data is also used for the information service functions in various products.

There are some risks inherent in the use of the electronic data, in managing information relatingincluding vulnerability to its employees.hacking and computer viruses, service failures due to unexpected events, and infrastructure issues, such as insufficient power supply and issues arising from damage caused by natural disasters. Although Canon makes itscontinues to make administrative and managerial improvements in order to alleviate these risks, such events may occur despite Canon’s best efforts to maintain the confidentialityefforts.

The materialization of such information through procedures designedrisks could result in interruptions to prevent accidental releaseessential work, leaks of confidential or sensitivedata and damage to the information such information may be inadvertently disclosed without Canon’s knowledge. If this occurs,service functions in products. The occurrence of any of these events has the potential to cause Canon mayto be subject to claims for damages from the affected individuals orand parties suffer harmand to negatively influence Canon’s brand image, the social trust it has developed, and its reputation or be subject to liabilities or penalties under applicable statutes.

Inadvertent disclosure of confidential information regarding new technology could also have a material adverse effect on Canon’s business.

Canon is subject to risks relating legal proceedings.

Canon is involved in various claimsoperations and legal actions arising in the ordinary course of its business. Results of actual and potential litigation are inherently uncertain. An unfavorable result in a legal proceeding could adversely affect Canon’s reputation, financial condition and operating results.conditions.

Item 4. Information on the Company

A. History and development of the Company

Canon Inc. is a joint stock corporation (kabushiki kaisha) formed under the Corporation Law of Japan. Its principal place of business is at 30-2, Shimomaruko 3-chome, Ohta-ku, Tokyo 146-8501, Japan. The telephone number is +81-3-3758-2111.

The Company was incorporated under the laws of Japan on August 10, 1937 to produce and sell Japan’s first focal plane shutter 35mm still camera, which was developed by its predecessor company, Precision Optical Research Laboratories, which was organized in 1933.

In the late 1950s, Canon entered the business machines field utilizing technology obtained through the development of photographic and optical products. With the successful introduction of electronic calculators in 1964, Canon continued to expand its operations to include plain paper copying machines, faxes, laser printers, bubble jet printers, computers, video camcorders and digital cameras.

The following are important recent events in the development of Canon’s business.

In fiscal 2012, 2011, and 2010, Canon’s increases in property, plant and equipment were ¥270,457¥182,343 million, ¥226,869¥188,826 million and ¥158,976¥270,457 million, respectively. In fiscal 2012,2014, the increases in property, plant and equipment were mainly used to expand production capabilities in both domestic and overseas regions, and to bolster Canon’s production-technology-related infrastructure. In addition, Canon has been continually investing in tools and dies for business machines, in which the amount invested is generally the same each year.

For fiscal 2013,2015, Canon projects an increaseto invest in property, plant and equipment of approximately ¥265,000¥205,000 million. This amount is expected to be spent for investments in new production plants and new facilities of Canon. Canon anticipates that the funds needed for this increase will be generated internally through operations.

B. Business overview

Canon is one of the world’s leading manufacturers of office multifunction devices (“MFDs”), plain paper copying machines, laser printers, inkjet printers, cameras and lithography equipment.

Canon sells its products principally under the Canon brand name and through sales subsidiaries. Each of these subsidiaries is responsible for marketing and distribution to retail dealers in an assigned territory. In fiscal 2012, 79.3%2014, 80.6% of consolidated net sales were generated outside Japan, with approximately 27.0%27.8%, 29.1%29.3% and 23.2%23.5% generated in the Americas, Europe and Asia and Oceania, respectively.

Canon’s strategy is to develop innovative, high value-added products incorporating advanced technologies.

Canon’s research and development activities range from basic research to product-oriented research directed at maintaining and increasing Canon’s technological leadership in the marketplace.

Canon manufactureswill work to realize the majorityoptimized global allocation of its productsproduction assets based on changes in Japan, butlocal conditions in an effort to reduce currency exchange risk and production costs, Canon has increased its overseas production and the use of local components.each country. Canon has manufacturing subsidiaries in a variety of countries, including the United States, Germany, France, the Netherlands, Taiwan, China, Malaysia, Thailand, Vietnam and Vietnam.the Philippines.

As a concerned member of the world community, Canon emphasizes recycling and has increased its use of clean energy sources and cleaner manufacturing processes. Canon has also launched programs to collect and recycle used Canon cartridges and to refurbish used Canon copying machines. In addition, Canon has removed virtually all environmentally unfriendly chemicals from its manufacturing processes.

Products

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

- Office Business Unit -

Canon manufactures, markets and services a widefull range of MFDs, officeprinters, copying machines for personal and personal-use copying machines.office use and production print products for print professionals. Canon also delivers added value added to customers through software, services and solutions. Our offerings cover a wide variety of markets from Small Office Home Office (“SOHO”), and Small and Midsize Business (“SMB”) to large enterprises and professional graphic arts.

In the office market, together with Océ, which Canon consolidated in 2010, Canon is now in a much improved position compared to fiscal 2011 to serve customers in terms of sales coverage, product portfolio and service capabilities and addressindustry, customer needs in the imaging and document space.

In fiscal 2012, Canon was able to maintain its revenue from sales of MFDs, services and solutions despite the strong yen and the deceleration of the global economy. The consolidation of Océpreference has brought many strategic assets to Canon, including expertise, resources and innovation.

The office market is subject to rapid change, and customer preferences have been shifting from monochrome to color products and from hardware to services and solutions. Especially in the professional print market, customers are increasingly turning to short-run, print-on-demand and variable data printing. The importance of connectivity, mobility, security, integration, workflow and web services is growing, and such added value is increasingly delivered together with hardware. Canon seeks to maintain its position as a market leader in these core markets.

In fiscal 2012,2014, Canon enhanced its portfolio with the launch of digital MFDs, the A4-size color device imageRUNNER ADVANCE C 5200 series,C350iF/C250iF. Canon also launched imageRUNNER 2202/2002, a colorlow-end A3-size monochrome device tailored to the emerging market. To deliver higher value added and expand our presence in the monochrome imageRUNNER ADVANCE 6200 and 8200 series. These models areexisting market while acquiring new markets in the next-generation imageRUNNER ADVANCE series, a platform of multifunction office systems designed to transform a workflow from a series of individual processes to a continuous, integrated flow of shared information.

Canon offers office MFDs for a wide range of environments from offices to professional graphic arts. Theproduction print industry, is increasingly turning to short-run, print-on-demand and variable data printing in recent years. In fiscal 2012, Canon introduced the imagePRESS C800/C700, the first imagePRESS series addressed to the color light production market, and the imagePRESS C60 for the graphic arts industry. In the high speed continuous feed printer area, the Océ VarioPrint 110/125/135, monochrome digital presses jointly developed with Océ. This system combines Canon’s respective best-of-class strengths, redefining excellenceColorStream 3000 series has enjoyed a good reputation in monochrome printing.the market.

Canon is also marketingIn software, services and solutions, delivering added-valueCanon was one of the first vendors to launch its customers. Canon’s application development platform, the Multifunctional“Multifunctional Embedded Application PlatformPlatform” (“MEAP”), which allows the creation of

customized applications for Canon MFDs enabling tight integration into customer’s IT infrastructure. The integration not only boosts productivity but also allows users to fully take advantage of the power of MFD cloud services. In fiscal 2012,our MFDs. Canon launched some new services as part of the Canon Business Imaging Online (“CBIO”) initiative. CBIO is a global cloud-based platform for implementing additional controlreinforcing its solutions capability through offerings such as managing, configuringimageWARE software suite, business process automation software “Enterprise Imaging Platform” (“EIP”) and monitoring devices remotely for Canon Managed Document Services engagements. It helps customers improve efficiency, reduceMDS, a device management solution that reduces total cost of ownership,ownership.

To maintain and enjoy more convenience through services such as form creationenhance its competitive edge and to meet increasingly sophisticated customer demands, Canon is committed to the continued reinforcement of Canon’s hardware and software offerings and solutions capability.

In the monochrome laser printer market, the transition to a low price segment is expected to expand sales in the micro office/home office market and in emerging markets. Canon expects an expansion in the color laser printer market to be driven by increasing demand for color printing. Moreover, Canon plans to aggressively launch new products in the MFDs market, including in the managed print services.service segment, to drive Canon’s business growth.

However, Canon hasis experiencing fierce competition with aggressive competitors in the laser printer market and an eventual decline in sales prices is becoming a major threat. Growth of the tablet PC and smartphone market, which affects users’ printing behavior and may also introduced imageWare Desktop Version 3lead to a decrease in demand for printing, is becoming a new threat. Canon is executing on several initiatives to enhance mobile printing solutions to tackle the imageRUNNER ADVANCE ecosystem.new threat and create further business opportunities.

