FORM 6-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Report of Foreign Issuer

Pursuant to Rule 13a-16 or 15d-16 of

the Securities Exchange Act of 1934

 

For the month of ….		November		………………………………………… ,		2019

 

		CANON INC.
		(Translation of registrant’s name into English)
		30-2, Shimomaruko 3-Chome, Ohta-ku, Tokyo 146-8501, Japan
		(Address of principal executive offices)

[Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.

 

Form 20-F		X		Form 40-F

[Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.

 

Yes				No		X

[If “Yes” is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b):82-....................

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

								CANON INC.
								(Registrant)
Date….		November 13, 2019						By...../s/………Sachiho Tanino ……………
								(Signature)*
								Sachiho Tanino
								General Manager
								Consolidated Accounting Div.
								Canon Inc.

*Print the name and title of the signing officer under his signature.

The following materials are included.

1. Quarterly Report filed with the Japanese government pursuant to the Financial Instruments and Exchange Law of Japan For the third quarter ended September 30, 2019

[English summary with full translation of consolidated financial information]

Quarterly Report filed with the Japanese government

pursuant to

the Financial Instruments and Exchange Law of Japan

For the third quarter ended

September 30, 2019

 

 

CANON INC.

Tokyo, Japan

CONTENTS

 

						Page
I		Corporate Information
		(1)		Consolidated Financial Summary			2
		(2)		Description of Business			2
II		The Business
		(1)		Risk Factors			3
		(2)		Operating Results and Financial Conditions			3
		(3)		Significant Business Contracts Entered into in the Third quarter of Fiscal 2019			7
III		Company Information
		(1)		Shares			8
		(2)		Directors and Executive Officers			10
IV		Financial Statements
		(1)		Consolidated Financial Statements			11
		(2)		Other Information			48

Disclaimer Regarding Forward-Looking Statements

This quarterly report includes forward-looking statements (within the meaning of Section 27A of the U.S. Securities Act of 1933 and Section 21E of the U.S. Securities Exchange Act of 1934) concerning Canon Inc. (the “Company”) and its subsidiaries (collectively “Canon”). To the extent that statements in this quarterly report do not relate to historical or current facts, they constitute forward-looking statements. These forward-looking statements are based on the current assumptions and beliefs of Canon in light of the information currently available to them, and involve known and unknown risks, uncertainties and other factors. Such risks, uncertainties and other factors may cause Canon’s actual results, performance, achievements or financial position to be materially different from any future results, performance, achievements or financial position expressed or implied by these forward-looking statements. Canon undertakes no obligation to publicly update any forward-looking statements after the date of this quarterly report. Investors are advised to consult any further disclosures by Canon in its subsequent filings with the U.S. Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934 and its other filings.

The risks, uncertainties and other factors referred to above include, but are not limited to, foreign currency exchange rate fluctuations; the uncertainty of Canon’s ability to implement its plans to localize production and other measures to reduce the impact of foreign currency exchange rate fluctuations; uncertainty as to economic conditions in Canon’s major markets; uncertainty of continued demand for Canon’s high-value-added products; Canon’s ability to continue to develop products and to market products that incorporate new technology on a timely basis, are competitively priced, and achieve market acceptance; the possibility of losses resulting from foreign currency transactions designed to reduce financial risks from changes in foreign currency exchange rates; disasters, outages or similar events; and inventory risk due to disruptions in supply chains and shifts in market demand.

 

1

I. Corporate Information

 

(1)	Consolidated Financial Summary

 

		Millions of yen (except per share amounts)
		Nine months   ended   September 30,   2019				Nine months   ended   September 30,   2018				Three months   ended   September 30,   2019				Three months   ended   September 30,   2018				Year ended   December 31,   2018
Net sales			2,639,830				2,893,597				869,495				926,498				3,951,937
Income before income taxes			144,212				262,930				47,024				67,050				362,892
Net income attributable to Canon Inc.			92,349				181,041				26,522				46,258				252,755
Comprehensive income (loss)			19,899				157,295				(765)				107,612				143,373
Canon Inc. shareholders’ equity			-				-				2,615,820				2,842,891				2,827,602
Total equity			-				-				2,811,300				3,071,658				3,017,913
Total assets			-				-				4,800,408				5,003,247				4,899,465
Net income attributable to Canon Inc. shareholders per share:
Basic (yen)			86.16				167.67				24.93				42.84				234.09
Diluted (yen)			86.15				167.66				24.93				42.84				234.08
Canon Inc. shareholders’ equity to total assets (%)			-				-				54.5				56.8				57.7
Cash flows from operating activities			194,512				193,707				-				-				365,293
Cash flows from investing activities			(157,845)				(136,454)				-				-				(195,615)
Cash flows from financing activities			(96,438)				(235,294)				-				-				(354,830)
Cash and cash equivalents at end of period			-				-				448,315				535,234				520,645

Notes:

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

 

2.	Consumption tax is excluded from the stated amount of net sales.

 

(2)	Description of Business

Canon prepares quarterly consolidated financial statements in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). Financial information presented in sections “II. The Business” is also in conformity with U.S.GAAP.

The Canon Group (consisting of the Company, 359 consolidated subsidiaries, and 8 affiliates accounted for using the equity method, as of September 30, 2019, collectively, the “Group”) is engaged in development, manufacturing, sales, and servicing activities in areas such as office, imaging systems, medical systems, and industrial equipment. No material change in Canon’s business has occurred during the nine months ended September 30, 2019.

