UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM20-F

OR

For the fiscal year ended December 31, 20142017

OR

For the transition period from                    to                    

OR

Date of event requiring this shell company report                    

Commission file number001-15122

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, Shimomaruko3-chome,Ohta-ku, Tokyo146-8501, Japan

(Address (Address of principal executive offices)

Shinichi Aoyama, +81-3-3758-2111, +81-3-5482-9680, Eiji Shimizu,+81-3-3758-2111,+81-3-5482-9680,30-2, Shimomaruko3-chome,Ohta-ku, Tokyo146-8501, 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, 2014, 1,091,831,8272017, 1,079,755,783 shares of common stock, including 26,472,81219,648,132 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 RegulationS-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, anon-accelerated filer, or a non-accelerated filer.an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” and large accelerated filer”“emerging growth company” in Rule12b-2 of the Exchange Act. (Check one):

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

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.  ☐

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

Indicate by check mark 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 inRule 12b-2 of the Exchange Act).    Yes  ¨☐    No  þ☑

TABLE OF CONTENTS

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iii

CERTAIN DEFINED TERMS, CONVENTIONS AND PRESENTATION OF FINANCIAL INFORMATION

All information contained in this Annual Report is as of December 31, 20142017 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 13, 2015,9, 2018, the noon buying rate for yen in New York City as reported by the Federal Reserve Bank of New York was ¥121.17=¥106.74= U.S.$1.

The Company’s fiscal year end is December 31. In this Annual Report “2014”“2017” refers to the Company’s fiscal year ended December 31, 2014,2017, 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“project,” “should” and similar expressions, as they relate to Canon or its management, are intended to identify forward-looking statements. Such statements, which include, but are not limited to, statements contained in “Item 3. Key Information-Risk Factors”,Factors,” “Item 4. Information on the Company, “,“Item” “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 13, 2015,9, 2018, the noon buying rate for yen in New York City as reported by the Federal Reserve Bank of New York was ¥121.17¥106.74 = 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, diagnostic equipment 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, diagnostic equipment and industrial equipment are affected by the financial results of its corporate customers or medical institutions, and deterioration of their financial results has caused and may continue to cause customers to limit capital investments. Demand for Canon’s consumer products, such as cameras and inkjet printers, is discretionary. Rapid price declines owing to intensifying competition and declines in levels of consumer spending and corporate investment could adversely affect Canon’s operating results and financial position.

Canon’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 markets for these technologies do not develop as Canon expects, or if its competitors produce these or competing technologies in a more timely or effective manner, Canon’s operating 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 andin-house production of key devices. If Canon cannot effectively implement these techniques, it may fail to realize cost advantages or product differentiation, 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. Canon has sought to invest substantial resources into introducing appealing, innovative and cost-competitive new products. There are several risks inherent in introduction of new products and services, such as delays in development or manufacturing, unsuitable product quality during the introductory period, variations in manufacturing costs, negative impact on sales of current products, uncertainty in predicting customer demand and difficulty in effectively managing inventory levels. Moreover, if Canon is unable to respond quickly to technological innovations with respect to information systems and networks, Canon’s revenue may be significantly affected as a result of delays associated with the incorporation into its products of such new information technologies.

Canon’s revenues and gross margins also may suffer adverse effects because of the timing of product or service introductions by its competitors. This risk is exacerbated when a competitor introduces a new product immediately prior to Canon’s introduction of a similar product. If any of these risks materialize, future demand for Canon’s products and services could be reduced, and its operating results could decline.

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

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”), 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 popularitydigitalization of tablet PCsworkflow in office 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, its operating results may be adversely affected.

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

The smartphone market has been growing dramatically on a global scale in recent years.scale. Smartphones allow users not only to take photos, but also share them instantly on SNSs and it changed people’s photo taking behavior. If Canon’s digital cameras cannot clearly state their advantages over smartphones’ cameras, Canon could suffer from an erosion of the digital camera market, with a resulting adverse effect on operating results.

Canon may not be able to adequately anticipate developments related to its medical device business, including changes to the market environment and developments related to medical device approvals, certifications and health insurance coverage.

Regarding the market for Canon’s medical equipment sold to medical institutions, mainly in the area of diagnostic imaging, it takes a long time to design, research, develop and commercialize products, because it is necessary to prove the clinical effectiveness of new technologies and new products, and obtain regulatory approvals and certifications prior to sale in individual countries. The global market for medical devices is expanding due to developing medical infrastructure in emerging countries, but in developed countries issues such as aging populations, rising health insurance costs and pressure to cut medical device costs may adversely affect Canon’s medical device business.

Canon invests in research and development of new medical device technologies based on detailed analysis of the potential technical and business prospects for such technologies. However, despite these investments, Canon may become less competitive if it cannot anticipate whether new technologies will have the expected clinical effects or developments in the market or regulatory environment for such technologies. Canon may need to significantly modify its business plans in response to these challenges and it may not be able to generate the expected returns on its investments in research and development of medical devices.

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

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

A substantial portionDisruptions 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 Canon distributors in specific sales territoriesor acquisitions of those distributors by competitors 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.

In addition, Canon depends on Hewlett-PackardHP Inc. for a significant part of its business. As a result, Canon’s business and operating results may be affected by the policies, business and operating results of Hewlett-Packard.HP Inc. Any decision by Hewlett-PackardHP Inc. management to limit or reduce the scope of its relationship with Canon would adversely affect Canon’s business and 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 rise, triggered by the imbalance of supply and demand along with other factors. If such events occur as an outcome of the dependency on outside vendors, Canon’s operating results may be adversely affected.

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.

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

Canon makes strategic acquisitions of other companies for the purpose of business expansion and Canon is also engaged in alliances, joint ventures, and strategic investments with other companies. Canon also makes strategic acquisitions of other companies. These activities can help Canon to promote Canon’s technological development process and expandgrow its customer base.business. However, weak business trends or disappointing performance by partners or acquired companies may adversely affect the success of such activities. In addition, theThe success of such activities may be adversely affected by the inability of Canon and its partners or acquired companies to successfully define and reach common objectives. Even if Canon and its partners or acquired companies succeed in designing a structure that allows for the definition and achievement of common objectives, synergies may not be created between the businesses of Canon and its partners or acquired companies. IntegrationIn addition, integration of operations may take more time than expected. In connection with its acquisitions, Canon recognizes goodwill and other intangible fixed assets on its consolidated balance sheet, and the amounts recognized may be impaired if there is a decline of future cash flow. An unexpected cancellation of a major business alliance may disrupt Canon’s overall business plans and may also result in a delayed return on, or reduced recoverability of, the investment, adversely affecting Canon’s operating results and financial position.

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 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’shigh-end precision products unmarketable, costs will increase, and Canon may lose sales opportunities and customer confidence.

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

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 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 disruptive events or developments such as the leakage of harmful substances and shutdowns of information 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 energymitigation of climate change, resource conservation including product recycling, reduction of hazardous substances, product recycling, clean air, clean water and waste disposal. Due to the laws and regulations, Canon may face liability for additional costs and alleged damages. Such costs and damages could adversely affect Canon’s business and operating results.

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

Canon is subject to risks relating to legal proceedings.

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

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

Because of the emphasis on product innovation in the markets for Canon’s products, many of which are subject to frequent technological innovations, patents and other intellectual property are an important competitive factor. 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: competitors will be able to develop similar technology independently; Canon’s pending patent applications may not be issued; the steps Canon takes to prevent misappropriation or infringement of its intellectual property may be unsuccessful; and intellectual property laws may not adequately protect Canon’s intellectual property, particularly in certain emerging markets.

In relation to third party intellectual property rights, if any third party is adjudicated to have a valid infringement claim against Canon, Canon could be required to: refrain from selling the relevant product in certain markets; pay monetary damages; pursue development ofnon-infringing technologies, or attempt to acquire licenses to the infringed technology and to make royalty payments, which may not be available on commercially reasonable terms, if at all.

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

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

With respect to employee inventions, Canon maintains company rules and an evaluation system and has been making adequate payments to employees for the 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.

Canon’s businesses, corporatebrand image and operating results could be adversely 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 andknow-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 is subject to risks arising from dependency on electronic data.

Canon possesses confidential electronic data relating to manufacturing, research and development, procurement, and production, as well as sensitive information obtained from its customers relating to the customers and to other individuals and parties. This electronic data is used by Canon and 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, including vulnerability to 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 continues to make administrative and managerial improvements in order to alleviate these risks, such events may occur despite Canon’s best efforts.