Canon’s expanded alliance with Hewlett-Packard contributedIn response, Canon aims to promote technological developments in order to introduce competitive products in a timely manner across the office business unit, and to pursue business efficiency through continuous cost reduction and optimization of its being awarded several large enterprise deals. Canon believes Canon and Hewlett-Packard continue to offer unmatched office workflow solutions that are highly responsive to customer needs in this market.

Canon made Océ a consolidated subsidiary in 2010 to strengthen its printing business. In fiscal 2012, Canon introduced the Océ VarioPrint 110/125/135, monochrome digital presses jointly developed with Océ. The cross selling of Canon’s mutual product portfolios continues to expand as Canon brings to its respective customer bases a richer set of combined offerings. The integration has brought broader channel coverage, complementary assets and capabilities, and incremental sales growth.

To enter the Poster print market, Canon launched a new wide format printer, the Océ ColorWave 650. During a major European fair, Canon introduced Océ InfiniStream, the industry´s fastest liquid toner technology.

Developed and fostered by Canon, laser printers are standard output peripherals for offices. Canon’s laser printers are relatively small and have high-quality capabilities attributable to Canon’s expertise with the relevant technologies. Canon’s adoption of a user-replaceable toner cartridge system containing optical components makes its printers easy to maintain. Most of Canon’s laser printer sales are on an Original Equipment Manufacturer (“OEM”) basis.

On a global basis, the production and sales of laser printers dropped drastically in 2009 after Lehman Brothers bankruptcy. In 2010 and 2011, the production and sales returned to positive growth in response to the global economic recovery driven by low-end product expansion. However, the trend returned to negative growth again in 2012 due to the serious recession in Europe and the stagnation of economic growth in many of Canon’s markets, even in emerging countries like China. By such a change of general market trend, the production and sales of Canon’s laser printers declined year-on-year in 2012. The Office Business Unit also includes the related sales of paper and chemicals, service and replacement parts.supply chain.

- Imaging System Business Unit -

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

The worldwide compact digital camera market declined by 10% year-on-year in fiscal 2012, primarily due to prolonged European debt crisis, slowdown of economic growth in emerging area, anti-Japan demonstration in China, and the rapid penetration of smartphones. Canon maintained its formidable position in the industry by bringing twenty new models to market in 2012. Three new models in particular have contributed to Canon’s sales: the PowerShot ELPH 110 HS, the PowerShot SX 40 HS, and the PowerShot A2300.

In 2012,2014, Canon launched fivetwo new camera products (one mirrorless, one entry class, two advanced amateurdigital SLR cameras and one professional). Canon particularly strengthened its product line uplineup. EOS Rebel T5, launched in the 35mm full-frame sensor category by introducing three new models:first half of the EOS-1D X,year, is the best model for DSLR beginners to enjoy the art of true photography for both still and moving images in an easy, user-friendly way. The Canon EOS 5D7D Mark IIIII, launched in the second half of the year, is designed to meet the demands of photographers and EOS 6D.

Canon’s flagship and professional model, the EOS-1D X delivers superior image quality owing to an 18.1 megapixel 35mm full -frame CMOS sensor, adjustable from ISO 100 to 51,200 within its standardvideographers who want a camera that can provide a wide range and, permitting shooting of artistic opportunities. It shoots up to twelve10 frames per second (fps).and has a 65-point all cross-type AF system. The EOS-1D Xnumber of available AF points, and whether single line or cross-type, varies depending on the lens. The new DSLR is popular for shooting all mannercapable of sportingcapturing precise moments of quickly and other events aroundirregularly moving objects. These new models as well as the world.

The EOS 5D Mark III delivers superb image quality, thanks to a new 22.3-megapixel full-framecurrent models pushed sales and Canon CMOS sensor, adjustable from ISO 100 to 25,600 within its standard range, a 61-point High Density Reticular Autofocus (AF) System and six fps continuous shooting speed.

The EOS 6D is the world’s lightest and smallest interchangeable lens digital camera equipped with a 35mm full -frame sensor as of November 30, 2012. The EOS 6D, designed for advanced amateurs, is also the first EOS equipped with wireless LAN and GPS capabilities.

Additionally,gained number one market share* in volume terms in 2014 in the entry class products, the EOS Rebel T4i is equipped with featuresmajor regions, such as a Vari-angle Touch Screen LCD monitor, a function to facilitate video shootingthe United States, Europe, and an improved fully automatic shooting function.Japan. Canon also offersbelieves there remains considerable room for future growth through development of new products based onstate-of-the-art technology following the EOS Rebel T3i in this class.

The EOS M is Canon’s first mirrorless EOS, featuring atrend of higher quality picture, small and light weight body stylish design and availability in various colors. In addition, owing to Mount Adapter EF-EOS M, the EOS M can use all of Canon’s EF lens.versatile movie functions.

The market for interchangeable lenses

Canon launched seven new lens products for digital SLR and celebrated a milestone with the production of the 100-millionth EF-series interchangeable lens for EOS cameras grew robustly as well.in April 2014, including Cinema Lenses(EF-Mount). The interchangeable lens lineup currently exceeds 90 products, including Cinema Lenses(EF-Mount). By enhancing its core capability, Canon has been introducing high-quality and high-performance lenses built ondeveloped by superior optical technology (e.g., a special “Sub-Wavelength” Coating, multilayer diffractive optical elements and image stabilizers),new elemental technology, which Canon believes allowed it to maintain its advantage over the competitioncompetition.

Canon introduced fourteen new models to the compact digital camera market worldwide in this field, as well as2014. While there has been a strong tendency toward reliance on electronic manufacturing services (“EMS”) in the compact digital SINGLE-LENS REFLEX (“SLR”) camera field. In October 2011,industry, the cumulative productionEMS manufacturers will likely to be unable to maintain their business and some of EF lens series interchangeable lenses surpassed 70 million. Including threethem might exit from the market due to the market slowdown. Canon is pressing forward with entire self-manufacturing, leveraging the economies of scale and building an optimum cost structure to strive to maintain profitability.

The market for conventional camcorders has been shrinking, as many other popular devices start equipping a movie function. On the other hand, new products launched in March 2011, the interchangeable lens lineup currently exceeds 60 products. With high expectations for further growthcategories like action cameras are emerging and expanding. Canon aims to expand sales in this market with a product lineup with higher value added based on Canon’s distinctive high-definition, high-resolution technologies. Concurrently, Canon expects to continue boosting both revenue and market share.

Canon maintains a leading position in the digital video camcorder market, havinghas introduced a series of flash memory models in fiscal 2008 followed by high-end models in fiscal 2009,new product with unique styled camcorder especially for self-shooting, aiming to successfully promote Canon’s brand reputation for high image quality. In fiscal 2010, Canon added general-purpose models, allowing Canon to cover the full range with flash memory models.exploit a new market category. In the field of professional camcorders, Canon introduced flash memory models, our “XF” series,the new model XF205/200 in 2010its XF series; small sized camcorders equipped with a wide-angle and 2011high magnification lens for use in broadcast news, documentary and independent filmmaking. Furthermore, in November 2011, Canon announced its full-fledged entry into digital high-resolution motion picture production by launching “CinemaCINEMA EOS System” which consists of new interchangeable lens digital cinema cameras featuring a newly developed Super 35mm-equivalent, approximately 8.29 megapixel Complementary Metal–Oxide–Semiconductor (“CMOS”) sensor, EF Lenses and new EF Cinema Lenses lineup. In 2012, “CINEMA EOS SYSTEM”SYSTEM has strengthened its line up withlineup by launching new digital cinema cameras capablecamera named EOS C100 Mark II equipped with the Dual Pixel CMOS AF, and improved user convenience through a wider selection of recording 4K-resolution video and entry level HD. Despite a continuing slowdownrelated software. Canon aims to solidify its top position in the overall digital video camcordermotion picture production market thereby introducing new products that suit a wide variety of market.

Canon experienced robust growth in the field of projectors for business applications, and in particular brighter, installation type projectors. In this market, Canon offers a range of products from an interchangeable lens type to a lens built-in type. Canon launched two new install-type models with the industry’s first short-throw and high shift function as well as a brighter flagship model in 2014, which are strategic and leading models for expanding the projector business and advancing Canon’s position in the market.

In the broadcast TV lens market, although demand arising from the switchover to high definition broadcast formats in developed countries slowed down, worldwide market demand is stable. Canon retains a steady, positive trendlarge share of the TV lens market with high value-added products.