No additions or removals of significant group entities have occurred during the nine months ended September 30, 2019.

 

2

II. The Business

 

(1)	Risk Factors

No material changes are recognized pursuant to the risk factors of Canon’s business indicated in the Annual Securities Report (Yukashoken Houkokusho) of the previous fiscal year.

 

(2)	Operating Results and Financial Conditions

Looking back at the global economy in the first nine months of 2019, the U.S. economy continued to grow supported by changes in monetary policy and strong employment conditions. However, signs of a slowdown were mounting, particularly for manufacturing industries. The European economy continued to slow down due to a delay in the recovery of exports, mainly in Germany, as well as the confusion surrounding the U.K.’s impending exit from the EU. The Chinese economy was lagging amid a slide in consumer spending as well as decreasing exports caused by prolonged trade friction with the United States. The economies of other emerging markets also slowed down, centered on countries that rely heavily on foreign demand. In Japan, while employment conditions continued to improve, the economy remained in a state of gradual recovery due mainly to worsening economic conditions for manufacturing industries. As a result, the global economy overall showed signs of a slowdown.

As for the markets in which Canon operates amid these conditions, demand for office multifunction devices (MFDs) remained at around the same level as the previous year, while demand for laser printers decreased due mainly to the economic slowdown in China. The market for cameras continued to contract and demand for inkjet printers decreased in each region except for Japan. The market for medical equipment recovered in Japan and demand grew moderately in other markets, mainly in developed countries. Within the Industry and Others sector, although customers continued to slow capital investments in industrial equipment, the market for network cameras enjoyed solid growth.

The average values of the yen during the third quarter and the first nine months of the year were ¥107.32 and ¥109.14 against the U.S. dollar, respectively, year-on-year appreciation of approximately ¥4 and the same level as the previous year, and ¥119.27 and ¥122.67 against the euro, respectively, year-on-year appreciation of approximately ¥10 and year-on-year appreciation of approximately ¥8.

 

3

(2)	Operating Results and Financial Conditions (continued)

 

[Third quarter results]

During the third quarter, overall unit sales of office MFDs decreased slightly compared with the same period of the previous year owing to the decrease of monochrome-model office MFDs. However, color-model office MFDs exceeded the growth of the market. Unit sales of laser printers decreased compared with the same period of the previous year, due to a slowdown in sales of low-speed models, although sales were strong for new models. While Canon has been working towards expanding sales of mirrorless cameras, unit sales of interchangeable-lens digital cameras decreased compared with the same period of the previous year amid the shrinking market for entry-class models. Looking at inkjet printers, overall unit sales decreased compared with the same period of the previous year due mainly to the slowdown in emerging markets. Sales of medical equipment increased compared with the same period of the previous year, due to solid overseas sales in Europe and some emerging countries, as well as expanded sales in Japan. For industrial equipment, sales of semiconductor lithography equipment and manufacturing equipment for organic LED (OLED) panels decreased compared with the same period of the previous year, due to the prolonged sluggishness of capital investments in semiconductor memory and small- and medium-size display panels. On the other hand, sales of network cameras increased steadily amid an expanding market. Under these conditions, third-quarter net sales decreased by 6.2% year on year to ¥869.5 billion. The gross profit ratio dropped by 1.3 points to 44.8% and gross profit decreased by 8.7% year on year to ¥389.9 billion due mainly to the negative effects of currency exchange rates. Operating expenses decreased by 2.0% year on year to ¥351.4 billion, thanks to efforts to thoroughly manage expenses as well as the positive effect of currency exchange rates. As a result, third-quarter operating profit decreased by 43.7% to ¥38.4 billion. Other income (deductions) increased by ¥9.9 billion, while income before income taxes decreased by 29.9% year on year to ¥47.0 billion and net income attributable to Canon Inc. decreased by 42.7% to ¥26.5 billion.

Basic net income attributable to Canon Inc. shareholders per share was ¥24.93 for the third quarter, a year-on-year decrease of ¥17.91.

[Nine-month results]

During the first nine months, overall unit sales of office MFDs increased slightly compared with the same period of the previous year owing to the increase of color-model office MFDs, although monochrome-model office MFDs decreased. Unit sales of laser printers decreased compared with the same period of the previous year, due to a slowdown in sales of low-speed models, although sales were strong for new models. While Canon has been working towards expanding sales of mirrorless cameras, unit sales of interchangeable-lens digital cameras decreased compared with the same period of the previous year amid the shrinking market for entry-class models. Looking at inkjet printers, overall unit sales decreased compared with the same period of the previous year due mainly to the slowdown in emerging markets. Sales of medical equipment increased compared with the same period of the previous year, due to solid overseas sales in Europe and some emerging countries, as well as expanded sales in Japan. For industrial equipment, sales of semiconductor lithography equipment and manufacturing equipment for organic LED (OLED) panels decreased compared with the same period of the previous year, due to the prolonged sluggishness of capital investments in semiconductor memory and small- and medium-size display panels. On the other hand, sales of network cameras increased steadily amid an expanding market. Under these conditions, net sales for the first nine months of the year decreased by 8.8% year on year to ¥2,639.8 billion. The gross profit ratio dropped by 1.5 points to 45.0% and gross profit decreased by 11.9% year on year to ¥1,186.6 billion due mainly to the negative effects of currency exchange rates. Operating expenses decreased by 3.5% year on year to ¥1,064.6 billion, thanks to efforts to thoroughly manage expenses as well as the positive effect of currency exchange rates. As a result, first nine months operating profit decreased by 49.9% to ¥122.0 billion. Other income (deductions) increased by ¥2.7 billion, while income before income taxes decreased by 45.2% year on year to ¥144.2 billion and net income attributable to Canon Inc. decreased by 49.0% to ¥92.3 billion.

