CANON : ANNUAL REPORT 2023

CANON ANNUAL REPORT 2023

Fiscal Year Ended December 31, 2023

TABLE OF CONTENTS

StrategyBusiness Segment/ Corporate StructureFinancial SectionCorporate Data

• 1 Financial Highlights

• 2 To Our Shareholders

• 9 Business Strategy

• 18 At a Glance

• 20 Research & Development

• 22 Production & Quality

• 24 Sales & Marketing

• 26 ESG

• 36 Financial Overview

• 54 Ten-Year Financial Summary

• 56 Consolidated Balance Sheets

• 57 Consolidated Statements of Income

• 57 Consolidated Statements of Comprehensive Income

• 58 Consolidated Statements of Equity

• 59 Consolidated Statements of

  Cash Flows

• 60 Notes to Consolidated Financial Statements

• 97 Schedule II Valuation and Qualifying Accounts

• 98 Management's Report on Internal Control Over Financial Reporting

• 99 Report of Independent Registered Public Accounting Firm

• 104 Transfer and Registrar's Office

• 104 Shareholder Information

• 104 Major Consolidated Subsidiaries

Cover Photo:

Products representing Canon's four new businesses.

Continuous Feed Presses: Printing

Computed Tomography (CT) systems: Medical Network Cameras: Imaging

Nanoimprint Lithography: Industrial

FINANCIAL HIGHLIGHTS

Millions of yen (except per share amounts)

2023

Net sales Operating profit

Income before income taxes

Net income attributable to Canon Inc.

Net income attributable to Canon Inc. shareholders per share:

-Basic

-Diluted

¥ 4,180,972 375,366 390,767 264,513

¥

• 264.20 ¥ 264.08

Total assets

Canon Inc. shareholders' equity

2022

¥ 4,031,414 353,399 352,440 243,961

236.71 236.63

¥ 5,416,577 ¥ 3,353,022

¥ 5,095,530

¥ 3,113,105

Change (%)

+3.7

+6.2 2,643,423

+10.9 2,751,880

+8.4 1,862,768

+11.6

+11.6 1.86

+6.3

+7.7

Notes:

• 1. Canon's consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles.

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

  2023

  $ 29,443,465

  $ 1.86

  $ 38,144,908 $ 23,612,831

• 2. U.S. dollar amounts are translated from yen at the rate of JPY142=U.S.$1, the approximate exchange rate on the Tokyo Foreign Exchange Market as of December 29, 2023, solely for the convenience of the reader.

Net Sales (Billions of yen)	Net Income Attributable to Canon Inc. (Billions of yen)
4,500	300
3,000	200
1,500	100
0	0

2019

2020

2021

2022

2023

2019

2020

2021

2022

2023

Net Income Attributable to Canon Inc.

Shareholders per Share (Yen)

300

ROE/ROA (%)

10

8

0

2019

2020

2021

2022

2023

2019

Basic

Diluted

ROEROA

2020

2021

2022

2023

TO OUR SHAREHOLDERS

Anticipating social change,

we will transform,

boldly press forward

and become a truly

excellent global corporation

FUJIO MITARAI

Chairman & CEO

Canon Inc.

Net sales and net income attributable to Canon Inc.

(Billions of yen)

Canon Inc. dividend per share (Yen)

10

2020	05
Net sales (left axis)	Net income attributable to Canon Inc. (right axis)	Year-end dividend

Interim dividend

2021

2022

2023

96

00

15

20

23

Commemorative dividend

Performance in 2023

The global economy during the 123rd Business Term (from January 1, 2023 to December 31, 2023) moved toward nor-malization due to the COVID-19 pandemic being brought under control and progress in the resolution of component shortages and logistical disruptions. Demand, on the other hand, remained weak due to factors such as a slowdown in the Chinese economy owing to the slump in the real estate market, and a sluggish European economy resulting from interest rate hikes implemented to control inflation and, in addition to Russia and Ukraine, heightened geopolitical risks in the Middle East.

Even under this environment, we grew sales of new busi-nesses, such as medical, network camera, and commercial printing as well as semiconductor lithography equipment on the back of high growth potential. And for office multifunc-tion devices (MFDs) and cameras where demand remainedfirm, we steadily generated profit. Prices of components and logistics which had been rising until then began to settle down from the beginning of spring, which led to progress in reducing costs from the second half.