The materialization of such risks could result in interruptions to essential work, leaks of confidential data and damage to the information service functions in products. The occurrence of any of these events has the potential to cause Canon to be subject to claims from affected individuals and parties and to negatively influence Canon’s brand image, the social trust it has developed, and its operations and financial conditions.

Canon’s financial results may be adversely affected if its deferred tax assets are not recoverable or if it is subject to international double taxation.

Canon currently has deferred tax assets, which are subject to periodic recoverability assessments based on projected future taxable income. The changes of future profitability due to future market conditions and tax reforms including changes in tax rates may require possible recognition of significant valuation allowances to reduce the net carrying value of deferred tax asset balances. When Canon determines that certain deferred tax assets may not be recoverable, the amounts which may not be realized are charged to income tax expense and will adversely affect net income.

Recently, international corporate tax avoidance has developed into a political issue with a focus on aggressive tax planning strategies of certain multinational corporations. The OECD established the BEPS (Base Erosion and Profit Shifting) project for the purpose of increasing cooperation among countries and implementing

harmonization of taxation. The BEPS action plan was published in July 2013; the OECD then conducted further study based on that plan and published its final report in October 2015. Each country has been revising or amending its domestic taxation system and tax treaties based on the final report.

Canon believes that liability of taxation is a basic and significant responsibility as a corporate citizen and that the revision or amendment will not significantly affect Canon. It is, however, possible that there will be differences in opinion between Canon and tax authorities based on new transfer pricing documentation requirements.

Canon’s retirement and severance benefit obligations are subject to certain accounting assumptions.

Canon has significant employee retirement and severance benefit obligations that are recognized based on actuarial valuations. Inherent in these valuations are key assumptions, including discount rates, expected return on plan assets, assumed rate of increase in compensation level and mortality rate. Actual results that differ from the assumptions are accumulated and amortized over future periods and, therefore any such differences would be expected to be linked to increases in actual costs, which may adversely affect net income.

Item 4. Information on the Company

A. History and development of the Company

Canon Inc. is a joint stock corporation (kabushiki kaisha) formed under the Corporation Law of Japan. Its principal place of business is at30-2, Shimomaruko3-chome,Ohta-ku, Tokyo146-8501, Japan. The telephone number is +81-3-3758-2111.+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.

On March 17, 2016, Canon entered into a Shares and Other Securities Transfer Agreement with Toshiba Corporation and acquired the share options for consideration of cash to acquire all the ordinary shares of Toshiba Medical Systems Corporation (“TMSC”)(Canon Medical Systems Corporation as of January 4, 2018), which is exercisable upon the clearances of necessary competition regulatory authorities. As such clearances were obtained, Canon exercised the share options and acquired all the ordinary shares of TMSC on December 19, 2016. The acquisition date was December 19, 2016 and the purchase price was ¥665,498 million, which approximates the fair value at that date. Under Phase V of the Excellent Global Corporation Plan, a five-year initiative that Canon has been implementing since 2016, “embracing the challenge of new growth through a grand strategic transformation” has been set as a basic policy. With regard to “strengthening and growing new businesses, and creating future businesses,” a particularly important strategy, Canon intends to develop a health care business within the realm of “safety and security,” as a next-generation pillar of growth.

In 2014, 2013,2017, 2016, and 2012,2015, Canon’s increases in property, plant and equipment were ¥182,343¥147,542 million, ¥188,826¥171,597 million and ¥270,457¥195,120 million, respectively. In 2014,2017, 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 2015,2018, Canon projects to invest in property, plant and equipment of approximately ¥205,000¥200,000 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, diagnostic equipment and lithography equipment.

Canon sells its products principally under the Canon brand name and through sales subsidiaries. Each of these subsidiaries is responsible for marketing and distribution to retail dealers in an assigned territory. In 2014, 80.6%2017, 78.3% of consolidated net sales were generated outside Japan, with approximately 27.8%27.1%, 29.3%25.2% and 23.5%26.0% generated in the Americas, Europe and Asia and Oceania, respectively.

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

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

Canon will work to realize the optimized global allocation of its production assets based on changes in local conditions in each country. Canon has manufacturing subsidiaries in a variety of countries, including the United States, Germany, France, the Netherlands, Taiwan, China, Malaysia, Thailand, Vietnam and the Philippines.Philippines, other than Japan.

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 threefour segments: the “Office Business Unit,” the “Imaging System Business Unit,” the “Medical System Business Unit” which was newly established in 2017 and the “Industry and Others Business Unit”.

- Office Business Unit -

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

In the industry, customer preference has been shifting from monochrome to color products and from hardware to services and solutions. Especially in the professional print market, customers are increasingly turning toshort-run,print-on-demand and variable data printing. The importance of connectivity, mobility, security, integration, workflow and cloud-based web services is growing, and such added value is increasingly delivered together with hardware. Canon seeks to maintain its position as a market leader in these corefast-changing markets.

In 2014,2017, Canon enhanced its portfolio withexpanded our hardware offerings by introducing the launchnew A3 color MFPs; the image RUNNER ADVANCE C3500 series and completed the introduction of the A4-size color deviceour third-generation imageRUNNER ADVANCE C350iF/C250iF.products with enhanced operability and productivity. Canon also launched imageRUNNER 2202/2002, a low-end A3-sizehigh-speed monochrome device tailored to the emerging market. To deliver higher value addedproduction devices; varioPRINT 140 series and expandVarioPrint 6330 series. The faster output capability of these new product series provides broad coverage for fast delivery andsmall-lot variable data printing needs of our presence in the existing market while acquiring new markets in the production print industry, 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 ColorStream 3000 series has enjoyed a good reputation in the market.customers.

In software, services and solutions, Canon was one of the first vendors to launch its application development platform, the “MultifunctionalMultifunctional Embedded Application Platform”Platform (“MEAP”) which allows the creation of

customized applications for Canon MFDs enabling users to fully take advantage of the power of our MFDs. Canon is reinforcing its solutions capability through offerings such as imageWARE software suite and uniFLOW, business process automation software “EnterpriseEnterprise Imaging Platform”Platform (“EIP”) and Canon MDS, a device management solution that reduces total cost of ownership.

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

In the monochromeAs for laser printerprinters, Canon has focused on expanding sales of high value-added products from mid tohigh-end class, especially for MFP, resulted in increased sales and market the transition to a low price segment is expected to expand salesshare in the micro office/home office market and in emerging markets.said products category successfully. 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 service segment, to drive Canon’s business growth.

However, Canonhowever, is experiencing fierce competition with aggressive competitors in the laser printer market and an eventual decline in sales prices is becoming a major threat. Growththreat, in addition to concerns over lagging growth of the tablet PC and smartphoneentire market which affects users’ printing behavior and may also leaddue to a decrease in demand for printing, is becoming a new threat. Canon is executing on several initiativeswhich has been caused by changes in printing behavior related to enhance mobile printing solutions to tackle the new threat and create further business opportunities.prevalent use of smartphone, cloud computing, etc.

In response, Canon is going to accelerate current momentum to increase sales quantity and market share by enhancing competitiveness in contractual business market by making the most of technical innovation and executing optimum sales strategies created closely for each region/products. Furthermore, Canon aims to promote technological developments in order to introduce competitive products in a timely manner across the office business unit, and to pursuemaximize business efficiency through making continuous efforts to achieve cost reductionreductions and optimization of its supply chain.

- Imaging System Business Unit -

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

In 2014,2017, Canon launched two new digital SLR cameras and strengthened its product lineup.lineup by launching six new digital interchangeable-lens cameras, including a compact and lightweight full frame model EOS Rebel T5, launched in6D Mark II for the first half of the year, is the best model for DSLR beginners to enjoy the art of true photography for both stilltime in five years, and moving images in an easy, user-friendly way. The Canonentry level yet high performance mirrorless cameras EOS 7D Mark II, launched in the second half of the year, is designed to meet the demands of photographers and videographers who want a camera that can provide a wide range of artistic opportunities. It shoots up to 10 frames per second and has a 65-point all cross-type AF system. The number of available AF points, and whether single line or cross-type, varies depending on the lens. The new DSLR is capable of capturing precise moments of quickly and irregularly moving objects.M100. These new models as well as the current models pushed sales and Canon gainedmaintained number one market share*share in the field of digital interchangeable-lens cameras in volume terms in 20142017 in the major regions, such as the United States, Europe, and Japan. Canon aims to expand the imaging domains of EOS, and believes there remains considerable room for future growth through development of new products based onstate-of-the-art technology following the trend ofsuch as higher picture quality, picture, small and light weight body and versatile movie / network functions.