Basic net income attributable to Canon Inc. shareholders per share was ¥86.16 for the first nine months, a year-on-year decrease of ¥81.51.

 

4

(2)	Operating Results and Financial Conditions (continued)

 

Looking at Canon’s first nine months performance by business unit, starting with the Office Business Unit, there was solid demand for new color models that feature enhanced security functions and the newly launched imagePRESS C910 series which targets the production printing market, although unit sales of monochrome-model office MFDs decreased due to the economic slowdown in emerging countries, overall unit sales of office MFDs increased slightly compared with the same period of the previous year. As for laser printers, although sales were strong for new models that achieve low power consumption, compact body designs and high productivity, unit sales of hardware decreased compared with the same period of the previous year due mainly to decreasing sales of low-speed models in emerging markets. Sales of consumables also decreased due mainly to the slowdown of the European economy. These factors resulted in total sales for the combined first nine months of the year totaled ¥1,267.3 billion, a year-on-year decrease of 5.1%, while income before income taxes totaled ¥132.4 billion, a year-on-year decrease of 20.4%.

Within the Imaging System Business Unit, unit sales of interchangeable-lens digital cameras decreased compared with the same period of previous year due to continuing market contraction, centered on entry-class models. However, unit sales of mirrorless cameras increased, owing to solid demand for new models equipped with full-frame sensors launched in the second half of the previous year as well as solid demand for affordably priced models. For inkjet printers, unit sales decreased overall compared with the same period of the previous year mainly due to the slowdown in emerging markets affected by the sluggish economy. As a result, sales for the combined first nine months of the year totaled ¥570.2 billion, a year-on-year decrease of 16.5%, while income before income taxes totaled ¥28.8 billion, a year-on-year decrease of 67.3%.

Within the Medical System Business Unit, sales of newly launched computed tomography (CT) systems and diagnostic ultrasound systems were strong amid the recovery of overall demand in Japan. Sales of CT systems intended to enhance the product line-up were strong in overseas markets, particularly in Europe. As a result, sales for the combined first nine months of the year totaled ¥328.5 billion, a year-on-year increase of 2.9%, while, mainly due to a decrease in both sales and profit for the first quarter, income before income taxes totaled ¥19.5 billion, a year-on-year decrease of 5.1%.

For the Industry and Others Business Unit, although investments in semiconductor lithography equipment for image sensors were strong, investments for memory devices remained at a low level. Sales of FPD lithography equipment and OLED panel manufacturing equipment decreased compared with the same period of the previous year due to the continued restraint of investments in the smartphone market. Sales of network cameras were strong, particularly for Axis, amid increasing market demand due to diversifying market needs and replacement demand. Consequently, sales for the combined first nine months of the year totaled ¥545.1 billion, a year-on-year decrease of 14.1%, while income before income taxes totaled ¥14.8 billion, a year-on-year decrease of 69.4%.

Financial Conditions

Total assets decreased by ¥99.1 billion to ¥4,800.4 billion at September 30, 2019, compared to the end of previous year, mainly due to the decrease of cash and cash equivalents and trade receivables, although operating lease right-of-use assets increased due to applying the new accounting standard. Total liabilities increased by ¥107.6 billion to ¥1,989.1 billion at September 30, 2019, compared to the end of previous year, mainly due to the increase of current and noncurrent operating lease liabilities to apply the new accounting standard same as total assets and the increase of short-term loans and current portion of long-term debt, although trade payables and accrued pension and severance cost decreased. Total equity decreased by ¥206.6 billion to ¥2,811.3 billion at September 30, 2019, compared to the end of previous year, mainly due to the dividends to Canon Inc. shareholders, the repurchasing of treasury stock and the increase of accumulated other comprehensive loss resulting from the appreciation of the yen.

 

5

(2)	Operating Results and Financial Conditions (continued)

 

Cash Flows

During the first nine months of 2019, cash flow from operating activities totaled ¥194.5 billion, an increase of ¥0.8 billion compared with the same period of the previous year, owing mainly to improvements in working capital, despite a decrease of profit. Cash flow used in investing activities increased by ¥21.4 billion year on year to ¥157.8 billion mainly due to an increase in investment in production equipment. Accordingly, free cash flow totaled positive ¥36.7 billion, a decrease of ¥20.6 billion compared with the same period of the previous year.

Despite an increase of short-term loans, cash flow used in financing activities recorded an outlay of ¥96.4 billion, mainly owing to the dividend payout and the repurchasing of treasury stock.

Owing to these factors, as well as the impact from foreign currency translation adjustments, cash and cash equivalents decreased by ¥72.3 billion to ¥448.3 billion from the end of the previous year.