The newly released CINE-SERVO lens is compatible with 4K cameras with large-format sensors. It has a detachable drive unit and can be used both in HDbroadcast and flash memory sales and volume.cinema style shooting, which Canon believes underlies its popularity.

Inkjet printer technology has been expanding its flash memory model lineups in orderevolving, driving expansion of application from home use to expand salesoffice and to take advantage of this growth of the HDcommercial use such as poster printing and flash memory markets.photo printing that require high-quality.

Canon began aggressively expandingoffers a wide variety of products to meet such needs based on its lineupcore technology “Full-photolithography Inkjet Nozzle Engineering” (“FINE”), which enables realization of network cameras used for business surveillance videohigh-speed printing and monitoring applications inhigh image quality at the second half of 2008 and has achieved a reputation for high-quality images due to the strength of its optical performance and video processing technology. This market is expected to expand further through improvements in high-quality imaging and image analysis, both of which are trends that will enable Canon to apply its traditional strengths. In fact Canon launched four new HD products in the second half of 2011 that contribute to societal safety and security.same time.

As the inventor of inkjet printing technology, Canon believes that it continues to provide customers with the best performing inkjet printer models.For home use, Canon offers high-performance and high value-added inkjet printers to home, business and professional users. In response to intense competition in the consumer segment, Canon launched a new lineup of printers in fiscal 2012. All of these models feature print heads based on Canon’s Full-photolithography Inkjet Nozzle Engineering (“FINE”) technology, which boosts print speed and image quality up to 9600 x 2400 dpi, and the ChromaLife100+ system, which provides high-quality and long-lasting photographic images using a combination of genuine ink and paper. Canon PIXMA photo printers offer many advanced features, including low profile design, My Image Garden, the Intelligent Touch System,such printer solutions as PIXMA Cloud Link and wireless printing, eachPIXMA Printing to tighten the connection with cloud computing, smartphone and tablet PC, whose functionality has been proliferating. Canon also offers My Image Garden, enabling a wide variety of which makes printer operation more user friendly for diversifiedphoto-print, an easy-to-use Intelligent Touch System and XL ink tank & ink cartridge. Canon hopes such enhancement of function and service will increase user-friendliness and satisfaction of users. With an advanced printer lineup, Canon has increased its unit sales.

In Februarythis year, Canon launched the new brand MAXIFY in the business inkjet printer segment, targeting the growing SOHO market. The MAXIFY printer series features Canon’s leading inkjet technologies such as high-quality printing with fast printing, and a low total cost of ownership.

In 2012, Canon started to ship the DreamLabo 5000, the first inkjet production photo printer which incorporates itsfeaturing new “FINE” high-density print head technology to significantly expand the potential of photo print quality.technology. In the autumn of 2011,professional printing market, Canon also introducedoffers three professional

photo inkjet printers: the PIXMA PRO-10PRO-1 with a ten-color12 LUCIA ink system of pigment-based inks, PIXMA PRO-10 with a 10 LUCIA ink system, and the PIXMA PRO-100 with eight dye inks to produce colorful and vivid prints. With the addition of these products, Canon aims to further expand its business, leveraging its strength in the photo printing market.

Regarding large-format inkjet printers, although the market slightly decreased in 2012 compared to the previous year, Canon significantly increased its unit sales, launching four new models for the graphic art market. CanonCanon’s large-format inkjet printers are based on “FINE” head technology and employ its unique image processor, “L-COA,”L-COA, developed for high-speed, high-resolution printing, and “LUCIA/LUCIA EX” pigment inks, developed for combininginks. Consequently, Canon receives a high evaluation and steadily boosts the glossiness of dye ink with vivid colors and weather resistance.market share.

Canon markets a wide variety of scanners geared toward a broad spectrum of user needs, including image scanners in theCanon’s lineup also includes CanoScan LiDE, series using athe flatbed scanners which use Contact Image Sensor (“CIS”)(CIS), and scannersa scanner with Charge-Coupled Devices (“CCD”)(CCD) for high resolution. CIS is a close-contact method that allows for a significant reduction in scanner weight and size. Although the scanner market has continued to shrink, and has shifted toward MFDs, Canon has maintained a highnumber one market share.

share, based on a Canon is the leader in the market for television lenses used by television stations for live sports, news broadcasts, concerts, dramatic productions and other applications. In 2011, Canon released the XJ95x8.6B high definition zoom lens for outdoor broadcasts. This lens achieves not only the world’s widest angle, but also 95x optical zoom magnification, which has bolstered Canon’s position as the broadcast television lens market leader.

Canon believes its television lenses are easily the most popular for broadcasting all manner of sporting and other events around the world, and continue to deliver thrilling true depictions of events to television viewers, while inspiring viewers and conveying to them a realistic picture of news stories around the world.

Canon’s calculator operations—from development to production to marketing—are centered in Hong Kong. Canon’s tradition of technological innovation began with its focus on personal information products, including calculators with built-in printers and electronic dictionaries. Canon continues to develop appealing personal information products that reflect demand trends.survey.

- Industry and Others Business Unit -

In 2012, the market for semiconductor lithography equipment, decreased approximately 30% frominvestments by memory makers have recovered due to the previous year to about 240 units. Equipment investment by chip makers remained low especiallyincrease in thedemand for DRAM and NAND Flash memory, segment primarily because supply continued to outweigh demand in the memory device market. However, image sensor, logic device and automotive device makers steadily increased their equipment investments, drawn by the growinggrowth of the mobile device market such as smartphones. Moreover, investments for image sensor production have been performing well, with expectations of market expansion in on-vehicle cameras and medical devices in addition to mobile devices.

In the market for smartphones, tablet PCs and hybrid cars. At the same time, some manufacturers-started to invest in i-line steppers, investments for small diameter wafers used inautomotive devices, power devices and LEDs as well ashave been stable while investments for new markets such as 3D mountings for through siliconintegration with Through-Silicon Via (“TSV”).(TSV) are expected to expand.

Through various activities to respond to these market changes, Canon has been rationalizing production systems to more flexibly respond to and match market changes, creating new systems with overall responsibility for each stepper model, and integrating manufacturing and sales functions so that customer needs can be more quickly reflected in development. Through these activities,developing a “design-in” business style, has been taking holdwhich enables customer needs to be reflected in the early stage of our product development process, and Canon believes steady progress is beinghas been made in developing and marketing products with high added value. For example, Canon released a new i-line stepper FPA-3030i5+, suitableoptimized for the production of green devices such as LEDs and power devices, and FPA-5510iV, which currently occupiesenables high productivity in the advanced packaging process such as TSV and BUMP. As a result of these activities, Canon has occupied a high share of the automotive devicei-line stepper market. For memory and LED markets.logic devices, FPA-5550iZ has captured a high share of the i-line stepper market. Canon also released a new KrF stepper FPA-6300ES6a with greatly improvedaims to gain an increased share of the market for DUV scanners by releasing the high productivity comparedFPA-6300ES6a. Furthermore, to conventional equipment.accelerate development of Nano-Imprint Lithography (“NIL”) equipment, Canon acquired Molecular Imprints, Inc. in April 2014, which has top-level intelligence and number of patents granted in NIL technology.

In 2012, the market for FPD lithography equipment, decreased 40%investments for large-sized panel production have been recovering due to demand from emerging markets and 4K TVs. Investments for small-to-mid-sized panel production, which had been strong for the previous yearlast few years, have shrunken drastically. In addition, panel makers are expected to around 70 units. Suchrequire higher resolution in FPD lithography equipment investments generally slowed due to a deterioration infor both large-sized and mid-to-small-sized panel makers’ earnings. Overall, the marketproduction.

Under these circumstances, Canon believes MPAsp-H800 series for 8th generation large-sized panel production declined 60% from the previous year while the market for 5.5-6th generation small-to-mid sized panel production maintained high growth due to the brisk market for smartphones and tablet PCs. Although the market has been shrinking, the MPAsp-H700 series supporting 7th and 8th generation large-sized panels continue to offer high productivity and havehas contributed to customerour customers’ production plans by allowing for quick equipment installation at existing production sites.offering world-highest resolution and high productivity. This has helped Canon capture and maintain a commandinglarge share of the FPD lithography equipment market for large-sized panel production. Furthermore, Canon has released MPAsp-E810 series for small-to-mid-sized panels, with improved resolution. Canon also aims to capture a large share of the market for small-to-mid sized panel production in addition to large-sized panel production.