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 in April 2014, including Cinema Lenses(EF-Mount).SLR. 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 developed by superior optical technology and new elemental technology, which Canon believes allowed it to maintain its advantage over the competition.

Canon introduced fourteen new models to theAs for compact digital cameracameras, while the overall market worldwide in 2014. While there has been shrinking, the premium segment with relatively large sensor size has been performing steadily. In such circumstance, in the second half of the year, Canon launched a new flagship model PowerShot G1 X Mark III, featuringAPS-C CMOS sensor, the largest sensor ever in a Canon point and shoot camera. Canon aims to strengthen its premium lineup further and strives to improve its profitability. Including those premium models, Canon launched a total of six models, and plans to maintain its full-line up strategy to meet a wide range of customer needs.

In compact photo printer market, along with the increasing demand for photo printing from smart devices, Canon has performed well. With its advantages, such as easy operation, portability, andlab-quality photo print,

SELPHY has gained a strong tendency toward reliance on electronic manufacturing services (“EMS”)market position in each region. The new SELPHY CP1300 with advanced usability launched in the compact digital camera industry, the EMS manufacturerssecond half of this year has shown high sales performance. Canon plans to tap new customer demand and will likely to be unableseek to maintain their business and some of them 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.its lead in this market.

The market for conventional camcorders has been shrinking, as many other popular devices start equippingadding a movie function. On the other hand, new categories like action cameras are emerging and expanding.In this environment, 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 has introduced a new product with unique styled camcorder especially for self-shooting, aiming to exploit a new market category. In the field of professional camcorders, Canon introduced the new model XF205/200 in its XF series; small sized camcorders equipped with a wide-angle and high magnification lens for use in broadcast news, documentary and independent filmmaking. CINEMAmodels EOS SYSTEM has strengthened its lineup by launching newC200/C200B; digital cinema camera named EOS C100 Mark II equippedcameras which are capable of recording 4K video in new format “Cinema RAW Light,” and XF405/400; compact and lightweight camcorders which are capable of shooting 4K/60P video with the Dual Pixel CMOS AF, and improved user convenience through a wider selection of related software.newly developed 15x optical zoom lens. Canon aims to solidify its top position in the motion picture production market by introducing new products that suit a wide variety of market.market requirements.

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.focusing on high resolution projectors of WUXGA and 4K with its advanced optical technologies. In 2017, Canon launched two new install-typeWUXGA models with LCOS panels and four world smallest and lightest 4K laser projectors*, 4K600STZ” and “4K600Z”, which meet the industry’s first short-throwvarious usage requirements of customers such as maintenance-free use and high shift function as well as a brighter flagship model in 2014, which are strategic and leading models for expandingeasy installation. Canon plans to expand the projector business with its high-resolution product lineup including 4K and advancingadvance Canon’s position in the market.

In the broadcast TVHDTV lens market, although demand arisingremains stable from the switchover to high definition broadcast formatssports broadcasting in developed countries slowed down, worldwide market demand is stable.and from switchover to HD in developing countries, and Canon retainscontinues to maintain a large share of the TV lens market with high value-added products.

The newly released CINE-SERVO Meanwhile, demand for 2/3” format 4K lenses is increasing especially in Europe and Asia, and Canon will expand the product lineup to meet this demand. On the other hand, Canon launched*CN-E70-200mm T4.4 L IS KAS S as second edition of “COMPACT SERVO” EF Cinema zoom lens series, which has excellent operability and mobility that meet various shooting styles, and also has optical performance compatible with both 4K and HD cameras. This lens is compatible with 4K cameras with large-format sensors. It has a detachable drive unit and can be used bothgetting great reviews in broadcast and cinema style shooting, which Canon believes underlies its popularity.the market.

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

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

For home use, Canon offers such printer solutions as PIXMA Cloud Link and PIXMA PrintingCanon PRINT Inkjet to tighten the connection with cloud computing, smartphonesmartphones and tablet PC, whose functionality has been proliferating.PCs. Canon also offers My Image Garden, enablingmore compact body, premium design, convenient front & rear dual paper feeder, a wide variety of photo-print, an easy-to-use Intelligent Touch Systemlarger and XL ink tank & ink cartridge.easy to read liquid crystal touchscreen panel. Canon hopes such enhancement of function and service will increase user-friendliness and satisfaction of users.

In this year,2014, Canon launched the new brand MAXIFY in the business inkjet printer segment, targeting the growing SOHO market. In 2016, Canon also launched new models with network management capability. 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 2016, Canon launched Refillable Ink Tank Printers that achieved high productivity and cost saving by featuringbuilt-in ink tanks, for business use in emerging market.

For meeting wide and high quality level requirements of the professional users in photo printing, Canon has completed new large format inkjet printer lineup from imagePROGRAFPRO-1000 for A2 size to the flagship model imagePROGRAFPRO-6000 for 60 inch size, by 2017. The color reproduction and dark expression of those new products are improved by employing 12 color LUCIA PRO ink which features new pigment ink and Chroma Optimizer, and new image processor engineL-COA PRO.Canon launched three new large format professional inkjet printers sequentially from the end of 2015 to 2016 : imagePROGRAFPRO-1000 (17”), imagePROGRAFPRO-2000 (24”), imagePROGRAFPRO-4000 (44”) which feature improved color reproduction and dark expression by employing a new image processor engineL-COA PRO and new LUCIA PRO 12 inks with new pigment inks and Chroma Optimizer. In the main body of these products, “RED LINE” is designed for a printer for the first time. “RED LINE” is allowed for only the product which can realize the highest photograph quality of the Canon products, producing the same quality as the high class Canon Digital SLR. Canon aims to further expand this business, leveraging its strength in the photo printing and fine art printing market.

In 2012, Canon started to ship the DreamLabo 5000, the first inkjet production photo printer featuring new “FINE”FINE high-density print head technology. In the professional printing market, Canon offers three professional

photo inkjet printers: the PIXMA PRO-1 with a 12 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. Canon aims to further expand its business, leveraging its strength in the photo printing market.

Canon’s large-format inkjet printers are based on “FINE” head technology and employ its unique image processor, L-COA, developed for high-speed, high-resolution printing, and LUCIA pigment inks. Consequently, Canon receives a high evaluation and steadily boosts the market share.

Canon’s lineup also includes CanoScan LiDE, the flatbed scanners which use Contact Image Sensor (CIS)(“CIS”), and a scanner with Charge-Coupled Devices (CCD)(“CCD”) for high resolution. AlthoughCanon has maintained high share in the scanner market by achieving stable sales results.

- Medical System Business Unit -

Canon markets diagnostic imaging systems, including Computed tomography (“CT”), Magnetic resonance imaging (“MRI”), ultrasound, andX-ray systems, as well as clinical laboratory systems and healthcare ICT solutions, and provides them to customers in more than 140 countries around the world, offering technology that enables fast diagnosis and early stage treatment. Continuing its long tradition of contributing to improvements in healthcare, Canon is making positive contributions toward hospital management and provides a range of patient-friendly healthcare systems and services.

The medical equipment market in Japan this fiscal year remained flat, while in the USA and Europe it was on a recovery trend. In emerging countries, medical needs are rising due to population growth and changes in disease prevalence patterns. Against this background, Canon’s CT systems business, which is the mainstay of medical system business units, remained steady.

Canon offers high-resolution imaging that enables more accurate diagnosis. Examples include Aquilion Precision, the world’s first ultrahigh-resolution CT scanner, released in Japan in April 2017, which has continuedtwice the spatial resolution in both thein-plane direction and the axial direction compared to shrink,a conventional CT scanner; and Aplio i-series diagnostic ultrasound systems, which in January 2017 received the Nihon Keizai Shimbun Award for Excellence, the top rank in the 2016 Nikkei Superior Products and Services Awards.

By incorporating various strengths (such as precision mechanical design, processing technology, sensor technology, and image processing technology) during the development, manufacture, and servicing of Canon’s medical equipment products, Canon will continue to work hard to provide products with high added value that further contribute to improvements in healthcare.