Non-GAAP Financial Measures

We have reported our financial results in accordance with U.S. GAAP. In addition, we have discussed our results using “free cash flow,” which is a non-GAAP measure.

We believe this measure, which takes into consideration the Company’s operating and investing activities, is beneficial to an investor’s understanding of Canon’s current liquidity and the alternatives of use in financing activities.

A reconciliation of this non-GAAP financial measure and the most directly comparable measures calculated and presented in accordance with U.S. GAAP are set forth on the following table.

 

 

6

(2)	Operating Results and Financial Conditions (continued)

 

Management Issues to be Addressed

No material changes or issues with respect to business operations and finances have occurred during the nine months ended September 30, 2019.

Research and Development Expenses

Canon’s research and development expenses for the nine months ended September 30, 2019 totaled ¥222.2 billion.

Property, Plant and Equipment

(1)    Major Property, Plant and Equipment

There were no significant changes to the status of existing major property, plant and equipment during the nine months ended September 30, 2019.

(2)    Prospect of Capital Investment in the first nine months of Fiscal 2019

The new construction of property, plant and equipment, which had been in progress as of December 31, 2018 and was completed during the first nine months of 2019, is as follows:

 

Name and location		Principal activities and products manufactured		Date of   completion
Miyazaki Canon Inc.,   Miyazaki, Japan		New production base* (Imaging System Business Unit)   *Leased to Miyazaki Canon Inc., a wholly-owned subsidiary, by  the Company		April 2019

There were no significant changes in the plans relevant to the retirement of property, plant and equipment during the nine months ended September 30, 2019. Moreover, there were no significant additional plans for new construction or retirement of property, plant and equipment during the nine months ended September 30, 2019.

 

(3)	Significant Business Contracts Entered into in the Third quarter of Fiscal 2019

No material contracts were entered into during the three months ended September 30, 2019.

 

7

III. Company Information

 

(1)

Shares

Total number of authorized shares is 3,000,000,000 shares. The common stock of Canon is listed on the Tokyo, Nagoya, Fukuoka, Sapporo and New York Stock Exchanges. Total issued shares are as follows:

 

		As of     September 30, 2019
Total number of issued shares			1,333,763,464

Stock Acquisition Rights

(1)    Stock options

Not applicable.

(2)    Other stock acquisition rights

Not applicable.

Exercise status of bonds with share subscription rights containing an adjustable exercise price clause

Not applicable.

Change in Issued Shares, Common Stock and Additional Paid in Capital

 

		Change during this term				As of September 30, 2019
Issued Shares (Number of shares)			-				1,333,763,464
Common Stock (Millions of yen)			-				174,762
Additional Paid-in Capital (Millions of yen)			-				306,288

Major Shareholders

Not applicable.

 

8

(1)	Shares (continued)

 

Voting Rights

The information provided below is based on the latest register of shareholders as of June 30, 2019.

 

				As of June 30, 2019
Classification				Number of shares   (shares)				Number of voting   rights (units)
Shares without voting rights				-				-
Shares with restricted voting rights (Treasury stock, etc.)				-				-
Shares with restricted voting rights (Others)				-				-
Shares with full voting rights (Treasury stock, etc.)				(treasury stock) 269,926,500				-
Shares with full voting rights (Others)				1,062,461,000				10,624,610
Fractional unit shares (Note)				1,375,964				-
Total number of issued shares				1,333,763,464				-
Total voting rights held by all shareholders				-				10,624,610

Note:

In “Fractional unit shares” under “Number of shares,” 68 shares of treasury stock are included.

Treasury Stock, etc.

		Number of shares owned								Number of shares owned  /
		(Number of shares)								Number of shares issued
Canon Inc.			269,926,500								20.24	%
Total			269,926,500								20.24	%

 

9

(2)	Directors and Executive Officers

There were no changes in members and functions of directors and auditors between the filing date of the Annual Securities Report (Yukashoken Houkokusho) for the fiscal year ended December 31, 2018 and the end of this quarter.

There were no changes in members of executive officers between the filing date of the Annual Securities Report (Yukashoken Houkokusho) for the fiscal year ended December 31, 2018 and the end of this quarter.

Changes in functions of executive officers are below:

 

 

The Number of Directors and Executive Officers by Gender

Males: 49, Females: 2 (Females account for 3.9% of the total.)

Based on the number of Directors and Executive Officers as of September 30, 2019.

 

10

IV.  Financial Statements (Unaudited)

 

(1)	Consolidated Financial Statements

Index of Consolidated Financial Statements of Canon Inc. and Subsidiaries:

 

		Page
Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018			12
Consolidated Statements of Income and Consolidated Statements of Comprehensive Income for the nine months ended September 30, 2019 and 2018			14
Consolidated Statements of Income and Consolidated Statements of Comprehensive Income for the three months ended September 30, 2019 and 2018			16
Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018			18
Notes to Consolidated Financial Statements			19

 

11

CANON INC. AND SUBSIDIARIES

Consolidated Balance Sheets

 