As a result, consolidated net sales for this term was 4,181.0 billion yen (up 3.7% from the previous term). Consolidated op-erating profit was 375.4 billion yen (up 6.2% from the previ-ous term). Consolidated net income attributable to Canon Inc. was 264.5 billion yen (up 8.4% from the previous term). This marked the third consecutive year of sales and profit growth.

As for our new businesses, which are the source of sales growth, we posted significant growth in this term as well, with consolidated net sales reaching nearly 1.2 trillion yen to account for 28% of the total. We are making steady progress in the transformation of our business portfolio as set out in Phase VI of the "Excellent Global Corporation Plan."

Excellent Global Corporation Plan

Phase I to Phase V (1996-2020)

Canon launched the Excellent Global Corporation Plan in 1996, and has since strengthened its management base through each of the plan's five-year stages, from Phase I through Phase V.

During Phase I, we stressed thorough cash flow manage-ment and significantly boosted productivity through the introduction of our cell production system, along with other measures. In Phase II, we stepped up efforts to digitalize our office multifunction devices and camera offerings, endeav-ored to strengthen the competitiveness of our products, and established a strong earnings structure. In Phase III, we rode the globalization and digitization wave to drive sales and profit higher. In 2007, we achieved record-high sales of 4,481.3 billion yen and recorded net profit of 488.3 billion yen. During that period, we also turned our attention to OLED displays and welcomed Canon Tokki (formerly Tokki) and Netherlands-based printer manufacturer Canon Production Printing (for-merly Océ) into the Canon Group.

During Phase IV, we promoted diversification by way of expanding our existing businesses into other new businesses, such as the Cinema EOS System, whilst also accelerating our M&A strategy in pursuit of new growth. In this man-ner, we set out a clear direction for shifting our focus for growth from B2C to B2B. At that time, we turned Milestone Systems ("Milestone") and Axis Communications ("Axis") into subsidiaries in order to reinforce and expand our rap-idly growing network camera business. Additionally, Canon Nanotechnologies (formerly Molecular Imprints) became a sub-sidiary, and we furthered the development of next-generation semiconductor manufacturing equipment that uses nanoim-print lithography, a technology that enables miniaturization and cost reductions for semiconductor devices.

In Phase V, under the basic policy of "embracing the chal-lenge of new growth through a grand strategic transforma-tion," we welcomed Canon Medical Systems Corporation ("Canon Medical"; formerly Toshiba Medical Systems) into the Canon Group, and completed the assembly of the four new businesses: commercial printing, network cameras, medical,and industrial equipment, while carrying out structural reforms on our existing businesses to re-establish their sustainable and highly profitable business structures. Thus we completed the first stage of our business portfolio transformation.

Phase I

1996-2000

Phase II

2001-2005

Phase III

2006-2010

Phase IV

2011-2015

Canon transformed its mindset to focus more on total (not partial) optimization and profitability (not sales) and also engaged in thorough cash flow management. We introduced various business in-novations, including the selection and consolidation of business areas, and reform activities in such areas as production and development.

Aiming to become No.1 in all major business areas, Canon focused on strengthening its competitiveness by stepping up efforts to digitalize its products in line with the changing times. We embarked on a fundamental reform of procurement activity under the newly organized Procurement Headquarters, and we took steps to reform inhouse systems, such as our personnel system, with the aim of balancing lifetime employment with merit-based principles.

Canon moved ahead with new growth strategies, including the enhancement of existing businesses and expansion of new business areas, and also implemented reforms for supply chain management and IT systems in order to achieve real-time man-agement that can readily adapt to changes.

Canon shifted away from a management policy targeting expansion of scale and reinforced its fi-nancial structure. While actively pursuing M&As, we pushed ahead with the rebuilding of our business foundation for future growth with a view to enter-ing industries that will serve as new growth engines in step with the changing times.

Phase V

2016-2020

Canon endeavored to reconsolidate its longstanding core businesses (namely, cameras and office equip-ment) and completed the first stage of the grand strategic transformation of its business portfolio by working to expand and strengthen the following four new businesses that would underpin Canon's future: commercial printing, network cameras, medical, and industrial equipment.