In the component business market, both the expanding demand in emerging markets and the demand to transition from Computed Radiography (“CR”) to Digital Radiography (“DR”) continue to drive steady market growth forX-ray equipment. On the other hand, technological competition with component manufacturers in Europe and the USA has been increasing forhigh-end products, and price competition with manufacturers in China and Korea has been increasing for thelow-end product segment where products are becoming commoditized. Under these market circumstances, Canon released our new flat panel detectors (“CXDI-710C

Wireless series”) in April, featuring weight-saving and waterproof performance, and this has contributed to increased sales in the DR product market. In the dynamicX-ray equipment market, where high growth is expected, Canon is continuing its strong efforts to promote sales of fluoroscopy and angiography systems. With regard to ourX-ray tube units,X-ray detectors, etc., Canon has maintained a number one market share,developed cost-competitive products for this business based on our highly reliable core technologies (high-voltage vacuum technology, hydrodynamic liquid metal bearing technology, cesium iodide deposition technology, etc.), which has contributed to strong sales.

Regarding ophthalmic equipment, Canon responded to stiffer market competition in the growing Optical Coherence Tomography (“OCT”) market by releasing a Canon survey.OCT Angiography software series which enables depiction of retinal blood vessels without using fluorescein, a substance that potentially causes strong allergic reactions.

- Industry and Others Business Unit -

In the market for semiconductor lithography equipment, investments byfor memory makersdevices have recoveredbeen increased due to the increasedemand expansion for3D-NAND flash memory semiconductors used in demand for DRAM and NAND Flash memory, drawn by the growth 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.

data center. In the market for i-line steppers, the demand has increased due to functional diversification of semiconductor for IoT devices, and also investments for automotive devices, power devices and LEDsthe production of automobile electronics, which is expected to become a stable market, have been stable while investmentsperforming well. In the market for 3Dback-end lithography systems, chip makers require higher density integration withand thinner chip production due to the trend of miniaturization and power saving in the mobile devices market, and the demand for mass-production of large-capacity memory such as Through-Silicon Via (TSV) are(“TSV”) is expected to expand.

Through various activitiesResponding to respond to these market changes,diversified semiconductor applications, Canon has been developing a “design-in”“design-in” business style, which enables customer needs to be reflected in the early stage of our product development process, and Canon believes steady progress has been made in developing products with high added value. For example, Canon released a new i-line stepper FPA-3030i5+, optimized forBoth of IoT devices and automobile electronics, which are rapidly becoming more widespread, would require the production of LEDs“Wide variety of small medium production volume” by “Legacy Process”. Canon will meet a wide range of chipmakers’ needs by expanding our product lineup. As for “200mm wafer tool lineup”, in addition to i-line stepperFPA-3030i5+, and power devices,KrF stepperFPA-3030EX6 which was introduced last year, Canon released “200mm wafer option” for i-line stepperFPA-5550iZ2 and FPA-5510iV,KrF scannerFPA-6300ES6a, which enablesrealized high productivity in the advanced packaging process such as TSV and BUMP. As a resultindustry-leading level of these activities,overlay. Furthermore, Canon has occupied a high share of the i-line stepper market. For memory and logic devices, FPA-5550iZ has captured a high share of the i-line stepper market. Canon also aims to gain an increased share of the marketreleased Nanoimprint Replica Mask Manufacturing Equipment for DUV scanners by releasing the high productivity FPA-6300ES6a. Furthermore, to accelerate development of Nano-Imprint Lithography (“NIL”)Mass-ProductionFPA-1100NR2, which can duplicate masks for semiconductor lithography equipment Canon acquired Molecular Imprints, Inc. in April 2014, which has top-level intelligence and number of patents granted in NIL technology.at low cost.

In the market for FPD lithography equipment, ongoing capital investments for large-sizedby panel production have been recovering duemakers forsmall-to-mid-sized panels offering high-definition organic light-emitting diode (“OLED”) panels in mobile devices led to demand from emerging marketsgrowth of lithography systems forsmall-to-mid-sized panel production. More and 4K TVs. Investments for small-to-mid-sized panel production, which had been strong for the last few years, have shrunken drastically. In addition, panelmore electronic makers are expected to requireuse OLED displays for large-screen TVs and monitors in the future. In addition, dimension-based panel market is expected to continue to expand with displays getting larger and higher resolution in FPD lithography equipmentresolution.

The demand for both large-sizedOLED is rapidly increasing due to more and mid-to-small-sized panel production.

more adoption of OLED in the latest smartphones. Under these circumstances, Canon believes MPAsp-H800 seriesMPAsp-E813 for large-sized panels has contributed to our customers’ production plans by offering world-highest resolutionsmall-to-mid-sized panel realized not only high productivity and high productivity. This has helped Canon capture and maintain a large shareoverlay accuracy but also the world’s highest level of resolution by the FPD lithography equipment marketadoption of newly-designed mirror optical system, which is suitable for large-sizedhigh-definition panel production. Furthermore, Canon has released MPAsp-E810 series for small-to-mid-sized panels, with improved resolution. Canon also aims to capture a largelarger share of the market by taking advantage of the growth of the OLED market. The resolution of large-screen TVs is also enhancing, which leads to the growing demands for small-to-mid sized panelOLED TVs. Canon’s MPAsp-H803 forlarge-sized panels, successfully achieved world highest level of resolution, and Canon aims to respond to the increasing demand for production inof larger and higher-resolution panels.

Recently network cameras have become widely used for the purpose of security has been well recognized, which led to increasing sales of high resolution models extensively. In addition, the application of network

camera as preventive security control is expected to large-sized panel production.increase with improvement of productivity and customer satisfaction is highly expected by combining those cameras with image analysis software beyond the simple recording.

In the medical equipment market, the digital static X-ray equipment maintains steady growth as a resultfirst half of a shift in demand from “Computed Radiography” (CR) to “Digital Radiography” (DR). Although competition is increasing along with market expansion,2017, 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 Canon expects future growth of its sales.

The market3 new models of network cameras for video surveillance applications is expected to grow,including theVB-S30VE which enables the outdoor installation under the eaves, the box type ofVB-S910F mounts 3.5 times of optical zoom lens together with the progressQ-1659 which Canon and Axis commercialized through theco-development.

In the second half of IT and digital technologies. Canon established a dedicated product group at the beginning of 2013 to expand its network camera business by utilizing its proprietary technologies of optics, sensor, imaging, and video streaming. In 2014,2017, Canon launched ten12 new HDmodels of network cameras including theVB-H45 improving the performance in a low light environment, theVB-H761LVE-H adopting the unique hydrophilic coating, infrared light as well as suitable for outdoor environment. Canon also launched 4 types of image analysis software, like Profile Analyzer Version 1.0 identifying the age group and Full HD network cameras. In addition, with the acquisitiongender of the world’s largest video management software vendor, Milestone Systems, bytarget individual. Canon Europealso announced that it will develop theME20F-SHN, which enables the viewing of color images in July, the dark, for launch in 2018.

Canon as a whole has been accelerating enhancement of its video surveillance business. Furthermore, on March 3, 2015, Canon commenced a public tenderplans to continue to offer for all of the issued shares of Axis AB, a global leader in theoptimum network video solutions industry. Canonin timely manner to the market through the integration of technologies from group companies and will further ensure its goal of becoming the world leader in network surveillance camera systems and aimalso continue to strive for a further leap forward.growth in a network camera market.

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 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 theyear-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.

Marketing and distribution

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

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

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

In Europe, Canon sells its products primarily through Canon Europa N.V., which sells mainly through subsidiaries or independent distributors to dealers and retail outlets in each locality. In addition, copying machines are sold directly toend-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 toend-users in Australia by Canon Australia Pty. Ltd.

For medical business, TMSC sells its products directly or through regional marketing subsidiaries and distributors.

Canon also sells laser printers on an OEM basis to Hewlett-Packard Company. Hewlett-PackardHP Inc.. HP Inc. resells these printers under the “HP LaserJet Printers” name. During 20142017 and 2013,2016, OEM sales to Hewlett-PackardHP Inc. constituted 17.4%13.1% and 17.6%14.8%, respectively, of Canon’s consolidated net sales.

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

Service

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

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

Canon services its copying machines, 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.

For diagnostic imaging systems, including CT, MRI, ultrasound, andX-ray systems, Canon provides comprehensive repairs, service, and maintenance to ensure that customers are able to use these products to their full potential at all times. Canon maintains support contracts with customers and has technical call centers. In addition, to help ensure customer satisfaction, Canon offers service training programs for engineers working in overseas medical institutions.