		Millions of yen
		September 30, 2019								December 31, 2018
Assets
Current assets:
Cash and cash equivalents (Notes 17 and 18)			448,315								520,645
Short-term investments (Notes 2 and 17)			1,743								956
Trade receivables, net (Note 3)			515,702								612,953
Inventories (Note 4)			634,292								611,281
Prepaid expenses and other current assets (Notes 6,11,13 and 17)			304,164								304,346
Total current assets			1,904,216								2,050,181
Noncurrent receivables (Note 15)			16,879								18,230
Investments (Notes 2 and 17)			47,252								42,556
Property, plant and equipment, net (Note 5)			1,081,714								1,090,992
Operating lease right-of-use assets (Note 14)			114,530								-
Intangible assets, net			351,070								391,021
Goodwill			873,855								908,511
Other assets (Note 6)			410,892								397,974
Total assets			4,800,408								4,899,465

 

12

CANON INC. AND SUBSIDIARIES

Consolidated Balance Sheets (Continued)

		Millions of yen
		September 30, 2019								December 31, 2018
Liabilities and equity
Current liabilities:
Short-term loans and current portion of long-term debt (Notes 8 and 16)			169,682								38,527
Trade payables (Note 7)			315,578								352,489
Accrued income taxes			24,050								41,264
Accrued expenses (Note 15)			316,883								321,137
Current operating lease liabilities (Note 14)			30,198								-
Other current liabilities (Notes 11,13 and 17)			221,581								276,237
Total current liabilities			1,077,972								1,029,654
Long-term debt, excluding current installments (Notes 8 and 16)			363,377								361,962
Accrued pension and severance cost			360,127								382,789
Noncurrent operating lease liabilities (Note 14)			84,288								-
Other noncurrent liabilities			103,344								107,147
Total liabilities			1,989,108								1,881,552
Commitments and contingent liabilities (Note 15)
Equity:
Canon Inc. shareholders’ equity (Note 9):
Common stock			174,762								174,762
(Number of authorized shares)			(3,000,000,000)								(3,000,000,000)
(Number of issued shares)			(1,333,763,464)								(1,333,763,464)
Additional paid-in capital			404,641								404,389
Legal reserve			67,499								67,116
Retained earnings			3,429,510								3,508,908
Accumulated other comprehensive income (loss) (Note 10)			(352,099)								(269,071)
Treasury stock, at cost			(1,108,493)								(1,058,502)
(Number of shares)			(269,927,942)								(254,013,641)
Total Canon Inc. shareholders’ equity			2,615,820								2,827,602
Noncontrolling interests (Note 9)			195,480								190,311
Total equity (Note 9)			2,811,300								3,017,913
Total liabilities and equity			4,800,408								4,899,465

 

13

CANON INC. AND SUBSIDIARIES

Consolidated Statements of Income and Consolidated Statements of Comprehensive Income

 

Consolidated Statements of Income
		Millions of yen
		Nine months ended     September 30, 2019				Nine months ended     September 30, 2018
Net sales (Notes 6 and 13):
Products and Equipment			2,073,513				2,327,760
Services			566,317				565,837
			2,639,830				2,893,597
Cost of sales (Notes 14 and 18):
Products and Equipment			1,186,410				1,281,157
Services			266,782				266,163
			1,453,192				1,547,320
Gross profit			1,186,638				1,346,277
Operating expenses:
Selling, general and administrative expenses (Notes 14 and 18)			842,451				870,347
Research and development expenses			222,189				232,556
			1,064,640				1,102,903
Operating profit			121,998				243,374
Other income (deductions):
Interest and dividend income			4,266				5,430
Interest expense			(811)				(653)
Other, net (Notes 2,10,13 and 18)			18,759				14,779
			22,214				19,556
Income before income taxes			144,212				262,930
Income taxes			41,332				71,946
Consolidated net income			102,880				190,984
Less: Net income attributable to noncontrolling interests			10,531				9,943
Net income attributable to Canon Inc.			92,349				181,041
		Yen				Yen
Net income attributable to Canon Inc. shareholders per share (Note 12):
Basic			86.16				167.67
Diluted			86.15				167.66
Cash dividends per share			80.00				80.00

 

14

CANON INC. AND SUBSIDIARIES

Consolidated Statements of Income and Consolidated Statements of Comprehensive Income

 

Consolidated Statements of Comprehensive Income
		Millions of yen
		Nine months ended     September 30, 2019				Nine months ended     September 30, 2018
Consolidated net income			102,880				190,984
Other comprehensive income (loss), net of tax (Note 10):
Foreign currency translation adjustments			(86,203)				(35,328)
Net unrealized gains and losses on securities			-				(141)
Net gains and losses on derivative instruments			(305)				(670)
Pension liability adjustments			3,527				2,450
			(82,981)				(33,689)
Comprehensive income (loss) (Note 9)			19,899				157,295
Less: Comprehensive income (loss) attributable to noncontrolling interests			10,456				6,980
Comprehensive income (loss) attributable to Canon Inc.			9,443				150,315

 

15

CANON INC. AND SUBSIDIARIES

Consolidated Statements of Income and Consolidated Statements of Comprehensive Income

 

Consolidated Statements of Income

 