Phase VI basic policy and key strategies

In Phase VI, which commenced in 2021, our basic policy is	Now that there are only two years left in Phase VI, 2024 will
to accelerate our productivity improvement and corporate	be a crucial year for the achievement of our ultimate goals. We
portfolio transformation through new business creation. For	are therefore focusing on the following four priority measures:
2025, the final year of Phase VI, we are targeting record-high	(1) strengthen and expand industry-oriented business groups,
net sales of more than 4,500 billion yen, an operating profit	(2) reorganize global supply chain, (3) strengthen technological
ratio of at least 12%, a net profit ratio of 8% or higher, and in	research capability, and (4) address cybersecurity risks.
terms of financial soundness, a shareholder equity ratio of at
least 65%.
Priority Measure 1

Strengthen and expand industry-oriented business groups

In April 2021, we bundled together the existing and new businesses that are technologically compatible with each other and placed them into the following four groups: Printing, Medical, Imaging, and Industrial. We intend to

PRINTING GROUP

Sheet-fed Presses

further streamline operations by eliminating organizational overlap and develop new products and solutions by com-bining technologies within the respective groups to trigger "chemical reactions."

The Printing Group primarily consists of office MFDs, laser printers, inkjet printers, and commercial and indus-trial printers.

In the field of commercial and industrial printers, we will further expand our business, with such measures as simultaneous launches of the varioPRINT iX1700, a digital commercial printer capable of delivering stable operation and high-quality printing on a par with offset printing, and the LabelStream LS2000, a printer that can handle a wide-range of label products, riding the wave of the industry's transition from analog to digital printing.

As for office MFDs, we will aim to increase our market share, offering more added value by providing printing solutions attuned to this era of digital transformation (DX),including cloud-based smart services for predictive maintenance as well as diagnosing and fixing failures, and also by boosting our cost competitiveness mainly through the standardization of product platforms.

With regard to inkjet printers and laser printers, in order to support hybrid working styles that have become commonplace in the last few years, we will look to offer a printing environment not limited to the constraints of physical working location by har-nessing our two technological strengths in the printing field: electrophotography and inkjet.

MEDICAL GROUP

CT Systems

The Medical Group handles diagnostic imaging equip-ment, including CT, MRI, and diagnostic ultrasound sys-tems, as well as X-ray tubes and other components for medical applications. In this group, we have our sights set on augmenting our global business operations, so our first task will be to transfer some of the marketing func-tions of our medical business to Canon Healthcare USA, Inc., a group company we established in 2023. Building a network with medical institutions engaged in cutting-edge medical care and deepening our understanding of the healthcare market will help us better develop products and propose solutions tailored to the trends and clinical needs of the market.

Also, from the perspective of enhancing our productcapabilities, we will aim to commercialize as quickly as possible our next-generation photon counting CT, a system that delivers clear images but with less exposure to radiation. Our aim is to capture the No.1 share of the global CT market.

To further boost the earning capability of this group, we are reinforcing our production engineering to promote automation and in-house production capabilities, while also doubling down on efforts to streamline operations, starting with the upstream development and design stage.

IMAGING GROUP

Network Cameras

The Imaging Group comprises interchangeable-lens digital

cameras, lenses, broadcast equipment, professional digital

camcorders, network cameras, and a 3D imaging solution

business. In this group we aim to maintain the No.1 global

share of the interchangeable-lens digital camera market.

To that end, we intend to further expand our lineup of

cameras and lenses.

In the field of network cameras, we collaborate with

surveillance camera manufacturer Axis, video manage-

ment software company Milestone, video content analytics

company BriefCam, and cloud services provider Arcules to

provide a suite of total solutions across the Canon Group,thereby further enhancing our presence in the industry. We will also look to further expand our business in the promis-ing field of advanced surveillance system by leveraging our SPAD sensor, which boasts the world's highest resolution.

In the field of video production, we will not only expand our products and services to help streamline production tasks and meet demand for less manpower, but also provide numerous video experiences as a leading company in the imaging industry. One such experience is our volumetric video system, which continues to be employed in the world of professional sports and en-tertainment to create 3D spatial data from multiple captured images. This technology will likely pioneer new possibilities for visual expression in the future.