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 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;HP Inc.; 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 andFuji Xerox. Co., Ltd., Konica Minolta Inc. and Toshiba TEC Corporation. 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 lensinterchangeable-lens digital camera market are Nikon Corporation and Sony Corporation.

Average prices for compact digital cameras in the industry increased in 20142017 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;Corporation and Nikon Corporation; and Samsung Electronics Co., Ltd.Corporation. 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 andHP Inc., Seiko Epson Corporation and Brother Industries, Ltd.

- Medical System Business Unit -

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

The markets for this segment are highly competitive. Canon has been consistently involved in the medical care business, from development to manufacturing, sales, and service. Canon believes that it provides high-resolution images that enable more accurate diagnosis. For example, we have developed severalworld’s-first technologies, such as an ultrahigh-resolution CT scanner with twice the spatial resolution in both thein-plane direction and the axial direction compared to a conventional CT scanner, and ultrasound technology that can perform imaging of very fine, slow-flowing bloodstreams that previously could not be visualized. We will continue to bring the latest diagnostic imaging systems to the market.

- Industry and Others Business Unit -

Very stiff competition continues in the markets for lithography equipment used in the production of semiconductor devices and FPDs.flat panel display (“FPD”). In order to produce lithography equipment that can provide ultra-fine processing, an integration of advanced optical, control and system technologies is required, along with continuous investment in technology development. The main competitors in these markets are Nikon Corporation, 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 meetingmarket, satisfying the needs of image sensor manufacturers by quickly adaptingproviding products which correspond to various unique specifications.the diversification of devices associated with the trend of IoT.

Canon believes its FPD lithography equipment with a common platform offers excellent productivity and reliability that has helped it capture market share 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 developmentIn the trend of higher definition panels in recent years.demand expansion for 4K displays and OLED displays, Canon believes it has also been meeting the needs of panel makers by continuously offering new products with high productivity and high resolution.

As for network cameras, the market is competitive in higher functional requirement and price pressure from customers. Canon’s primary competitors are Hikvision Digital Technology Co., Ltd. and Panasonic Corporation. Canon is developing the innovative technology to continue to be a global market leader in this industry.

Environmental regulations

Canon is subject to a wide variety of laws, regulations 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.

The United Nations adopted the 2030 Agenda for Sustainable Development Goals (“SDGs”) on September 25, 2015, under the UN Sustainable Development Summit. SDGs cover global issues to be addressed for transforming the world toward sustainable development over the next 15 years, which are composed of 17 goals and 169 targets. The goals and targets cover a wide-range global issues, including the environmental areas such as climate change, sustainable energy, efficient use of natural resources and reduction of waste. Based upon the SDGs, member states will introduce national policies and initiatives to tackle such global environmental issues, and Canon may need to implement further actions to respond to potential national initiatives.

The Paris Agreement on climate change adopted in 2015 and entered into force in 2016. The Agreement relates to a common future framework beyond 2020 to address climate change. In the Agreement, all member states of UNFCCC agreed to take countermeasures to hold Global temperature rise to well below 2 degrees Celsius abovepre-industrial levels and to pursue efforts to limit the temperature rise to 1.5 degrees Celsius.

Upon the Agreement, Canon is further striving to reduce CO2 emissions toward thelow-carbon society. Canon has established 2017-2019Mid-Term Environmental Goals and monitors its progress on a yearly basis. Canon is implementing initiatives to achieve these goals, which focus on “Lifecycle CO2 emissions improvement index per product by 3 percent improvement (compared to the previous year)”, “Raw materials and usage CO2 emissions improvement index per product by 3 percent improvement (compared to the previous year)”, “Improve energy consumption basic unit at operational sites by 1.2 percent (compared to the previous year)”. Canon has successfully reduced its “Life Cycle CO2 emission” per product by approximately 34 percent between 2008 and 2016. Also, total lifecycle CO2 emissions in 2016 were 6.212 million tons, which were verified by a third party in April 2017.

Canon continues to pursue CO2 emission reductions both locally and globally through energy-efficient product design and improvement of logistics and factory operations.

Under 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. The scope of products covered was expanded to include medical and measurement equipment fromstarting in July 2014. AnNew subsidiary directive of RoHS Directive restricting an additional four substances will bewas published as restricted substances in June 2015, and these substances will be restricted fromstarting in 2019. In parallel with these developments, all the RoHS exempted applications for which the restricted substances can be used are now under review. If these exemptions expire, 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 EEE 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 waste EEE. The WEEE recast Directive was published on July 24, 2012 and was applied from February 2014. Due to a change in official interpretation, the scope of products covered is to be expanded to include consumables.

If tighter restrictions are enforced in 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 implemented in 2007. This regulation covers almost all chemicals (products in gaseous, liquid, paste or powder form) and articles (products in solid state) manufactured in or imported into the European Union. All chemicals manufactured in or imported into the European Union that exceed specific content thresholds must be registered. If certain substances of very high concern are contained in an article, the substances must be communicated to the recipient or consumer of the article. Furthermore, additional restrictions on the use of certain substances can be proposed at any time by the ECHA (European Chemical Agency) or member states, and, some of them have been already adopted and others are now under discussion, manufacturers such as Canon must take steps to address such new restrictions.

Canon keeps meeting these existing and newly-added requirements under the REACH Regulation, and 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, and implementing measures with respect tooff-mode and standby mode and external power supplies were adopted in and have been applied since 2010. This measure was expanded in 2013 to include requirements for energy modes with “networked standby”. The requirements for “networked standby” were applied from 2015. For imaging equipment, the industry made a public commitment to attain certain targets on environmentally conscious designs from 2012 by an industrial voluntary agreement (VA)(“VA”) and began implementation in 2011. By the 1st revisionregular revisions 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 (expanded both in scope and requirements) are now considered, and some of them will cover Canon’s products. Canon is continuing to comply with requirement under the ErP Directive. However, the requirements are expected to be challenging, and achieving compliance will likely increase Canon’s costs, especially by required design changes.

E-waste recycling laws have been enacted or proposed in more than twenty American states. Although most 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 publishedrevised Administrative Measures on the Control of Pollution Caused by Electrical and Electronic Information Products in February 2006,January 2016, and regulates the same six substances covered by the EU RoHS in electrical and 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. 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”“Compliance catalog”) be restricted by limitations similar to the EU 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”“Compliance catalog” are under discussion,proposed, including with regard to printers.printers, copying machines and facsimile machines.

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. Producers and importers are required to pay a fee to a government fund. The list of products falling under the waste electrical and electronic products catalogue issued on February 9, 2015 includes printer,printers, copying machinemachines and facsimile machine. The Regulation of thosemachines. Those payment fees described above will be enforced on March 1, 2016.are under discussion by the Chinese government.

These requirements will likely increase Canon’s costs and could 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-fivetwenty-six 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 markets such as China, India, Russia, Vietnam, and other countries. Compliance with any such additional regulations may increase Canon’s costs and may adversely affect Canon’s operating results and financial condition.

Other regulations

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

Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012 (“ITRA”) added Section 13 (r)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. bynon-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, 2014,2017, the following Canon affiliates hadengaged in the transactions with Iran-related organizations.described below that are required to be disclosed pursuant to Section 13(r) of the Exchange Act. These transactions were conducted in compliance with applicable law in the respective countries.

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, 20142017 that requires disclosure in this report under Section 13(r) of the Exchange Act. After considering recent changes in the international situation and economic sanctions relating to Iran, Canon does not intendhas restarted business with certain Iranian counterparties. Canon maintains policies and procedures designed to conduct any further business activitiesensure that transactions, including transactions with Iranian counterparties, required to be disclosed under the ITRA, except for sales of consumables, repair,are conducted in accordance with applicable economic sanction laws and maintenance services for products Canon previously sold to such entities.regulations.

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, 2014,2017, Canon Inc. had 261376 consolidated subsidiaries and 7 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, 2014.2017.