		Millions of yen
		Three months ended     September 30, 2019				Three months ended     September 30, 2018
Net sales (Notes 6 and 13):
Products and Equipment			685,079				740,003
Services			184,416				186,495
			869,495				926,498
Cost of sales (Notes 14 and 18):
Products and Equipment			395,926				412,541
Services			83,693				86,925
			479,619				499,466
Gross profit			389,876				427,032
Operating expenses:
Selling, general and administrative expenses (Notes 14 and 18)			277,624				281,302
Research and development expenses			73,807				77,402
			351,431				358,704
Operating profit			38,445				68,328
Other income (deductions):
Interest and dividend income			1,349				1,935
Interest expense			(275)				(239)
Other, net (Notes 2,10,13 and 18)			7,505				(2,974)
			8,579				(1,278)
Income before income taxes			47,024				67,050
Income taxes			16,202				17,114
Consolidated net income			30,822				49,936
Less: Net income attributable to noncontrolling interests			4,300				3,678
Net income attributable to Canon Inc.			26,522				46,258
		Yen				Yen
Net income attributable to Canon Inc. shareholders per share (Note 12):
Basic			24.93				42.84
Diluted			24.93				42.84

 

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CANON INC. AND SUBSIDIARIES

Consolidated Statements of Income and Consolidated Statements of Comprehensive Income

 

Consolidated Statements of Comprehensive Income

 

		Millions of yen
		Three months ended     September 30, 2019				Three months ended     September 30, 2018
Consolidated net income			30,822				49,936
Other comprehensive income (loss), net of tax (Note 10):
Foreign currency translation adjustments			(32,032)				55,307
Net unrealized gains and losses on securities			-				-
Net gains and losses on derivative instruments			(405)				(300)
Pension liability adjustments			850				2,669
			(31,587)				57,676
Comprehensive income (loss) (Note 9)			(765)				107,612
Less: Comprehensive income (loss) attributable to noncontrolling interests			4,314				6,008
Comprehensive income (loss) attributable to Canon Inc.			(5,079)				101,604

 

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CANON INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

 

		Millions of yen
		Nine months ended   September 30, 2019				Nine months ended   September 30, 2018
Cash flows from operating activities:
Consolidated net income			102,880				190,984
Adjustments to reconcile consolidated net income to net cash provided by operating activities:
Depreciation and amortization			178,514				185,921
Loss on disposal of fixed assets			4,271				3,136
Deferred income taxes			(8,504)				(11,173)
Decrease in trade receivables			76,967				26,609
Increase in inventories			(42,366)				(98,084)
Decrease in trade payables			(28,295)				(64)
Decrease in accrued income taxes			(16,501)				(48,456)
Increase in accrued expenses			8,892				6,788
Decrease in accrued (prepaid) pension and severance cost			(8,515)				(15,752)
Other, net			(72,831)				(46,202)
Net cash provided by operating activities			194,512				193,707
Cash flows from investing activities:
Purchases of fixed assets			(151,941)				(131,899)
Proceeds from sale of fixed assets			120				8,556
Purchases of securities			(4,228)				(2,075)
Proceeds from sale and maturity of securities			761				1,485
(Increase) decrease in time deposits, net			(1,516)				550
Acquisitions of businesses, net of cash acquired			(1,716)				(13,346)
Other, net			675				275
Net cash used in investing activities			(157,845)				(136,454)
Cash flows from financing activities:
Proceeds from issuance of long-term debt			-				211
Repayments of long-term debt			(2,410)				(54,828)
Increase in short-term loans, net (Note 8)			132,657				1,172
Dividends paid			(171,487)				(178,159)
Repurchases and reissuance of treasury stock, net			(50,003)				(15)
Other, net			(5,195)				(3,675)
Net cash used in financing activities			(96,438)				(235,294)
Effect of exchange rate changes on cash and cash equivalents			(12,559)				(8,539)
Net change in cash and cash equivalents			(72,330)				(186,580)
Cash and cash equivalents at beginning of period			520,645				721,814
Cash and cash equivalents at end of period			448,315				535,234
Supplemental disclosure for cash flow information:
Cash paid during the period for:
Interest			639				630
Income taxes			75,193				123,331

 

18

CANON INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

(1)	Basis of Presentation and Significant Accounting Policies

 

(a)

Basis of Presentation

The Company issued convertible debentures in the United States in May 1969 and established a program in which its American Depositary Receipts (ADRs) were traded in the U.S. over-the-counter market. Since then, under the U.S. Securities Act of 1933 and the U.S. Securities Exchange Act of 1934, the Company has prepared its annual consolidated financial statements in accordance with U.S. GAAP and filed them with the U.S. Securities and Exchange Commission on Form 20-F. The Company’s ADRs were listed on the NYSE in September 2000 after being quoted on NASDAQ from February 1972 to September 2000.

Canon’s quarterly consolidated financial statements are prepared in accordance with the recognition and measurement criteria of accounting principles generally accepted in the United States. Certain disclosures have been omitted.

The number of consolidated subsidiaries and affiliated companies that were accounted for by the equity method as of September 30, 2019 and December 31, 2018 are summarized as follows:

 

 

(b)

Principles of Consolidation

The consolidated financial statements include the accounts of the Company, its majority owned subsidiaries and those variable interest entities where the Company or its consolidated subsidiaries are the primary beneficiaries. All significant intercompany balances and transactions have been eliminated.