In the medical equipment market, the digital static X-ray equipment maintains steady growth as a result of a shift in demand from “Computed Radiography” (CR) to “Digital Radiography” (DR). Although competition is increasing along with market expansion, Canon grew its sales and kept a large share of the static DR market owing to such well-received products as equipping an X-ray automatic detection mode, based on a Canon survey. In addition, Canon has recently made strong efforts to promote in the dynamic X-ray equipment market, which is also expanding along with static equipment market. As a result, sales of fluoroscopy and high-end angiography systems have increased.

The ophthalmic equipment market remained stable and Canon’s sales have slightly increased. Also, Canon believes its Canon-branded “Optical Coherence Tomography” (OCT), launched in 2012, has a good reputation, and service support systems have earned high accolades in China.

Canon expects FPD lithography equipment investmentsfuture growth of its sales.

The market of network cameras for video surveillance applications is expected to grow, with the progress of IT and digital technologies. Canon established a dedicated product group at the beginning of 2013 to expand its network camera business by panel makers to recover in 2013, mainly led by Chinese makers.utilizing its proprietary technologies of optics, sensor, imaging, and video streaming. In 2014, Canon aims to turn aroundlaunched ten new HD and Full HD network cameras. In addition, with the market share by revamping its product lineup by including products for small-to-mid-sized panels.

Medical equipment soldacquisition of the world’s largest video management software vendor, Milestone Systems, by Canon includes X-ray image sensors, X-ray imagingEurope in July, Canon as a whole has been accelerating enhancement of its video surveillance business. Furthermore, on March 3, 2015, Canon commenced a public tender offer for all of the issued shares of Axis AB, a global leader in the network video solutions industry. Canon will further ensure its goal of becoming the world leader in network surveillance camera systems retinal cameras, autorefractometers and image-processing equipmentaim for computerized systems. a further leap forward.

NET SALES BY SEGMENT

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

NET SALES BY GEOGRAPHIC AREA

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

Seasonality

Canon’s pioneering digital radiography system takes X-ray photography intosales for the digital age.

Other Canonfourth quarter are typically higher than for the other three quarters, mainly due to strong demand for consumer products, such as electronic components, including magnetic headscameras and micro-motors, are sold primarilyinkjet printers, during the year-end holiday season.

In Japan, corporate demand for office products peaks in the first quarter, as many Japanese companies end their fiscal years in March. Sales also tend to equipment manufacturers. In addition, increase at the start of the new school year in each region.

Sources of supply

Canon provides industrial machinespurchases materials such as die bonderglass, aluminum, plastic, steel and magnetic disk film deposition equipment.chemicals for use in various product components and in the manufacturing process. Canon also offers business information products, which primarily consistprocures raw materials from all over the world and selects suppliers based on a number of personal computers, serverscriteria, including environmental friendliness, quality, cost, supply stability and document scanners.financial condition.

With the trend toward digitization, the demand for scanning documents into text or image dataPrices of some raw materials fluctuate according to market trends. Although Canon is expanding. Canon’s document scanners rapidlycurrently focusing on globalizing supplies and efficiently digitize large volumesimproving raw material resource management strategies, and believes that it will be able to continue procuring sufficient quantities of printed information. Canon offers a wide range of scanner models, including color-capable compact sheet-fed types and a flatbed model suitable for scanning book format documents. Canon also offers a hybrid model that can create microfilm records. Canon’s diverse lineup seeksraw materials to meet increased demand by business customers for digitizing office documents, which enablesits needs, there can be no assurance that supply shortages will not occur or that raw materials, such customers to share documents across Internetas crude oil, will be available at competitive prices, or intranet platforms or to capture forms with optical character recognition.at all, in the future.

Marketing and distribution

Canon sells its products primarily through subsidiaries organized under regional marketing subsidiaries: Canon Marketing Japan Inc. in Japan; Canon U.S.A., Inc. in North and South America; Canon Europe Ltd. and Canon Europa N.V. in Europe, Russia, Africa and the Middle East; Canon (China) Co., Ltd. in Asia outside Japan; and Canon Australia Pty. Ltd. in Oceania. Each subsidiary is responsible for its own market research and for determining its sales channels, advertising and promotional activities. Each subsidiary provides tailor-made solutions to a diverse range of unique customers and aims to advance Canon’s reputation as a highly trusted brand.

In Japan, Canon sells its products primarily through Canon Marketing Japan Inc., mainly to dealers and retail outlets.

In the Americas, Canon sells its products primarily through Canon U.S.A., Inc., and Canon Canada Inc. and Canon Latin America, Inc., mainly to dealers and retail outlets.

In Europe, Canon sells its products primarily through Canon Europa N.V., which sells mainly through subsidiaries or independent distributors to dealers and retail outlets in each locality. In addition, copying machines are sold directly to end-users by several subsidiaries such as Canon (UK) Ltd. in the United Kingdom and Canon France S.A.S. in France.

In Southeast Asia and Oceania, Canon sells its products through subsidiaries located in those areas. In addition, copying machines are sold directly to end-users in Australia by Canon Australia Pty. Ltd.

Canon also sells laser printers on an OEM basis to Hewlett-Packard Company. Hewlett-Packard resells these printers under the “HP LaserJet Printers” name. During fiscal 20122014 and fiscal 2011, such2013, OEM sales to Hewlett-Packard constituted 17.0%17.4% and 19.3%17.6%, respectively, of Canon’s consolidated net sales.

Canon continues to enhance its distribution system by promoting the continuing education of its sales personnel and by improvingoptimizing inventory managementlevels and business planning through weekly analysis of sales data.

Service

In Japan and overseas, product service is provided in part by independent retail outlets and designated service centers that receive technical training assistance from Canon. Canon also services its products directly.

Most of Canon’s business machines carry warranties of varying terms, depending upon the model and country of sale. Cameras and camera accessories carry warranties that vary depending upon the model and country of sale.

Canon services its copying machines, MFDs, printers, and supplies replacement drums, parts, toner and paper. Most customers enter into a contract under which Canon provides maintenance services, replacement drums and parts in return for a stated amount of the contract plus a per copy charge. Copying machines not covered by a service contract may be serviced from time to time by Canon or local dealers for a fee.

Seasonality

Canon’s sales for the fourth quarter are typically higher than for the other three quarters, mainly due to strong demand for consumer products, such as cameras and inkjet printers, during the year-end holiday season.

In Japan, corporate demand for office products peaks in the first quarter, as many Japanese companies end their fiscal years in March. Sales also tend to increase at the start of the new school year in each region.

Sources of supply

Canon purchases materials such as glass, aluminum, plastic, steel and chemicals for use in various product components and in the manufacturing process. Canon procures raw materials from all over the world and selects suppliers based on a number of criteria, including environmental friendliness, quality, cost, supply stability and financial condition.

Prices of some raw materials fluctuate according to market trends. Although Canon is currently focusing on globalizing supplies and improving raw material resource management strategies, and believes that it will be able to continue procuring sufficient quantities of raw materials to meet its needs, there can be no assurance that supply shortages will not occur or that raw materials, such as crude oil, will be available at competitive prices, or at all in the future.

NET SALES BY SEGMENT

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

NET SALES BY GEOGRAPHIC AREA

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

Competition

Canon encounters intense global competition in all areas of its business. Canon’s competitors range from some of the world’s major multinational corporations to smaller, highly specialized companies. Canon competes in a number of different business areas, whereas many of its competitors focus on one or more individual areas. Consequently, Canon may face significant competition from entities that apply greater financial, technological, sales and marketing or other resources than Canon to their activities in a particular market segment.

The principal elements of competition that Canon faces in each of its markets are technology, quality, reliability, performance, price and customer service and support. Canon believes that its ability to compete effectively depends in large part on conducting successful research and development activities that enable it to create new or improved products and release them on a timely basis and at commercially attractive prices.

The competitive environments in which each product group operates are described below:

- Office Business Unit -

The markets for this segment are highly competitive. Canon’s primary competitors are Xerox Corporation/Fuji Xerox Co., Ltd.; Ricoh Company, Ltd.; Konica Minolta Holdings, Inc.; Hewlett-Packard Company; Samsung Electronics Co., Ltd.; and Lexmark International, Inc. Canon believes that it is one of the leading global manufacturers of office MFDs, copying machines and laser printers. In addition to the general elements of competition described above, Canon’s ability to compete successfully in these markets also depends significantly on whether it can provide effective, broad-based “business solutions” to its customers and respond to interrelated customer needs. In particular, the ability to provide equipment and software that connect effectively to networks (ranging in scope from local area networks to the Internet) is often a key to Canon’s competitive strength. In the United States, Europe and Japan, Canon is one of the market leaders in all areas of the business machine market. In China, the current market leaders for business machines are Toshiba TEC Corporation, Sharp Corporation and Konica Minolta Holdings, Inc. Canon hopes to join this group by introducing products tailored to the Chinese market and by strengthening sales and service channels. In the color printing market, Ricoh, Xerox and Konica Minolta have been very aggressive, especially in Europe and the United States, and competition in this market has become fierce.