INDUSTRIAL GROUP

Semiconductor Lithography Equipment

The Industrial Group handles semiconductor and flat panel display (FPD) lithography equipment, as well as OLED panel manufacturing equipment and the like. This group is establishing a system for expanding produc-tion capacity to meet strong demand for semiconductor manufacturing systems and is reinforcing its global sales capabilities in an effort to further expand sales. For our semiconductor lithography equipment, we are construct-ing a new plant at our Utsunomiya Office (which is slated to come online in 2025), which will enable us to signifi-cantly scale up our production capacity. At the same time, we will make thoroughgoing efforts to keep costs down. In addition, we will build the business foundation for our groundbreaking nanoimprint lithography technology thatcan fabricate even finer chips but with less energy and at lower cost, working with semiconductor manufacturers to evaluate and verify the technology.

In the display panel market, our focus will be on the development of equipment for mid-sized panels, an area in which we ex-pect to see increased investment. Going forward, we will aim to generate stronger earnings by providing FPD lithography equip-ment and OLED display manufacturing equipment capable of contributing to greater productivity at display panel makers.

FRONTIER BUSINESS

The Frontier Business is engaged in the exploration of new businesses by drawing on Canon's core competency technologies in the three fields of solutions (such as devices and components), life sciences, and materials. For example, in the field of materials, we are developing coating materials such as anti-reflective coatings and hydrophilic coatings that are expected to be used in fields such as mobility and energy. We intend to clearly establish evaluation criteria, including market size, technological superiority, and cost competitiveness, in a bid to create business seeds with future market growth potential.

Images of Canon's high-performance materials that can be used in areas such as mobility and energy to improve performance

Priority Measure 2

Reorganize global supply chain

In an uncertain and unstable global environment, the sup-ply chain is the lifeline of a manufacturer, and from not only an economical, but also from a stability and sustainability perspective, we need to reorganize. In addition to consolidat-ing production sites in countries and regions where we see

Priority Measure 3

Strengthen technological research capability

Under four groups largely reorganized by industry, Canon is carrying out the development of new products and solutions based on proprietary technology through the integration of core technologies it has cultivated with the technologies of companies that it has acquired. On top of that, now that tech-nological innovations that could dramatically change the world are consistently being created, there is a need to actively incor-porate the latest technologies constantly to further enhance the

Priority Measure 4

Address cybersecurity risks

As for information security risks that are an increasing global threat, we consider this to be an important management issue and have established a management system for the entire group, including production facilities. While working on coun-termeasures against information leakage from within the group and malware and other cyberattacks from outside, we are also taking other steps such as raising the awareness of employees.

In the unlikely event that an information security incident occurs, we have established a dedicated team, CSIRT*, to dealpolitical and social stability, in order to promote the return of production of high-value-added products to Japan, we will reinforce our automation technology and technology for in-house production through cooperation among design, pro-duction technology and production sites.

added value of products. To this end, we will establish a system for conducting research on a global scale and acquire neces-sary technologies promptly through investments in companies engaged in advanced technology as well as through M&A.

Moreover, we will strengthen and develop a system to cer-tify talented engineers as "top scientists" and "top engineers" to respond to the rapid advancement of technology from a human resource perspective as well.

with it promptly, which also endeavors to collect information in ordinary times.

Furthermore, since we are working to boost the conve-nience of our products and services by connecting them to the cloud and smartphones via networks, as a key initiative, we are also working on countermeasures against cybersecurity risks, such as the leakage of personal and confidential infor-mation, from the development stage.

* Computer Security Incident Response Team (general term for organizations to deal with incidents and accidents related to computer security)

In conclusion

In 2023, we held Canon EXPO for the first time in eight years. It provided us the opportunity to showcase a Canon reborn following the significant transformation of our business portfolio, as well as the future society we envision. To achieve that vision, it is imperative that we achieve sustained growth by possessing the ability to swiftly adapt to the rapidly chang-ing socio-economic system. To put it more simply, "change is progress, transformation is advancement." We will continue to grow by demonstrating our comprehensive capabilities

in development, procurement, production, and sales, all the while pursuing further productivity improvements and strengthening our business competitiveness with a view to at-taining our 2025 targets. We look forward to your continued support and understanding.