 

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CANON INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)

 

(1)	Basis of Presentation and Significant Accounting Policies (continued)

 

(c)

Recent Accounting Guidance

Recently adopted accounting guidance

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02, Leases (Topic 842) Section A – Leases: Amendments to the FASB Accounting Standards Codification, which requires lessees to recognize most leases on their balance sheets but recognize expenses on their income statements in a manner similar to the previous guidance. For lessors, the standard modifies the classification criteria and the accounting for sales-type and direct financing leases. The FASB also modified the definition of a lease. Additionally, this guidance expands the qualitative and quantitative disclosures related to leases. This guidance is effective for annual reporting periods beginning after December 15, 2018. Canon applied the guidance from the quarter beginning January 1, 2019. Canon applied the package of practical expedients that allows it not to reassess whether any existing contracts at or expired contracts prior to the adoption date are or contain leases, lease classification and whether initial direct costs qualify for capitalization, in addition to the short term lease exception. Canon also adopted the transition method for which no restatement of comparative periods and no reassessment of land easements not previously accounted for as a lease that existed at or expired prior to the adoption date are required. The right of use assets for operating leases recognized at January 1, 2019 was ¥125,649 million. The corresponding lease liabilities were also recognized. The adoption of this guidance did not have a material impact on its consolidated results of operation. For further information, please refer to Notes 6 and 14.

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which amends existing guidance to simplify the application of the hedge accounting in certain situations and enables an entity to better portray the economic results of an entity’s risk management activities in its financial statements. This guidance eliminates the requirement to separately measure and report hedge ineffectiveness, and requires an entity to present the earnings effect of the hedging instrument in the same income statement line item in which the earnings effect of the hedged item is reported. Canon adopted this guidance from the quarter beginning January 1, 2019 with the modified retrospective method through a cumulative effect adjustment directly to retained earnings as of the beginning of the period. Gains and losses resulting from derivative financial instruments designated as cash flow hedges associated with forecasted intercompany sales, which were previously included in other income (deductions) in the consolidated statements of income, are included in net sales after the adoption of this guidance. The adoption of this guidance did not have a material impact on its consolidated results of operation and financial condition.

 

20

CANON INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)

 

(2)	Investments

The unrealized and realized gains and losses related to equity securities for the nine months and three months ended September 30, 2019 and 2018 are as follows:

 

		Millions of yen
		Nine months ended September 30, 2019				Nine months ended September 30, 2018
Net gains and (losses) recognized during the period on equity securities			2,023				780
Less: Net gains and (losses) recognized during the period on equity securities sold during the period			(17)				675
Unrealized gains and (losses) recognized during the period on equity securities still held at September 30.			2,040				105
		Millions of yen
		Three months ended September 30, 2019				Three months ended September 30, 2018
Net gains and (losses) recognized during the period on equity securities			1,849				(1,604)
Less: Net gains and (losses) recognized during the period on equity securities sold during the period			34				103
Unrealized gains and (losses) recognized during the period on equity securities still held at September 30.			1,815				(1,707)

The carrying amount of non-marketable equity securities without readily determinable fair value totaled ¥8,031 million and ¥4,629 million at September 30, 2019 and December 31, 2018, respectively. The impairment or other adjustments resulting from observable price changes recorded during the nine months ended September 30, 2019 and 2018 were not significant.

There were no available-for-sale debt securities included in short-term investments and investments at September 30, 2019. The cost, gross unrealized holding gains, gross unrealized holding losses and fair value for available-for-sale debt securities included in short-term investments and investments by major security type were not significant at December 31, 2018.

The unrealized and realized gains and losses related to available-for-sale debt securities were not significant for the nine months and three months ended September 30, 2019 and 2018, respectively.

Time deposits with original maturities of more than three months are ¥1,743 million and ¥326 million at September 30, 2019 and December 31, 2018, respectively, and are included in short-term investments in the accompanying consolidated balance sheets.

 

21

CANON INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)

 

(3)	Trade Receivables

Trade receivables are summarized as follows:

 

 

(4)	Inventories

Inventories are summarized as follows:

 

 

(5)	Property, Plant and Equipment

Property, plant and equipment are stated at cost less accumulated depreciation and are summarized as follows:

 

Fixed assets presented in the consolidated statements of cash flows includes property, plant and equipment and intangible assets.

After the adoption of ASU No. 2016-02 from the beginning of the first quarter of 2019, Canon has reclassified finance lease assets from buildings and machinery and equipment to finance lease right-of-use assets. Finance lease assets at December 31, 2018 also have been reclassified.

 

22

CANON INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)

 

(6)	Lessor Accounting

Canon provides leasing arrangement to its customers primarily for the sales of office products. Revenue from the sale of these products under sales-type leases is recognized at the inception of the lease. Interest 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 related revenue is recognized ratably over the lease term. When product leases are bundled with maintenance contracts, revenue is allocated based upon the estimated standalone selling prices of the lease and non-lease components. Lease components generally include product and financing while non-lease components generally consist of maintenance contracts and supplies.

Some of the contracts include options to extend or to terminate the lease. Canon takes such options into account to determine the lease term when it is reasonably certain that it will exercise these options. The majority of Canon’s lease contracts do not contain bargain purchase options for their customers.

Lease income is included in Products and Equipment sales in the accompanying consolidated statement of income. Supplemental income statement information is as follows:

 

Allowance for Credit Losses

Finance receivables represent financing leases which consist of sales-type leases and direct financing leases resulting from the sales of Canon’s and complementary third-party products. These receivables typically have terms ranging from 1 year to 7 years. Finance receivables are ¥339,589 million and ¥331,011 million at September 30, 2019 and December 31, 2018, respectively.