- Imaging System Business Unit -

In addition to the traditional camera manufacturers, other electrical manufacturers started aggressively launching interchangeable lens digital cameras and related products in fiscal 2011. Nevertheless, Canon has continued to invest aggressively in competitive new products and intends to maintain its leadership position in this market.

Canon’s primary competitors in the interchangeable lens digital camera market are Nikon Corporation, Sony Corporation and Panasonic Corporation. Another major competitor is Sigma Corporation, which produces lenses for use with Canon’s digital SLR products.

The compact digital camera market is extremely competitive, and a large number of Canon’s competitors are relying on electronic manufacturing service (“EMS”) manufacturers to do their development and production work.

Except for Japan, where competition is so fierce that expansion of market size is generally possible only by greatly reducing sales prices, average prices in the industry did not decline much in fiscal 2012 from levels seen in the previous year. Nevertheless, prices have been rapidly declining as measured by the standard of specification price value, and the commoditization of products has been progressing. Market contraction and exchange rate fluctuation risks caused by the financial crisis which started in 2008 are having a major impact, resulting in severe conditions in the digital camera market. Despite these difficulties, Canon will seek to take advantage of its status as the number one brand in the industry, along with its economies of scale, in order to maintain profitability.

Canon’s primary competitors in the compact digital camera market are Sony Corporation; Nikon Corporation; Panasonic Corporation; Fujifilm Co., Ltd.; Samsung Electronics Co., Ltd.; and Casio Computer Co., Ltd. Canon’s primary competitors in the digital video camcorder market are Sony Corporation; Panasonic Corporation; and JVC KENWOOD Corporation. Canon’s primary competitors in the inkjet printer market are Hewlett-Packard Company and Seiko Epson Corporation.

- Industry and Others Business Unit -

There continues to be very stiff competition in the markets for lithography equipment used in the production of semiconductor devices and FPDs. In order to produce lithography equipment that can provide ultra-fine processing, there needs to be an integration of advanced optical, control and system technologies, along with continuous investment in technology development. The main competitors in these markets are Nikon Corporation, in the markets for semiconductor and FPD lithography equipment, and ASML Holding N.V., in the market for semiconductor lithography equipment only.

Canon has helped its customers to improve their productivity by continuously improving the cost performance of semiconductor lithography equipment using the i-line and KrF laser light sources. In particular, the equipment using i-line has captured a large share of the global market. Canon has also been meeting the needs of image sensor manufacturers by quickly adapting to various unique specifications.

Canon’s FPD lithography equipment for FPD panels with a common platform offering excellent productivity and reliability have captured large shares of the industry-leading South Korean market and the promising Chinese market.

Patents and licenses

Canon holds a large number of patents, design rights and trademarks in Japan and abroad to protect proprietary technologies stemming from its research and development activities. Canon utilizes these intellectual property rights as important strategic management tools. For example, Canon leverages its intellectual property rights to expand its product lines and business operations and to form alliances and exchange technologies with other companies.

Canon has granted licenses with respect to its patents to various Japanese and foreign companies, most often with respect to electrophotography, laser printers, multifunction printers, facsimile machines and cameras.

Companies to which Canon has granted licenses include:

Canon has also been granted licenses with respect to patents held by other companies.

Companies that have granted licenses to Canon include:

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

Companies with which Canon has entered into cross-licensing agreements include:

Canon has placed a high priority on the management of its intellectual property. Some products that are material to Canon’s operating results incorporate patented technology. Patented technology is critical to the continued success of Canon’s products, which typically incorporate technology from dozens of different patents. However, Canon does not believe that its business, as a whole, is dependent on, or that its profitability would be materially affected by the revocation, termination, expiration or infringement upon, any particular patent, copyright, license or intellectual property rights or group thereof.

Competition

Canon encounters intense global competition in all areas of its business. Canon’s competitors range from some of the world’s major multinational corporations to smaller, highly specialized companies. Canon competes in a number of different business areas, whereas many of its competitors focus on one or more individual areas. Consequently, Canon may face significant competition from entities that apply greater financial, technological, sales and marketing or other resources than Canon to their activities in a particular market segment.

The principal elements of competition that Canon faces in each of its markets are technology, quality, reliability, performance, price and customer service and support. Canon believes that its ability to compete effectively depends in large part on conducting successful research and development activities that enable it to create new or improved products and release them on a timely basis and at commercially attractive prices. The competitive environments in which each product group operates are described below:

- Office Business Unit -

The markets for this segment are highly competitive. Canon’s primary competitors are Xerox Corporation/Fuji Xerox Co., Ltd.; Ricoh Company, Ltd.; Konica Minolta Inc.; Hewlett-Packard Company; Samsung Electronics Co., Ltd.; and Lexmark International, Inc. Canon believes that it is one of the leading global manufacturers of office MFDs, copying machines and laser printers. In addition to the general elements of competition described above, Canon’s ability to compete successfully in these markets also depends significantly on whether it can provide effective, broad-based “business solutions” to its customers and respond to interrelated customer needs. In particular, the ability to provide equipment and software that connect effectively to networks (ranging in scope from local area networks to the Internet and the cloud) is often a key to Canon’s competitive strength. In the United States, Europe and Japan, Canon is one of the market leaders in all areas of the business machine market. In emerging markets, for example in China, the current market leaders for business machines are Toshiba TEC Corporation, Sharp Corporation and Konica Minolta Inc. Canon hopes to join this group by introducing products tailored to the Chinese market and by strengthening sales and service channels.

- Imaging System Business Unit -

Canon has continued to invest aggressively in competitive new products and intends to maintain its position in this market.

Canon’s primary competitors in the interchangeable lens digital camera market are Nikon Corporation and Sony Corporation.

Average prices for compact digital cameras in the industry increased in 2014 from the previous year. Market contraction is having a major impact, resulting in severe conditions in the digital camera market. Despite these difficulties, Canon will seek to take advantage of its status as the major brand in the industry, along with its economies of scale, in order to maintain profitability.

Canon’s primary competitors in the compact digital camera market are Sony Corporation; Nikon Corporation; and Samsung Electronics Co., Ltd. Canon’s primary competitors in the digital video camcorder market are Sony Corporation; Panasonic Corporation; and JVC Kenwood Corporation. Canon’s primary competitors in the inkjet printer market are Hewlett-Packard Company and Seiko Epson Corporation.

- Industry and Others Business Unit -

Very stiff competition continues in the markets for lithography equipment used in the production of semiconductor devices and FPDs. In order to produce lithography equipment that can provide ultra-fine processing, an integration of advanced optical, control and system technologies is required, along with continuous investment in technology development. The main competitors in these markets are Nikon Corporation, in the markets for semiconductor and FPD lithography equipment, and ASML Holding N.V., in the market for semiconductor lithography equipment only.

Canon believes that it has helped its customers improve their productivity by continuously improving the cost performance of semiconductor lithography equipment using the i-line and KrF laser light sources. In particular, equipment using i-line has captured a large share of the global market. Canon believes that it has also been meeting the needs of image sensor manufacturers by quickly adapting to various unique specifications.

Canon believes its FPD lithography equipment with a common platform offers excellent productivity and reliability that has helped it capture market share of the industry-leading South Korean market and the growing Chinese market. Canon’s sales and service support systems have also received high accolades from the customers in these markets. Panel makers are accelerating development of higher definition panels in recent years. Canon believes it has also been meeting the needs of panel makers by continuously offering new products with high resolution.

Environmental regulations

Canon is subject to a wide variety of laws, regulations and industry standards relating to energy and resource conservation, recycling, global warming, pollution prevention, pollution remediation and environmental health and safety. Some of the environmental laws that affect Canon’s businesses are summarized below.

Fiscal 2012 was the final year of the first commitment period (2008-2012) under the Kyoto Protocol. The Japanese government has called upon the manufacturing, transport, services and household sectors to take further action for energy conservation.

The revised Energy Saving Law in Japan (Law Concerning the Rational Use of Energy) and the revised Act on Promotion of Global Warming Countermeasures came into full effect in April 2010. These laws require business operators to report their energy consumption and mid and long-term energy conservation plans in an effort to encourage energy efficiency. The Japanese government is also implementing multifaceted measures to reduce emissions, including the granting of a “domestic credit” to any large company that helps small and medium enterprises to conserve energy. This credit is expected to provide substantial incentives, as it will be deemed an emission reduction for participating companies. Trial implementation of an emissions trading scheme was launched in October 2008.