D. Property, plants and equipment

Canon’s manufacturing is conducted primarily at 2830 plants in Japan and 18 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, 20142017 are as follows:

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			1,8721,825			Toner cartridges and rubber functional components
Canon Components, Inc., Saitama			610681			Contact image sensors, inkjet cartridges and medical equipment
Oita Canon Inc., Oita			1,2181,387			Digital cameras, lenses and digital video camcorders
Nagahama Canon Inc., Shiga			1,093			TonerLaser printers, toner cartridges andA-Si drums
Oita Canon Materials Inc., Oita			2,9492,647			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			9811,310			Inkjet printers and inkjet cartridges
Canon Semiconductor Equipment Inc., Ibaraki			345232			Development and production of semiconductor production-related equipment
Canon Ecology Industry Inc., Ibaraki			651901			Recycling of toner cartridges, repair and recycling of business machines
Nisca Corporation, YamanashiFukui Canon Materials Inc., Fukui			380194			Copying machine peripherals, scanner units and optical equipmentOPC raw stock, material for optics, High water-repellent material
Miyazaki Daishin Canon Inc., Miyazaki			168179			Digital cameras
Canon Mold Co., Ltd., Ibaraki			219			Molds
Canon ANELVA Corporation, Kanagawa and Yamanashi			749729			Production equipment for electron devices, flat panel display and semiconductors
Canon Machinery Inc., Shiga			622666			Automated production equipment and semiconductor production-related equipment
Canon Tokki Corporation, Niigata, Kanagawa and Tokyo			253360	��		Vacuum technology-related equipment
Nagasaki Canon Inc., Nagasaki			477469			Digital cameras
Hita Canon Materials Inc., Oita			369			Rubber functional components
Toshiba Medical Systems Corporation, Tochigi			1,753			R&D, manufacturing and sales of medical equipment
Toshiba Electron Tubes & Devices Corporation, Tochigi			329			R&D, manufacturing and sales of electron tubes and its application products

Name and location		Floor space (including leased space)				Principal activities and products manufactured
Overseas		(Thousands of square feet)
Europe
Canon Giessen GmbH, Giessen, Germany			336			Remanufacturing of copying machines and semiconductor production equipment
Canon Bretagne S.A.S., Liffre, France			489505			Manufacturing and recycling of toner cartridges
Océ-Technologies B.V., Venlo, the Netherlands			2,5502,190			Document management, high speed digital production printing systems and wide format printers
Océ-Printing Printing Systems GmbH & Co. KG, Poing, Germany			1,2321,256			High speed digital production printing systems
Americas
Canon Virginia, Inc., Virginia, U.S.			1,6791,662			Toner cartridges, molds and remanufacturing of copying machines
Canon Environmental Technologies, Inc., Virginia, U.S.			185			Recycling of toner cartridges
Asia
Canon Inc., Taiwan, Taiwan			1,7171,593			Lenses and digital cameras
Canon Opto (Malaysia) Sdn. Bhd., Selangor, Malaysia			584611			Lenses and optical lens parts
Canon Dalian Business Machines, Inc., Dalian, China			1,7401,732			Production and recycling of toner cartridges, production of laser printers
Canon Zhuhai, Inc., Zhuhai, China			1,157			Digital cameras, digital video camcorders and contact image sensors
Canon Prachinburi (Thailand) Ltd., Prachinburi, Thailand			9041,268			Copying machines
CanonHi-Tech (Thailand) Ltd., Ayutthaya and Nakohon Ratchasima, Thailand			3,2693,274			Inkjet printers, MFDs, scanners, molds and plastic injection molded parts
Canon Zhongshan Business Machines Co., Ltd., Zhongshan, China			1,3351,387			Laser printers
Canon Vietnam Co., Ltd., Hanoi, Vietnam			3,4823,278			Inkjet printers, laser printers, MFDs, scanners and contact image sensors
Canon (Suzhou) Inc., Suzhou, China			1,5171,524			Copying machines
Canon Finetech Nisca (Shenzhen) Inc., Shenzhen, China			721			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, medical equipment, semiconductor lithography equipment and 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 threefour segments: the Office Business Unit, the Imaging System Business Unit, the Medical System Business Unit which was newly established in 2017, and the Industry and Others Business Unit.

Economic environment

Looking back at the global economy in 2014, although2017, the United StatesU.S. economy continued to grow steadily as employment conditions and other developed countries were initially expected to bring about a return to a path of full-fledged growth, such expectations came up shortcorporate earnings improved. In Europe, the economy remained stable as unemployment rates decreased and capital investment increased due to strong exports. The Chinese economy rallied due to public investments while the ongoing occurrenceeconomies of such unforeseen circumstancesemerging countries realized moderate recovery as the conflict betweeneconomies of Russia and Ukraine.Brazil bottomed out owing to the rising price of natural resources. In Japan, corporate earnings improved and consumer spending showed signs of recovery. As a result, the U.S., despite the negative impact of the major cold wave that struckglobal economy overall continued to recover more robustly than was expected 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 decline following the rush in demand leading up to the hike in the country’s consumption tax, growth fell short of the rate recorded in the previous year.

Market environment

Looking atAs for the markets in which Canon operates amid these conditions, demand for MFDsoffice multifunction devices (“MFDs”) and laser printers maintained steady growth. Demandremained at around the same level as the previous year. While demand for interchangeable-lens digital cameras continued to face harsh conditions due to the economic slowdown. Demand for digital compact cameras continued to shrink in both developed countries and emerging markets. Demandshrank moderately, demand for inkjet printers decreased due toincreased from the sluggishprevious year with the economies of Asia and Europe. In the industry and others sector, a reboundrecovering in capital investment for both memory devices and image sensors led to a pickup in

emerging countries. Additionally, there was solid demand for semiconductor lithography equipment. Additionally,medical equipment, mainly outside of Japan. Within the Industry and Others sector, demand for FPD (Flat panel display) lithography equipment used inand manufacturing equipment for organic LED (“OLED”) panels enjoyed strong growth and the production of FPDs increaseddemand for large-size panels.network camera also enjoyed solid growth.

The average value of the yen during the year was ¥106.18¥112.13 against the U.S. dollar, a year-on-year depreciation of approximately ¥8,¥4, and ¥140.62¥126.69 against the euro, a year-on-year depreciation of approximately ¥11.¥6.

Summary of operations

During 2017, unit sales of office MFDs andincreased compared with the previous year due to the expanded sales of color models. Additionally, unit sales of laser printers enjoyed solidincreased compared with the previous year, supported by the steady sales of newly launched models, as demand duringrecovered in emerging countries. While unit sales of interchangeable-lens digital cameras decreased compared with the previous year, and industrial equipmentunit sales increased significantly. Withinof digital compact cameras remained at around the same level amid the shrinking market, owing to increased sales of high-value-added models. Looking at inkjet printers, unit sales increased compared with the previous year, thanks to such factors as strong sales of newly launchedhome-use models and refillable ink tank models for interchangeable-lens digitalemerging countries. Additionally, sales of semiconductor lithography equipment, FPD lithography equipment, and manufacturing equipment for OLED panels exceeded those of the previous year, thanks to favorable market conditions, and sales of network cameras and digital compact cameras, less-than-expected demand duringincreased steadily in response to the year-end shopping season led to a decline in net sales. As a result, despitegrowing market. Under these conditions, along with the positive effectsimpact of favorable currency exchange rates,acquiring TMSC, net sales for the year decreasedincreased by 0.1%19.9% year on year to ¥3,727.3 billion. The¥4,080,015 million. Although the gross profit ratio however, rose 1.7decreased by 0.4 points to 48.8% due to the effect of the product mix, gross profit increased by 19.0% year on year to 49.9%¥1,992,691 million, thanks to such factors as the effects of ongoing cost-cutting efforts along with the depreciation of the yen. Despite an increase in foreign-currency-denominated operatingsales and continuous cost reduction efforts. Operating expenses increased by 15.0% year on year, mainly due to impairment loss on goodwill of commercial printing business in Office Business Unit and the depreciationimpact of the yen, Group-wide efforts to reduce spending contributed to limiting operating expenses to ¥1,498.0 billion, an increase of just 2.5% year on year.acquiring TMSC. As a result, operating profit increased by 7.8% year on year44.8% to ¥363.5 billion.¥331,479 million. Other income (deductions) increased by ¥9.4 billion¥6,620 million mainly due to gain on securities contributed to retirement benefit trust and foreign currency exchange gainslosses while income before income taxes increased by 10.3%44.6% year on year to ¥383.2 billion. Net¥353,884 million and net income attributable to Canon Inc. increased by 10.5%60.6% to ¥254.8 billion. Accordingly, despite the slight decline in net sales, Canon achieved profit growth.¥241,923 million.

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

Revenues

Net sales and profit ratio

As Canon pursues the goal to become a truly excellent global company, one indicator upon which Canon’s management places strong emphasis is revenue. The following are some of the KPIs related to revenue that management considers to be important.

