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 office MFDs, laser printers, inkjet printers, cameras, medical equipment and 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 four segments: the Printing Business Unit, the Imaging Business Unit, the Medical Business Unit and the Industrial Business Unit. Economic environment Looking back at 2022, while the global economy resumed its economic activities in earnest, the pace of economic recovery slowed due to global inflation and tight monetary policies in order to control inflation in each country. In the United States, although affected by inflation and tightening monetary policy, the economic recovery continued due to robust increases in personal consumption and expansion of exports. In Europe, the economy slowed down due to surge in energy prices resulting from the Ukraine crisis and continuous price hikes caused by inflation. In China, the recovery of personal consumption declined and capital investment slowed due to restrictions implemented under its Zero-COVID strategy. In other emerging countries, the economy recovered moderately, mainly in India and Southeast Asia. In Japan, affected by surge in price of energy and inflation caused by depreciation of the yen, the economy continued to recover moderately, mainly in terms of personal consumption. Market environment Amid the unstable economic environment, in the markets in which Canon operates, despite a shortage of semiconductor chips and supply chain disruptions, demand improved moderately. Looking at performance by products, demand for office multifunction devices (MFDs) remained firm due to a recovery of in-office work. Meanwhile demand for laser printers and inkjet printers slowed due to decreased demand from customers working from home. For cameras, demand remained solid, mainly for mirrorless cameras and lenses for professionals and enthusiasts. For medical equipment, demand in Japan declined this year due to a drop-off following the conclusion of government spending in 2021, although investments in the medical field recovered slowly, mainly for diagnostic imaging unit products outside Japan. For semiconductor lithography equipment, 30 Table of Contents while the memory devices market declined, overall demand remained firm due to strong demand for power devices and sensors. For FPD (Flat Panel Display) lithography equipment, demand tended to decline due to decreased demand from customers working from home amid the COVID-19 pandemic, and demand for laptop computers decreased in response to the current economic slowdown. The average value of the yen for the year was ¥131.66 against the U.S. dollar, a year-on-year depreciation of approximately ¥22, and ¥138.42 against the euro, a year-on-year depreciation of approximately ¥8. Summary of operations Summarized results of Income statement for 2022 and 2021 are as follows: 2022 Change 2021 (Millions of yen, except per share amounts and percentage data) Net sales 4,031,414 +14.7 % 3,513,357 Gross profit 1,827,802 +12.3 1,627,792 Operating expenses 1,474,403 +9.5 1,345,874 Operating profit 353,399 +25.4 281,918 Other income (deductions) (959 ) — 20,788 Income before income taxes 352,440 +16.4 302,706 Net income attributable to Canon Inc. 243,961 +13.6 214,718 Net income attributable to Canon Inc. shareholders per share: Basic 236.71 +15.3 205.35 Diluted 236.63 +15.3 205.29 Note: See notes to Item 3A “Selected Financial Data”. In 2022, Canon ensured adequate supplies of products through sustained efforts such as switching to alternative components and seeking new vendors, and taking swift action to secure transportation capacity while utilizing alternative transportation routes to deal with a shortage of components and the logistics disruption. Net sales for the year increased by 14.7% year-on-year to ¥4,031,414 million due to adjustment of product prices and depreciation of the yen. Sales by new business exceeded ¥1,000 billion, and net sales exceeded ¥4,000 billion for the first time in five years since 2017 as a result of the business portfolio transformation. Gross profit as a percentage of net sales decreased by 1.0 points to 45.3% due to the increase in the ratio of hardware sale caused by stabilization of production supply including printers, in addition to the increased costs of parts and logistics. However, gross profit increased by 12.3% year-on-year to ¥1,827,802 million, mainly due to price adjustment of products and the depreciation of the yen. Although operating expenses increased by 9.5% year-on-year to ¥1,474,403 million as a result of increased operating expenses denominated in foreign currencies due to the depreciation of the yen, as well as an increase in selling expenses accompanying a growth in sales, the operating expense to sales ratio decreased by 1.8 points to 36.5% due to continued efficiency-focused cost control and improvements to management structure. As a result, operating profit increased by 25.4% year-on-year to ¥353,399 million. Other income (deductions) decreased by ¥21,747 million year-on-year to a loss of ¥959 million, mainly due to deterioration of valuation gains and losses on securities and currency exchange losses from liabilities, incurred by group finance, denominated in foreign currencies, caused by the depreciation of the yen. As a result, income before income taxes increased by 16.4% year-on-year to ¥352,440 million and net income attributable to Canon Inc. increased by 13.6% year-on-year to ¥243,961 million. Basic net income attributable to Canon Inc. shareholders per share was ¥236.71 for the year, a year-on-year increase of ¥31.36. 