Despite the economic downturn, Canon has been working to achieve its voluntary action plan target (which is consistent with the plan of the Japan Electrics and Electronics Industrial Associations) and has been strengthening its group structure to comply with revised environmental laws. Eventually, Canon expects to

achieve its target. Canon has been participating in the trial emissions trading scheme and managed through dedicated efforts to achieve the year 2010 target. However, due to the shutdown of nuclear power plants in Japan caused by the severe failure of the Fukushima Dai-ichi nuclear power plant, which was damaged by the great east Japan earthquake and subsequent tsunami disaster in 2011, Canon has still been asked to achieve further electricity savings and energy conservation. These activities including a response to this request could increase Canon’s management costs and have adverse effects on its operating results and financial condition.

A framework of Post-Kyoto Protocol (beyond 2012) has been discussed at the Conference of the Parties (“COP”) to the United Nations Framework Convention on Climate Change (UNFCCC). In December 2011, COP17 was held in Durban and member states have agreed to join a second commitment period for the Kyoto Protocol that will expire in 2020, and to fulfill national commitments for the implementation of individual or joint quantified emission reduction plans to achieve the 2020 targets under the Cancun Agreements in 2010. Member states have also launched a new negotiating process of “Future Framework beyond 2020” to reach an agreement that all member states will have the same legal regime to address climate change by 2015. In December 2012, COP18 was held in Doha to discuss the agenda of COP17 in detail. However, negotiations were unsuccessful and most of the agenda was carried over to the forthcoming COP19.

The Japanese government has declared its intention not to participate in the second commitment period of the Kyoto Protocol. Instead, the Japanese government has announced its plan to submit a new emission reduction target for 2020 to COP after establishing a new domestic Climate Change remediation plan, in place of the current 25% greenhouse gas emission reduction target under the Cancun Agreement.

Canon continues to pursue CO2 emission reductions through energy-efficient product design, improvement of logistics and factory operations with due consideration for the above mentioned international developments and the domestic Climate Change remediation plan. However, these efforts could increase Canon’s management costs and have adverse effects on its operating results and financial condition.

The Tokyo Metropolitan Government has mandated that the owners of certain large CO2 emitters, including office buildings, reduce CO2 emissions from April 2010. The target for the first compliance period (April 2010 to March 2015) has been set at 8% or 6% (according to the type of building) below base emissions, which can be determined based on the amount of emissions from the building in recent years. In order for the owners of large buildings to fulfill the requirement, they must reduce CO2 emissions from their respective buildings and, if such reduction is insufficient, obtain certain Tokyo Metropolitan Government-sanctioned credits. Canon expects to fulfill the requirement during the first compliance period.

Canon continues to pursue CO2 emission reductions through energy-efficient office operations. However, such efforts could increase Canon’s management costs and have adverse effects on its operating results and financial condition.

A 2010 amendment to the Soil Pollution Prevention Law of Japan tightens certain requirements to survey soil to measure certain pollution levels. If soil pollution exceeds specified limits, a prefecture governor may designate the land as “Measure required area” when effects to human health due to soil pollution (and with exposure to pollutant) are foreseen, and the prefecture governor orders removal of pollutants. When exposures to pollutants are blocked and effects to human health are not foreseen, the area is declared a “designated area for notification of changes of the land character.” The prefecture governor may publicly announce such designation and make the investigation report available upon request. The substances designated as pollutants consist of twenty-five chemical groups, including lead, arsenic and trichloroethylene. If an investigation shows that there is

a likelihood that soil contamination may affect human health, the prefecture governor may issue an order to the landowner to take designated remedial actions and may restrict the changes of the land character. Canon has commenced a detailed survey and measurement of soil and groundwater to check for pollution at all of Canon’s operational sites in Japan. Additional costs may arise if these investigations reveal that remedial measures are necessary. These factors could adversely affect Canon’s operating results and financial condition of the sites.

See “Risk Factors—Other Risks—Environmental cleanup and remediation costs relating to Canon’s properties and associated litigation could decrease Canon’s net cash flow, adversely affect its operating results and impair its financial condition.”

The Law for Promotion of Effective Utilization of Resources, administered by the Japanese Ministry of Economy, Trade and Industry, was enacted in 2001. This law requires manufacturers of “specified reuse-promoted products,” including copying machines, to promote the use of recyclable resources and recovered products (designing and manufacturing products that may be easily reused or recycled). Failure to comply with the law could adversely affect Canon’s operating results.

These two directives were originally published in the Official Journal of the European Union in 2003, and member states were required to enact laws necessary to comply with these directives by 2004.

According to theUnder RoHS Directive, from July 1, 2006, companies have been required to ensure that electrical and electronic equipment (“EEE”) sold in the European Union does not contain lead, cadmium, hexavalent chromium, mercury, polybrominated biphenyls or polybrominated diphenyl ethers if placed on the market after that date. Pursuant to the RoHS Directive, Canon adapted its products so that they do not contain the prohibited hazardous substances.ethers. The RoHS recast Directive was published on July 1, 2011. As a result, manufacturers, like Canon, will be required to prepare new declarations of conformity and compliance documentation from January 2013, in addition to meeting current restrictions on substances. Furthermore, the scope of products covered will bewas expanded to medical and measurement equipment from July 2014. An additional four substances will be published as restricted substances in 2015, and will be restricted from 2019. In parallel with these developments, all the RoHS exempted applications for which the restricted substances can be used are now under review. If these exemptions expire, additional design changes may be required for Canon products, and cost of changing designs may increase total compliance costs.

The WEEE Directive requires that companies selling electrical and electronic equipmentEEE bearing their trade names in the European Union must arrange and pay for collection, treatment, recycling, recovery and disposal of their equipment. Canon has become a member company of collective compliance schemes in each member state of the European Union and has achieved the required recycling levels for electrical and electronic equipment waste.waste EEE. The WEEE recast Directive was published on July 24, 2012 and will bewas applied from February 2014. Due to a change in official interpretation, the scope of products covered may be expanded. Also, the scope of local regulations similar to WEEE tendsis to be more expansive in such jurisdictions.expanded to include consumables.

If tighter restrictions are enforced in 2013 and beyond,the future, Canon’s compliance costs could increase, including with costs related to the actions for newly-covered products and the development and adoption of substitute materials or processes. Such increased costs may have an adverse effect on Canon’s operating results.

The REACH Regulation was published in the Official Journal of the European Union, and was implemented in 2007. This regulation covers almost all chemicals (products in gaseous, liquid, paste or powder form) and articles (products in solid state) manufactured in or imported into the European Union.

All chemicals manufactured in or imported into the European Union that exceed specific content thresholds must be registered. Registration requires disclosure of information about usage and chemical characteristics. The

registration of new chemicals commenced in June 2008. For chemical substances in use before “existing chemicals,” “pre-registration” was accepted from June to December 2008. Substances that were not pre-registered cannot be used until formally registered. Pre-registered substances are subject to compliance with formal registration procedures according to their quantity and hazardous properties. Canon uses some chemicals which are subject to pre-registration requirements and has completed the necessary pre-registrations.

If certain substances of very high concern are contained in an article, the substances must be communicated to the recipient or consumer of the article. This requirement has been in place since October 2008. Moreover, starting in 2011, certain cases required notifying the European Chemical Agency of more specific information.

Furthermore, the addition ofadditional restrictions on the use of certain substances hascan be proposed at any time by the ECHA (European Chemical Agency) or member states, and, some of them have been proposed,already adopted and if adopted,others are now under discussion, manufacturers such as Canon will need tomust take measuressteps to address such new restrictions.

Canon has been implementingkeeps meeting these existing and newly-added requirements under the REACH Regulation, whichand their implementation could increase Canon’s management costs and have adverse effects on its operating results and financial condition.

The ErP Directive applies in Europe to all energy-using products, although implementing measures for specific product categories have yet to be adopted. Until these implementing measures are adopted, it is difficult to predict the potential effects of the ErP Directive. However,and implementing measures with respect to off-mode and standby mode and external power supplies were adopted in and have been applied since 2010. Currently, a horizontal implementingThis measure covering home and office electric and electronic equipment which can be connectedwas expanded in 2013 to a network is also under consideration, and is expected to be published in the middle of 2013.include requirements for energy modes with “networked standby”. The requirements for “networked standby” were applied from 2015. For imaging equipment, the industry has made a public commitment to attain certain targets on environmentally conscious designs from 2012 by an industrial voluntary agreement (VA) and began implementation in 2011. Furthermore,By the 1st revision of the VA, commitments will become tighter than ever because the European authorities and NGOs are expected to require a stricter VA. In addition, many new or revised implementing measures for AV equipment including projectors(expanded both in scope and requirements) are now considered, and some of them will be finalized after finalizing regulations for networked products described above (2013).cover Canon’s products. Canon is continuing its preparations to comply with requirement under the ErP Directive. However, the requirements are expected to be challenging, and achieving compliance will likely increase Canon’s costs, especially by required design changes.