Net sales is one such KPI. Canon derives net sales primarily from the sale of products and, to a lesser extent, provision of services associated with its products. Sales vary depending on such factors as product demand, the number and size of transactions within the reporting period, market acceptance for new products, and changes in sales prices. Other factors involved are market share and market environment. In addition, management considers the evaluation of net sales by segment to be important for the purpose of assessing Canon’s sales performance in various segments, taking into account recent market trends.

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

Operating profit ratio (ratio of operating profit to net sales) and R&D expense to net sales ratio are considered to be KPIs by Canon. Canon is focusing on two areas for improvement. Canon is striving to control and reduce its selling, general and administrative expenses as its first key point. Secondly, Canon’s R&D policy is designed to maintain adequate spending in core technology to sustain Canon’s leading position in its current business areas and to exploit opportunities in other markets. Canon believes such investments will create the basis for future success in its business and operations.

Cash flow management

Canon also places significant emphasis on cash flow management. The following are the KPIs relating to cash flow management that Canon’s management believes to be important.

Inventory turnover measured in days is a KPI because it measures the efficiency of supply chain management. Inventories have inherent risks of becoming obsolete, physically damaged or otherwise decreasing significantly in value, which may adversely affect Canon’s operating results. To mitigate these risks, management believes that it is crucial to continue reducingwork-in-process inventories by decreasing production lead times in order to promptly recover related product expenses, while balancing risks of supply chain disruptions by optimizing finished goods inventories in order to avoid losing potential sales opportunities.

Canon’s management seeksThe debt to meet its liquidity and capital requirements primarily with cash flow from operations. Managementtotal assets ratio is also seeks debt-free operations.one of the KPIs. For a manufacturing company like Canon, it generally takes considerable time to realize profit from a business due to lead times required for R&D, manufacturing and sales has to be followed for success. Therefore, management believes that it is important to have sufficient financial strength so that the Company does not have to rely on external funds.strength. Canon has continuedwill continue to reduce its dependency on external funds for capital investments in favor of generating the necessary funds from its own operations.

Canon Inc. stockholders’shareholders’ equity to total assets ratio is another KPI for Canon. Canon believes that its stockholders’shareholders’ equity to total assets ratio measures its long-term sustainability. Canon also believes that achieving a high or rising stockholders’shareholders’ equity ratio indicates that Canon has maintained a strong financial position or further improved its ability to fund debt obligations and other unexpected expenses. In the long-term, Canon’s management believes a high stockholders’shareholders’ equity ratio will enable the company to maintain a high level of stable investments for its future operations and development. As Canon puts strong emphasis on its R&D activities, management believes that it is important to maintain a stable financial base and, accordingly, a high level of its stockholders’shareholders’ equity to total assets ratio.

Critical accounting policies and estimates

The consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and based on the selection and application of significant accounting policies which require management to make significant estimates and assumptions. These estimates and assumptions include future market conditions, net sales growth rate, gross margin and discount rate. Though Canon believes that the estimates and assumptions are reasonable, actual future results may differ from these estimates and assumptions. Canon believes that the following are the more critical judgment areas in the application of its accounting policies that currently affect its financial condition and results of operations.

Revenue recognition

Canon generates revenue principally through the sale of office, imaging system and imagingmedical system products, equipment, supplies, and related services under separate contractual arrangements. Canon recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred and title and risk of loss have been transferred to the customer or services have been rendered, the sales price is fixed or determinable, and collectibility is probable.

Revenue from sales of office products, such as office MFDs and laser printers, and imaging system products, such as digital cameras and inkjet printers, is recognized upon shipment or delivery, depending upon when title and risk of loss transfer to the customer.

Revenue from sales of optical equipment, such as semiconductor lithography equipment and FPD lithography equipment that are sold with customer acceptance provisions related to their functionality, is recognized when the equipment is installed at the customer site and the specific criteria of the equipment functionality are successfully tested and demonstrated by Canon. Service revenue is derived primarily from separately priced product maintenance contracts on equipment sold to customers and is measured at the stated amount of the contract and recognized as services are provided.

Canon also offers separately priced product maintenance contracts for most office products, for which the customer typically pays a stated base service fee plus a variable amount based on usage. Revenue from these service maintenance contracts is measured at the stated amount of the contract and recognized as services are provided and variable amounts are earned.

Revenue from the sale of equipment under sales-type leases is recognized at the inception of the lease. Income on sales-type leases and direct-financing leases is recognized over the life of each respective lease using the interest method. Leases not qualifying as sales-type leases or direct-financing leases are accounted for as operating leases and the related revenue is recognized ratably over the lease term. When equipment leases are bundled with product maintenance contracts, revenue is first allocated consideringbased upon the estimated relative fair value of the lease andnon-lease deliverables based upon the estimated relative fair values of each element. deliverables. Lease deliverables generally include equipment, financing and executory costs, whilenon-lease deliverables generally consist of product maintenance contracts and supplies.

Revenue from sales of equipment that are sold with customer acceptance provisions related to their functionality including optical equipment such as semiconductor lithography equipment and FPD lithography equipment, and certain medical equipment such as computed tomography and magnetic resonance imaging, is recognized when the equipment is installed at the customer site and the specific criteria of the equipment functionality are successfully tested. Service revenue is derived primarily from separately priced product maintenance contracts on the equipment sold to customers and is measured at the stated amount of the contract and recognized as services are provided.

For all other arrangements with multiple elements, Canon allocates revenue to each element based on its relative selling price if such element meets the criteria for treatment as a separate unit of accounting. Otherwise, revenue is deferred until the undelivered elements are fulfilled and accounted for as a single unit of accounting.

Canon records estimated reductions to sales at the time of sale for sales incentive programs including product discounts, customer promotions and volume-based rebates. Estimated reductions to sales are based upon historical trends and other known factors at the time of sale. In addition, Canon provides price protection to certain resellers of its products, and records reductions to sales for the estimated impact of price protection obligations when announced. In 2011, the sales incentive program accruals were quite difficult to estimate

compared to prior years because of the significant fluctuation in consumer product supplies from our manufacturing facilities, due to the earthquake in Japan and the flooding in Thailand. Although Canon utilized available data to produce its best estimate of promotion payments to be claimed in 2012, actual claims in 2012 were not as high as Canon had estimated. Moreover, in recent years, as a result of the market conditions and customer preferences, usage of incentive programs has shifted from mail-in rebates to instant rebates. Accordingly, the historical data relating to mail-in-rebates could not be used to determine instant rebates. Given the limited experience with instant rebates, this led Canon to maintain its estimated accruals for a longer period of time. As 2012 progressed and new information became available, Canon reviewed the 2011 accrual balance in order to determine whether the accrual needed to be revised during 2012. By using new additional statistical information and gathering sales and inventory data from customers, Canon was able to revise its estimates.

Estimated product warranty costs are recorded at the time revenue is recognized and are included in selling, general and administrative expenses. Estimates for accrued product warranty costs are based on historical experience, and are affected by ongoing product failure rates, specific product class failures outside of the baseline experience, material usage and service delivery costs incurred in correcting a product failure.

Allowance for doubtful receivables

Allowance for doubtful receivables is determined using a combination of factors to ensure that Canon’s trade and financing receivables are not overstated due to uncollectibility. These factors include the length of time receivables are past due, the credit quality of customers, macroeconomic conditions and historical experience. Also, Canon records specific reserves for individual accounts when Canon becomes aware of a customer’s inability to meet its financial obligations to Canon, due for example to bankruptcy filings or deterioration in the customer’s operating results or financial position. If circumstances related to customers change, estimates of the recoverability of receivables are further adjusted.

Valuation of inventories

Inventories are stated at the lower of cost or marketnet realizable value. Cost is determined by the average method for domestic inventories and principally thefirst-in,first-out method for overseas inventories. MarketNet realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make a sale. Canon routinely reviews its inventories for their salability and for indications of obsolescence to determine if inventories should be written-down to market value. Judgments and estimates must be made and used in connection with establishing such allowances in any accounting period. In estimating the marketnet realizable value of its inventories, Canon considers the age of the inventories and the likelihood of spoilage or changes in market demand for its inventories.

Impairment of long-lived assets

Long-lived assets, such as property, plant and equipment, and acquired intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the carrying amount of the asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. Determining the fair value of the asset involves the use of estimates and assumptions.

Property, plant and equipment

Property, plant and equipment are stated at cost. Depreciation is calculated principally by the declining-balance method, except for certain assets which are depreciated by the straight-line method over the estimated useful lives of the assets.