31 Table of Contents Summarized results of Balance sheet for 2022 and 2021 are as follows: 2022 Change 2021 (Millions of yen, except per share amounts and percentage data) Total assets 5,095,530 344,642 4,750,888 Total liabilities 1,746,500 94,041 1,652,459 Canon Inc. shareholders’ equity 3,113,105 239,332 2,873,773 Noncontrolling interests 235,925 11,269 224,656 Total equity 3,349,030 250,601 3,098,429 Total liabilities and equity 5,095,530 344,642 4,750,888 Canon Inc. shareholders’ equity as a percentage of total assets 61.1 % 0.6 % 60.5 % Total assets increased by ¥344,642 million to ¥5,095,530 million at December 31, 2022, compared with the end of previous year, mainly due to an increase of inventories resulting from procuring electrical part, materials and key parts, and increasing of trade receivable due to increase of sales. In 2022, the decrease of long-term loans by ¥120.0 billion was a result of the repayment of loans for the acquisition of Toshiba Medical Systems Corporation (currently, Canon Medical Systems Corporation). Under this condition, total liabilities increased by ¥94,041 million to ¥1,746,500 million at December 31, 2022, compared with the end of previous year mainly due to a increase of short-term loans in response to the increase in required working capital. Total equity increased by ¥250,601 million to ¥3,349,030 million at December 31, 2022, compared with the end of previous year, mainly due to an increase in retained earnings resulting from net income attributable to Canon, and an increase in accumulated other comprehensive income due to the depreciation of the yen. In addition, there were repurchases of treasury stock twice. Under these conditions, Canon Inc. shareholders’ equity as a percentage of total assets increased by 0.6 points to 61.1%. 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 2022 2021 2020 2019 2018 Net sales (Millions of yen) 4,031,414 3,513,357 3,160,243 3,593,299 3,951,937 Gross profit to net sales ratio 45.3 % 46.3 % 43.5 % 44.8 % 46.4 % R&D expense to net sales ratio 7.6 % 8.2 % 8.6 % 8.3 % 8.0 % Operating profit to net sales ratio 8.8 % 8.0 % 3.5 % 4.9 % 8.7 % Income before income taxes to net sales ratio 8.7 % 8.6 % 4.1 % 5.4 % 9.2 % Inventory turnover measured in days 69 days 66 days 60 days 59 days 56 days Debt to total assets ratio 8.2 % 6.8 % 10.9 % 10.8 % 8.2 % Canon Inc. shareholders’ equity to total assets ratio 61.1 % 60.5 % 55.7 % 56.3 % 57.5 % Note: 1. See notes to Item 3A “Selected Financial Data”. Net sales and profit ratio As Canon pursues the goal to become a truly excellent global corporation, 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. 32 Table of Contents 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 product to be important for the purpose of assessing Canon’s sales performance in various products, taking into account recent market trends. Gross profit to net sales ratio is another KPI for Canon. Under the basic policy of Phase VI of the Excellent Global Corporation Plan, Canon has been consistently strengthening business competitiveness and striving to provide highly profitable products with price competitiveness. Furthermore, Canon promotes cost reduction initiatives across the Canon Group through in-house production and automation of assembly processes which integrate the three functions of design, production technology and manufacturing. Canon will continue to actively take these measures to improve Canon’s gross profit to net sales ratio. Operating profit to net sales ratio, income before income taxes to net sales ratio, 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 reducing work-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. The debt to total assets ratio is also 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. Therefore, management believes that it is important to have sufficient financial strength. Canon will continue to reduce its dependency on external funds for capital investments in favor of generating the necessary funds from its own operations. Canon Inc. shareholders’ equity to total assets ratio is another KPI for Canon. Canon believes that its shareholders’ equity to total assets ratio measures its long-term sustainability. Canon also believes that achieving a high or rising 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 shareholders’ equity ratio will enable Canon 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 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 33 Table of Contents 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. In addition, actual results and outcomes may differ from management’s estimates and assumptions due to pandemic, geopolitical risk and economic slowdown risk in response to inflation. 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 mainly through the sale of products of the Printing Business Unit, the Imaging Business Unit, the Medical Business Unit and the Industrial Business Unit, supplies and related services under separate contractual arrangements. Revenue is recognized when, or as, control of promised goods or services transfers to customers in an amount that reflects the consideration to which Canon expects to be entitled in exchange for transferring these goods or services. Revenue from sales of products of the Printing Business Unit, such as office MFDs, laser printers and inkjet printers, and the Imaging Business Unit, such as digital cameras, is primarily recognized at a point in time upon shipment or delivery, depending upon when the customer obtains controls of these products. Revenue from sales of equipment of the Medical Business Unit and the Industrial Business Unit that are sold with customer acceptance provisions related to their functionality, including certain medical equipment such as CT systems and MRI systems, and lithography equipment such as semiconductor and FPD lithography equipment, is recognized