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

The Chinese Ministry of Information Industry published Administrative Measures on the Control of Pollution Caused by Electronic Information Products in February 2006. These measures are modeled on2006, and regulates the European Unionsame six substances covered by the EU RoHS Directive described above and regulate six substances: lead, mercury, hexavalent chromium, cadmium, polybrominated biphenyls and polybrominated diphenyl ethers in electronic information products. The measures establish two stages of implementation. Stage 1 is in effect and covers nearly all Canon products.

To comply with Stage 1 requirements, a China-specific label must be placed on any covered product if any of the six regulated substances are contained therein, and use of the six regulated substances must be disclosed in each product manual. In addition, each product’s environmental protection use period (“EPUP”) must be stated within its recycling mark and include the production date. Packaging material markings must be displayed on the boxes of the covered products.

Stage 2 requires that the contents of six regulated substances in specific electronic information products (as specified by the Chinese Government in the “list for emphasized management”) be restricted by limitations similar to the European UnionEU RoHS Directive. A China-specific compulsory product certification system will be introduced for such products. Standards to implement these measures and the “emphasized management list” are under discussion, including with regard to printers.

If these requirements are applied to Canon’s products, this could increase Canon’s costs and have an adverse effect on its operating results and financial condition.

The Regulation for the Management of the Recycling and Disposal of Waste Electrical and Electronic Products was issued by the Chinese government in 2009 and implemented on January 1, 2011. This regulation concerns the management of recycling and disposal activities with regard to waste electrical and electronic products in the interest of promoting comprehensive utilization of resources and the development of a circular economy. Producers and importers will beare required to pay a fee to a government fund. The first list of products falling under the waste electrical and electronic products catalogue has been issuedon February 9, 2015 includes printer, copying machine and includes four types of household appliances as well as personal computers.facsimile machine. The Regulation of those payment fees described above waswill be enforced on JulyMarch 1, 2012.2016.

If these

These requirements are applied to Canon’s products, this couldwill likely increase Canon’s costs and have an adverse effectcould adversely affect on its operating results and financial condition.

A 2010 amendment to the Soil Pollution Prevention Law of Japan tightens certain requirements to survey soil to measure certain pollution levels. If soil pollution exceeds specified limits, a prefecture governor may designate the land as a “Measure required area” if effects to human health due to soil pollution are foreseen, and the prefecture governor may order removal of pollutants. The substances designated as pollutants consist of twenty-five chemical groups, including lead, arsenic and trichloroethylene. If an investigation shows that soil contamination may affect human health, the prefecture governor may issue an order to the landowner to take designated remedial actions and may restrict the changes of the land character. Canon has commenced a detailed survey and measurement of soil and groundwater to check for pollution at all of Canon’s operational sites in Japan, and necessary procedures are being carrying out. Additional costs may arise if these investigations reveal that additional remedial measures are necessary. These factors could adversely affect Canon’s operating results and financial condition.

In addition to the laws described above, various environmental laws and regulations may have been promulgated or enacted by European Union member states, states of the United States, emerging countriesmarkets such as China, India, Russia, Vietnam, and others.other countries. Compliance with any such additional regulations may increase Canon’s costs and may adversely affect Canon’s operating results and financial condition.

Other regulations

Disclosure under Section 13(r) of the Securities Exchange Act of 1934

Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012 (“ITRA”) added Section 13(r)13 (r) to the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Section 13(r) requires an issuer to disclose in its annual or quarterly reports, as applicable, whether, during the reporting period, it or any of its affiliates knowingly engaged in certain activities, transactions or dealings relating to Iran or with designated natural persons or entities involved in terrorism or the proliferation of weapons of mass destruction. Disclosure is required even where the activities, transactions or dealings are conducted outside the U.S. by non-U.S. affiliates in compliance with applicable law, and whether or not the activities are sanctionable under U.S. law.

During the year ended December 31, 2012,2014, the following Canon affiliates had the transactions with Iran-related organizations. These transactions were conducted in compliance with applicable law in the respective countries.

As of the date of this report, Canon is not aware of any other activity, transaction or dealing by us or any of our affiliates during the year ended December 31, 20122014 that requires disclosure in this report under Section 13(r) of the Exchange Act. Canon does not intend to conduct any further business activities with Iranian counterparties required to be disclosed under the ITRA, except for sales of consumables, repair, and maintenance services for products Canon previously sold to such entities.

C. Organizational structure

Canon Inc. and its subsidiaries and affiliates form a group of which Canon Inc. is the parent company. As of December 31, 2012,2014, Canon Inc. had 275261 consolidated subsidiaries and 97 affiliated companies accounted for by the equity method.

The following table lists the significant subsidiaries owned by Canon Inc., all of which are consolidated as of December 31, 2012.2014.

D. Property, plants and equipment

Canon’s manufacturing is conducted primarily at 28 plants in Japan and 1718 plants in other countries. Canon owns all of the buildings and the land on which its plants are located, with the exception of certain immaterial leases of land and floor space of certain of its subsidiaries. The names and locations of Canon’s plants and other facilities, their approximate floor space and the principal activities and products manufactured therein as of December 31, 20122014 are as follows:

Name and location		Floor space (including leased space)				Principal activities and products manufactured
Domestic		(Thousands of square feet)
Kosugi Office, Kanagawa			395			Development of software for office imaging products
Fuji-Susono Research Park, Shizuoka			1,037			R&D in electrophotographic technologies
Ayase Plant, Kanagawa			393			R&D and manufacturing of semiconductor devices
Hiratsuka Plant, Kanagawa			1,1391,099			R&D of display products and manufacturing of semiconductor devices
Tamagawa Office, Kanagawa			155383			Quality engineering
Oita Plant, Oita			205283			Manufacturing of semiconductor devices
Yako Office, Kanagawa			904905			Development of inkjet printers, inkjet chemical products
Utsunomiya Plant,Office, Tochigi			2,7522,761			Manufacturing of lenses for cameras and other applications, R&D in optical technologies, development and sales of broadcasting equipment, R&D, manufacturing, sales and servicing of semiconductor production equipment
Toride Plant, Ibaraki			3,2033,176			R&D in electrophotographic technologies,mass-production trials and support;supports; manufacturing of office imaging products, chemical products; training of manufacturing
Ami Plant, Ibaraki			1,131			Manufacturing of FPD production equipment
Canon Electronics Inc., Tokyo, Saitama and Gunma			1,3111,309			Components, magnetic heads, document scanners and laser printers
Canon Finetech Inc., Saitama, Ibaraki and Fukui			915			Business-use printers, business machines peripherals and chemical products
Canon Precision Inc., Aomori			1,509			Toner cartridges, sensors and micromotors
Canon Optron Inc., Ibaraki			143			Optical crystals (for lithography equipments, cameras, telescopes) and vapor deposition materials
Canon Chemicals Inc., Ibaraki			2,098			Toner cartridges and rubber functional components
Canon Components, Inc., Saitama			612			Contact image sensors, inkjet cartridges and medical equipment
Oita Canon Inc., Oita			1,238			Digital cameras, lenses and digital video camcorders
Nagahama Canon Inc., Shiga			1,093			Laser printers, toner cartridges and A-Si drums