Business combinations

The acquisition is accounted for using the acquisition method of accounting. The acquisition method of accounting requires the identification and measurement of all acquired tangible and intangible assets and assumed liabilities at their respective fair values, as of the acquisition date. The determination of the fair value of net assets acquired involves significant judgment and estimates, such as future cash flow projections, appropriate discount and capitalization rates and other estimates based on available market information. Estimates of future cash flows are based on a number of factors including operating results, known and anticipated trends, as well as market and economic conditions.

Goodwill and other intangible assets

Goodwill and other intangible assets with indefinite useful lives are not amortized, but are instead tested for impairment annually in the fourth quarter of each year, or more frequently if indicators of potential impairment

exist. Canon performs its impairment test of goodwill using the two-step approach at the reporting unit level, which is one level below the operating segment level. All goodwill is assigned to the reporting unit or units that benefit from the synergies arising from each business combination. If the carrying amount assigned to the reporting unit exceeds the fair value of the reporting unit, Canon performs the second step to measurerecognizes an impairment charge in an amount equal to that excess, limited to the amount by which the carryingtotal amount of agoodwill allocated to that reporting unit’s goodwill exceeds its implied fair value.unit. Fair value of a reporting unit is determined primarily based on the discounted cash flow analysis which involves estimates of projected future cash flows and discount rates. Estimates of projected future cash flows are primarily based on Canon’s forecast of future growth rates. Estimates of discount rates are determined based on the weighted average cost of capital, which considers primarily market and industry data as well as specific risk factors. Canon has completed its impairment test in the fourth quarter of 2017 and recognized an impairment charge for the commercial printing business included in Office Business Unit for the amount by which the carrying amount exceeded the reporting unit’s fair value. For further information, please refer to Notes 8 and 20 of the Notes to Consolidated Financial Statements. The fair values of remaining reporting units exceeded its respective carrying amount, and thus no other impairment charges were recognized as a result of 2017 impairment test. However, since goodwill attributed to Medical System Business Unit and network camera business included in Industry and Others Business Unit were resulted from recent acquisitions, fair values in excess of reported carrying values as a percentage are relatively low. As a result, a future reduction more than expected in cash flows of the related business, could trigger an impairment. The goodwill related to these reporting units are ¥499,915 million and ¥235,172 million, respectively. Intangible assets with finite useful lives consist primarily of software, trademarks, patents and developed technology, license fees patented technologies and customer relationships. Software and license feesrelationships, which are amortized using the straight-line method over themethod. The estimated useful lives which range primarilyof software are from 3 years to 56 years, for softwaretrademarks are 15 years, patents and 5developed technology are from 7 years to 1017 years, for license fees. Patented technologiesfees are amortized using the straight-line method principally over the estimated useful lives, which range7 years, and customer relationships are from 811 years to 16 years. Customer relationships are amortized principally using the declining-balance method over the estimated useful life of 5 years.15 years, respectively.

Income tax uncertainties

Canon considers many factors when evaluating and estimating income tax uncertainties. These factors include an evaluation of the technical merits of the tax positions as well as the amounts and probabilities of the outcomes that could be realized upon settlement. The actual resolutions of those uncertainties will inevitably differ from those estimates, and such differences may be material to the financial statements.

Valuation of deferred tax assets

Canon currently has significant deferred tax assets, which are subject to periodic recoverability assessments. Realization of Canon’s deferred tax assets is principally dependent upon its achievement of projected future taxable income. Canon’s judgments regarding future profitability may change due to future market conditions, its ability to continue to successfully execute its operating restructuring activities and other factors. Any changes in these factors may require possible recognition of significant valuation allowances to reduce the net carrying value of these deferred tax asset balances. When Canon determines that certain deferred tax assets may not be recoverable, the amounts, which may not be realized, are charged to income tax expense and will adversely affect net income.

Employee retirement and severance benefit plans

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

In preparing its financial statements for 2014,2017, Canon estimated a weighted-average discount rate used to determine benefit obligations of 1.1%0.6% for Japanese plans and 2.9%2.2% for foreign plans and a weighted-average expected long-term rate of return on plan assets of 3.1% for Japanese plans and 4.9%4.2% for foreign plans. In estimating the discount rate, Canon uses available information about rates of return on high-quality fixed-income

government and corporate bonds currently available and expected to be available during the period to the maturity of the pension benefits. Canon establishes the expected long-term rate of return on plan assets based on management’s expectations of the long-term return of the various plan asset categories in which it invests. Management develops expectations with respect to each plan asset category based on actual historical returns and its current expectations for future returns.returns

Decreases in discount rates lead to increases in actuarial pension benefit obligations which, in turn, could lead to an increase in service cost and amortization cost through amortization of actuarial gain or loss, a decrease in interest cost, and vice versa. For 2014,2017, a decrease of 50 basis points in the discount rate increases the projected benefit obligation by approximately ¥91,609¥101,964 million. The net effect of changes in the discount rate, as well as the net effect of other changes in actuarial assumptions and experience, is deferred until subsequent periods.

Decreases in expected returns on plan assets may increase net periodic benefit cost by decreasing the expected return amounts, while differences between expected value and actual fair value of those assets could affect pension expense in the following years, and vice versa. For 2014,2017, a change of 50 basis points in the expected long-term rate of return on plan assets would cause a change of approximately ¥4,218¥4,948 million in net periodic benefit cost. Canon multiplies management’s expected long-term rate of return on plan assets by the value of its plan assets to arrive at the expected return on plan assets that is included in pension expense. Canon defers recognition of the difference between this expected return on plan assets and the actual return on plan assets. The net deferral affects future pension expense.

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

Recently Issued Accounting Guidance

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

Consolidated results of operations

20142017 compared with 20132016

Summarized results of operations for 20142017 and 20132016 are as follows:

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

Sales

The shrinking market for interchangeable-lens digital cameras and digital compact cameras, and less-than-expected demand duringIn the year-end shopping season ledcurrent business term, the world economy as a whole continued to a major decline in net sales in Imaging System Business Unit. However,recover more robustly than was expected at the beginning of the year. In such an environment, due to the stable demand for MFDsefforts to promote sales of newly launched models and laser printers, and industrial equipment saleshigh-value-added models, along with the positive effectsimpact of favorable currency exchange rates,acquiring TMSC, Canon’s consolidated net sales in 20142017 totaled ¥3,727,252¥4,080,015 million, a slight decreasean increase of 0.1%19.9% from the previous year.

Overseas operations are significant to Canon’s operating results and generated 80.6%78.3% of total net sales in 2014.2017. Such sales are denominated in the applicable local currency and are subject to fluctuations in the value of

the yen relative to those currencies. Despite efforts to reduce the impact of currency fluctuations on operating results, including localization of manufacturing in some regions along with procuring parts and materials from overseas suppliers, Canon believes such fluctuations have had and will continue to have a significant effect on its results of operations.

The average value of the yen during the year was ¥106.18¥112.13 against the U.S. dollar, ayear-on-year depreciation of approximately ¥8,¥4, and ¥140.62¥126.69 against the euro, ayear-on-year depreciation of approximately ¥11.¥6. The effects of foreign exchange rate fluctuations positively affected net sales by approximately ¥186,000¥96,224 million in 2014.2017. This favorable impact consisted of approximately ¥98,200¥42,467 million of favorable impact for the U.S. dollar denominated sales ¥66,800and favorable impact of ¥42,950 million for the euro denominated sales, and ¥21,000¥10,807 million for other foreign currency denominated sales.

Cost of sales

Cost of sales principally reflects the cost of raw materials, parts and labor used by Canon in the manufacture of its products. A portion of the raw materials used by Canon is imported or includes imported materials. Many of these raw materials are subject to fluctuations in world market prices accompanied by fluctuations in foreign exchange rates that may affect Canon’s cost of sales. Other components of cost of sales include depreciation expenses, maintenance expenses, light and fuel expenses, and rent expenses. The ratioratios of cost of sales to net sales for 20142017 and 2013 was 50.1%2016 were 51.2% and 51.8%50.8%, respectively.

Gross profit

Canon’s gross profit in 20142017 increased by 3.5%19.0% to ¥1,861,472¥1,992,691 million from 2013.2016. The gross profit ratio also increaseddecreased by 1.70.4 points year on year to 49.9%48.8%. The increasedecrease in the gross profit ratio reflects ongoing cost-cutting efforts along withis primarily due to the positive effectseffect of the depreciation of the yen.product mix.