at a point in time when the equipment is installed at the customer site and the agreed-upon specifications are objectively satisfied and confirmed. Most of Canon’s service revenue is generated from maintenance service in the products of the Printing Business Unit and the Medical Business Unit which is recognized over time. For the service contracts of the Printing Business Unit, the customer typically pays a variable amount based on usage, a stated fixed fee or a stated base fee plus a variable amount which frequently include the provision of consumables as well as break fix activities. The majority portion of service revenue from the products of the Printing Business Unit is recognized as billed since the invoiced amount directly correlates with the value to the customer of the underlying performance obligation delivered to date. For the service contracts of the Medical Business Unit, the customer typically pays a stated fixed fee for the stand ready maintenance service and revenue is recognized ratably over the contract period. The majority of service arrangements for the products are executed in combination with related products. Transaction prices for products and services need to be allocated to each performance obligation on a relative standalone selling price basis where judgements are required. Canon estimates the standalone selling price using a range of prices that would meet the allocation objective based on all the information that is reasonably available including market conditions and other observable inputs. If transaction prices of the product or service contracts are not within the acceptable range then the revenue is subject to allocation based on the estimated standalone selling prices. Canon recognizes the incremental costs of obtaining a contract as an expense when related products of the Printing Business Unit are sold. Revenue from sales of certain industrial equipment which do not have alternative use and for which Canon has enforceable right to payment to the customers for the performance completed to date is recognized over time with progress towards completion measured using the cost based input method as the basis to recognize revenue and an estimated margin. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses become evident. Changes in job performance, job conditions, estimated margin and final contract settlements may result in revisions to projected costs and revenue and are recognized in the period in which the revisions to estimates are identified and the amounts can be reasonably estimated. Factors that may 34 Table of Contents affect future project costs and margins include, production efficiencies, availability and costs of labor and materials. These factors can impact the accuracy of Canon’s estimates and materially impact future reported revenue and cost of sales. The transaction prices that Canon is entitled to receive in exchange for transferring goods or services to the customer include certain forms of variable consideration, including product discounts, customer promotions and volume-based rebates mainly for the products of the Imaging Business Unit, which are sold predominantly through distributors and retailers. Canon includes estimated amounts in the transaction price only to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Variable considerations are estimated based upon historical trends and other known factors at the time of sale, and are subsequently adjusted in each period based on current information. In addition, Canon may provide a right of return on its products for a short time period after a sale. These rights are accounted for as variable consideration when determining the transaction price, and accordingly Canon recognizes revenue based on the estimated amount to which Canon expects to be entitled after considering expected returns. Taxes collected from customers and remitted to governmental authorities are excluded from revenues in the consolidated statements of income. Allowance for credit losses Allowance for credit losses for trade and lease receivables is maintained for all customers based on ASC 326 “Financial Instruments—Credit Losses”, based on historical experiences of credit losses and reasonable and supportable forecasts. 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. If circumstances related to customers change, estimates of the recoverability of receivables would be further adjusted. When all collection options are exhausted including legal recourse, the accounts or portions thereof are deemed to be uncollectable and charged against the allowance. Valuation of inventories Inventories are stated at the lower of cost or net realizable value. Cost is determined by the average method for domestic inventories and principally the first-in, first-out method for overseas inventories. Net 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 net 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 sum of 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. 