Name and location		Floor space (including leased space)				Principal activities and products manufactured
Domestic		(Thousands of square feet)
Canon Precision Inc., Aomori			1,503			Toner cartridges, sensors and micromotors
Canon Optron Inc., Ibaraki			143			Optical crystals (for lithography equipments, cameras, telescopes) and vapor deposition materials
Canon Chemicals Inc., Ibaraki			1,872			Toner cartridges and rubber functional components
Canon Components, Inc., Saitama			610			Contact image sensors, inkjet cartridges and medical equipment
Oita Canon Inc., Oita			1,218			Digital cameras, lenses and digital video camcorders
Nagahama Canon Inc., Shiga			1,093			Toner cartridges and A-Si drums
Oita Canon Materials Inc., Oita			2,9772,949			Chemical products for copying machines and printers, and inkjet cartridges
Ueno Canon Materials Inc., Mie			654			Chemical products for copying machines and printers
Fukushima Canon Inc., Fukushima			966981			Inkjet printers and inkjet cartridges
Canon Semiconductor Equipment Inc., Ibaraki			420345			Development and production of semiconductor production-related equipment
Canon Ecology Industry Inc., Ibaraki			679651			Recycling of toner cartridges, repair and recycling of business machines
Nisca Corporation, Yamanashi			390380			Copying machine peripherals, scanner units and optical equipment
Miyazaki Daishin Canon Inc., Miyazaki			168			Digital cameras
Canon Mold Co., Ltd., Ibaraki			219			Molds
Canon ANELVA Corporation, Kanagawa and Yamanashi			766749			Production equipment for electron devices, flat panel display and semiconductors
Canon Machinery Inc., Shiga			627622			Automated production equipment and semiconductor production-related equipment
Canon Tokki Corporation, Niigata, Kanagawa and Tokyo			208253	��		Vacuum technology-related equipment
Nagasaki Canon Inc., Nagasaki			477			Digital cameras
Hita Canon Materials Inc., Oita			370369			Rubber functional components

Name and location		Floor space (including leased space)				Principal activities and products manufactured
Overseas		(Thousands of square feet)
Americas
Canon Virginia, Inc., Virginia, U.S.			1,6761,679			Toner cartridges, molds and remanufacturing of copying machines
Industrial ResourceCanon Environmental Technologies, Inc., Virginia, U.S.			185			Recycling of toner cartridges
Asia
Canon Inc., Taiwan, Taiwan			1,5281,717			Lenses and digital cameras
Canon Opto (Malaysia) Sdn. Bhd., Selangor, Malaysia			584			Digital cameras, lensesLenses and optical lens parts
Canon Dalian Business Machines, Inc., Dalian, China			1,740			Production and recycling of toner cartridges, production of laser printers
Canon Zhuhai, Inc., Zhuhai, China			7521,157			Digital cameras, digital video camcorders and contact image sensors
Canon Prachinburi (Thailand) Ltd., Prachinburi, Thailand			808904			Copying machines
Canon Hi-Tech Thailand(Thailand) Ltd., Ayutthaya and Nakohon Ratchasima, Thailand			3,1243,269			Inkjet printers, MFDs, scanners, molds and plastic injection molded parts
Canon Zhongshan Business Machines Co., Ltd., Zhogshan,Zhongshan, China			1,3311,335			Laser printers
Canon Vietnam Co., Ltd., Hanoi, Vietnam			3,3023,482			Inkjet printers, laser printers, MFDs, scanners and contact image sensors
Canon (Suzhou) Inc., Suzhou, China			1,5161,517			Copying machines
Canon Finetech Nisca (Shenzhen) Inc., Shenzhen, China			684721			Copying machines and laser printer peripherals
Canon Electronics Vietnam Co., Ltd., Hung Yen Province, Vietnam			308			Components
Canon Business Machines (Philippines),Inc., Batangas, Philippines			898			Laser printers

Canon considers its manufacturing and other facilities to be well maintained and believes that its plant capacity is adequate for its current requirements. None of the buildings or land are subject to any major encumbrances.

Main facilities under construction for establishment/expansion

Item 4A. Unresolved Staff Comments

None.

Item 5. Operating and Financial Review and Prospects

A. Operating Results

The following discussion and analysis provides information that management believes to be relevant to understanding Canon’s consolidated financial condition and results of operations.

Overview

Canon is one of the world’s leading manufacturers of plain paper copying machines, office multifunction devices (“MFDs”), laser printers, cameras, inkjet printers, semiconductor lithography equipment and flat-panel-display (“FPD”)FPD (Flat panel display) lithography equipment. Canon earns revenues primarily from the manufacture and sale of these products domestically and internationally. Canon’s basic management policy is to contribute to the prosperity and well-being of the world while endeavoring to become a truly excellent global corporate group targeting continued growth and development.

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

Economic environment

Looking back at the global economy in 2012, in2014, although the United States thereand other developed countries were signsinitially expected to bring about a return to a path of improvement in employment conditions and housing issuesfull-fledged growth, such expectations came up short due to the ongoing occurrence of such unforeseen circumstances as the economy continued to grow moderately.conflict between Russia and Ukraine. In Europe, the economic downturn in Southern European countries spread to Germany and other major countries, having a serious impact on the overall European economy. Economic growth in emerging markets such as China and India slowed down somewhat due to lagging exports and the effects of tight monetary policies. In Japan,U.S., despite the reconstruction demand seennegative impact of the major cold wave that struck at the beginning of the year, the economy showed steady signs of recovery, buoyed by the improvement in employment conditions and healthy growth in consumer spending. In Europe, the economy remained sluggish due to such factors as the negative impact of Russia’s deteriorating economy on neighboring euro area countries. The pace of economic expansion in China was modest while other emerging countries in Southeast Asia and South America faced slowdowns in market growth due to economic stagnation. In Japan, with the economy yet to recover from the previous year’s earthquakedecline following the rush in Japan and floodingdemand leading up to the hike in Thailand, the economy entered a phase of recession during the latter halfcountry’s consumption tax, growth fell short of the year due to the slowdownrate recorded in the global economy and reduced domestic demand. As for the global economy overall, the effects of the European financial crisis were felt worldwide, leading to a widespread slowdown.previous year.

Market environment

As forLooking at the markets in which Canon operates amid these conditions, while demand for office color MFDs showed growth in Japan and other regions, demand for laser printers remained sluggish mainly in European markets.maintained steady growth. Demand for interchangeable-lens digital cameras continued to display strong growth across global markets while demandface harsh conditions due to the economic slowdown. Demand for digital compact digital cameras shrunk not onlycontinued to shrink in both developed countries but also in China and some emerging nations. Overall demandmarkets. Demand for inkjet printers, also waneddecreased due to the weak economy.sluggish economies of Asia and Europe. In the industry and others segment,sector, a rebound in capital investment for both memory devices and image sensors led to a pickup in demand for semiconductor lithography equipment remained restrained due to weak capital investmentequipment. Additionally, demand for memory devices while lithography equipment used in the production of FPD encountered sluggish demandFPDs increased for large-size FPD panels despite the healthy market for mid- and small-size FPD panels used mainly in smartphones and tablet PCs.panels.

The average value of the yen during the year was ¥79.96¥106.18 against the U.S. dollar, a slightyear-on-year depreciation compared with the previous year,of approximately ¥8, and ¥102.80¥140.62 against the euro, a year-on-year appreciationdepreciation of approximately ¥8.¥11.

Summary of operations

Owing to the economic slowdown mainly in EuropeMFDs and the high valuation of the yen against the euro, combined with the cooling off oflaser printers enjoyed solid demand in China during the latter half ofyear and industrial equipment sales increased significantly. Within the year, the Canon Group faced

increasingly challenging conditions across all of its businesses. Amid this harsh environment, although Canon continued Group-wide efforts to expand sales, mainlyshrinking market for competitively priced products such as interchangeable-lens digital cameras and office equipment,digital compact cameras, less-than-expected demand during the year-end shopping season led to a decline in net sales. As a result, despite the positive effects of favorable currency exchange rates, net sales for the year declined 2.2%decreased by 0.1% year on year to ¥3,479.8¥3,727.3 billion. The gross profit ratio, declined by 1.4however, rose 1.7 points year on year to 47.4%49.9% thanks to the effects of ongoing cost-cutting efforts along with the depreciation of the yen. Despite an increase in foreign-currency-denominated operating expenses due to the significant impactdepreciation of the strong yen, and product mix. Thanks to Group-wide efforts to thoroughly reduce spending such as research and development (“R&D”) expenses,contributed to limiting operating expenses decreasedto ¥1,498.0 billion, an increase of just 2.5% year on year. As a result, operating profit increased by 2.4%7.8% year on year to ¥1,326.1 billion. Operating profit decreased 14.3% to ¥323.9¥363.5 billion. Other income (deductions) achieved a turnaround of ¥22.2increased by ¥9.4 billion owingdue to an improvement in foreign currency exchange gain, resulting ingains while income before income taxes of ¥342.6 billion, a decrease of 8.5% year on year.increased by 10.3% to ¥383.2 billion. Net income attributable to Canon Inc. decreasedincreased by 9.7%10.5% to ¥224.6 billion from¥254.8 billion. Accordingly, despite the previous year.slight decline in net sales, Canon achieved profit growth.

Key performance indicators

The following are the key performance indicators (“KPIs”) that Canon uses in managing its business. The changes from year to year in these KPIs are set forth in the table shown below.

KEY PERFORMANCE INDICATORS