The activities in the allowance for credit losses are as follows:

 

 

23

CANON INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)

 

(6)	Lessor Accounting (continued)

Canon has policies in place to ensure that its products are sold to customers with an appropriate credit history and continuously monitors its customers’ credit quality based on information including length of period in arrears, macroeconomic conditions, initiation of legal proceedings against customers and bankruptcy filings. The allowance for credit losses of finance receivables is evaluated collectively based on historical experience of credit losses. An additional reserve for individual accounts is recorded when Canon becomes aware of a customer’s inability to meet its financial obligations, such as in the case of bankruptcy filings. Finance receivables which are past due or individually evaluated for impairment at September 30, 2019 and December 31, 2018 are not significant.

Canon has a syndication arrangement to sell its entire interests in finance receivables to a third-party financial institution. The transactions under the arrangement are accounted for as sales in accordance with ASC 860 “Transfers and Servicing.” There were no significant transfers of finance receivables for the nine months ended September 30, 2019 and 2018. The amount remained uncollected was ¥17,926 million and ¥22,956 million at September 30, 2019 and December 31, 2018, respectively. Canon continues to provide collection and administrative services for the financial institution. The amount associated with the servicing liability measured at fair value was not material at September 30, 2019 and December 31, 2018, respectively. Canon also retains limited recourse obligations which cover credit defaults. The recourse obligation was not material at September 30, 2019 and December 31, 2018, respectively.

 

(7)	Trade Payables

Trade payables are summarized as follows:

 

 

(8)	Short-Term Loans and Long-Term Debt

Short-term loans consisting of bank borrowings at September 30, 2019 and December 31, 2018 were ¥168,473 million and ¥35,887 million, respectively.

Canon has revolving credit facilities expiring in December 2021. The outstanding loans under the credit facilities are ¥360,000 million at a floating interest of 0.09%, are included in long-term debt, excluding current installments in the consolidated balance sheets. Canon has no unused credit facilities as of September 30, 2019.

 

24

CANON INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)

 

 

(9)

Equity

The changes in the carrying amounts of total equity, equity attributable to Canon Inc. shareholders and equity attributable to noncontrolling interests in the consolidated balance sheets for the nine months ended September 30, 2019 and 2018 are as follows:

 

		Millions of yen
		Common stock				Additional paid-in capital				Legal reserve				Retained earnings				Accumulated other comprehensive income (loss)				Treasury stock				Total Canon Inc. shareholders’ equity				Non- controlling interests				Total equity
Balance at December 31, 2018			174,762				404,389				67,116				3,508,908				(269,071)				(1,058,502)				2,827,602				190,311				3,017,913
Cumulative effects of accounting standard update—adoption of ASU No.2017-12															122				(122)								-				-				-
Equity transactions with noncontrolling interests and other							265																				265				270				535
Dividends to Canon Inc. shareholders															(171,487)												(171,487)								(171,487)
Dividends to noncontrolling interests																															(5,557)				(5,557)
Transfer to legal reserve											383				(383)												-								-
Comprehensive income:
Net income															92,349												92,349				10,531				102,880
Other comprehensive income (loss), net of tax
Foreign currency translation adjustments																			(85,782)								(85,782)				(421)				(86,203)
Net unrealized gains and losses on securities																			-								-				-				-
Net gains and losses on derivative instruments																			(305)								(305)				-				(305)
Pension liability adjustments																			3,181								3,181				346				3,527
Total comprehensive income (loss)																											9,443				10,456				19,899
Repurchases and reissuance of treasury stock							(13)								1								(49,991)				(50,003)								(50,003)
Balance at September 30, 2019			174,762				404,641				67,499				3,429,510				(352,099)				(1,108,493)				2,615,820				195,480				2,811,300
		Millions of yen
		Common stock				Additional paid-in capital				Legal reserve				Retained earnings				Accumulated other comprehensive income (loss)				Treasury stock				Total Canon Inc. shareholders’ equity				Non- controlling interests				Total equity
Balance at December 31, 2017			174,762				401,386				66,879				3,429,312				(143,228)				(1,058,481)				2,870,630				225,545				3,096,175
Cumulative effects of accounting standard update—adoption of ASU No.2014-09															(106)												(106)				(76)				(182)
Cumulative effects of accounting standard update—adoption of ASU No. 2016-01															5,343				(5,343)								-				-				-
Equity transactions with noncontrolling interests and other							226																				226				1,771				1,997
Dividends to Canon Inc. shareholders															(178,159)												(178,159)								(178,159)
Dividends to noncontrolling interests																															(5,453)				(5,453)
Transfer to legal reserve											219				(219)												-								-
Comprehensive income:
Net income															181,041												181,041				9,943				190,984
Other comprehensive income (loss), net of tax
Foreign currency translation adjustments																			(32,318)								(32,318)				(3,010)				(35,328)
Net unrealized gains and losses on securities																			(141)								(141)				-				(141)
Net gains and losses on derivative instruments																			(679)								(679)				9				(670)
Pension liability adjustments																			2,412								2,412				38				2,450
Total comprehensive income (loss)																											150,315				6,980				157,295
Repurchases and reissuance of treasury stock																							(15)				(15)								(15)
Balance at September 30, 2018			174,762				401,612				67,098				3,437,212				(179,297)				(1,058,496)				2,842,891				228,767				3,071,658

 

25