35 Table of Contents 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. Lease As for lessor accounting, Canon provides leasing arrangement to its customers primarily for the sale 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 the customers will exercise these options. The majority of Canon’s lease contracts do not contain bargain purchase options for their customers. As for lessee accounting, Canon has operating and finance leases for various assets including office buildings, warehouses, employees’ accommodations, and vehicles. Canon determines if an arrangement is a lease at the inception of each contract. Some of the contracts include options to extend or to terminate the lease. Canon takes such options into accounts to determine the lease term when it is reasonably certain that it will exercise these options. Canon’s lease arrangements do not contain material residual value guarantees or material restrictive covenants. As a rate implicit in most of Canon’s leases cannot be determined, Canon uses incremental borrowing rate based on the information available at commencement to determine the present values of lease payments. Canon has lease contracts with lease and non-lease components, which are accounted for separately. Canon allocates the consideration in the lease contract to the lease and non-lease components based upon the estimated standalone prices. Costs associated with operating lease assets are recognized on a straight-line basis over the term of the lease. Business combinations Acquisitions are 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. 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 recognizes an impairment charge in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting 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 36 Table of Contents fourth quarter of 2022 and determined that there were no reporting units that failed the impairment test as the fair value of each reporting unit substantially exceeded its respective carrying amount. However, with regard to goodwill attributed to the Medical Reporting Unit, fair value in excess of reported carrying amount as a percentage is lower than other reporting units. As a result, a future reduction in cash flows of the related business could trigger an impairment. The goodwill related to this reporting unit as of December 31, 2022 is ¥542,695 million. Future cash flows for the Medical Reporting Unit were based on a mid-term management plan that considered the future market growth of medical equipment and growth in geographies where Canon operates its medical business. Intangible assets with finite useful lives consist primarily of software, trademarks, patents and developed technology, license fees and customer relationships, which are amortized using the straight-line method. The estimated useful lives of software are from 3 years to 8 years, trademarks are 15 years, patents and developed technology are from 7 years to 21 years, license fees are 8 years, and customer relationships are from 10 years to 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 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. 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 2022, Canon estimated a weighted-average discount rate used to determine benefit obligations of 1.2% for Japanese plans and 4.1% for foreign plans and a weighted-average expected long-term rate of return on plan assets of 3.1% for Japanese plans and 5.7% 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. 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 37 Table of Contents in interest cost, and vice versa. For 2022, a decrease of 50 basis points in the discount rate increases the projected benefit obligation by approximately ¥77,641 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 2022, a decrease of 50 basis points in the expected long-term rate of return on plan assets would increase approximately ¥4,862 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 deferred amount 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 an accumulated other comprehensive income (loss), net of tax. Environmental Liabilities Liabilities for environmental remediation and other environmental costs are accrued when environmental assessments or remedial efforts are probable and the costs can be reasonably estimated, and are included in other noncurrent liabilities in the consolidated balance sheets. Such liabilities are adjusted as further information develops or circumstances change. Costs of future obligations are not discounted to their present values. Recently Issued Accounting Guidance Please refer to Note 1 of the Notes to Consolidated Financial Statements. Consolidated results of operations 2022 compared with 2021 Summarized results of operations for 2022 and 2021 are as follows: 2022 Change 2021 (Millions of yen, except per share amounts and percentage data) Net sales Products and Equipment 3,231,837 +15.2 % 2,804,680 Services 799,577 +12.8 708,677 4,031,414 +14.7 3,513,357 Operating profit 353,399 +25.4 281,918 Income before income taxes 352,440 +16.4 302,706 Net income attributable to Canon Inc. 243,961 +13.6 214,718 Net income attributable to Canon Inc. shareholders per share: Basic 236.71 +15.3 205.35 Diluted 236.63 +15.3 205.29 Note: See notes to Item 3A “Selected Financial Data”. Sales In the current business term, while the global economy resumed its economic activities in earnest, the pace of economic recovery slowed due to global inflation and tight monetary policies in order to control inflation in 38 Table of Contents each country. In such an environment, despite a shortage of semiconductor chips and supply chain disruptions, Canon’s consolidated net sales in 2022 totaled ¥4,031,414 million, an increase of 14.7% from the previous year largely due to a moderate recovery of demand in each segment. Net sales of products and equipment totaled ¥3,231,837 million, a year-on-year increase of 15.2%, while net sales of services totaled ¥799,577 million, a year-on-year increase of 12.8%. Overseas operations are significant to Canon’s operating results and generated 78.5% of total net sales in 2022. Such sales are denominated in the applicable local currencies 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 ¥131.66 against the U.S. dollar, a year-on-year depreciation of approximately ¥22, and ¥138.42 against the euro, a year-on-year depreciation of approximately ¥8. The effects of foreign exchange rate fluctuations positively affected net sales by ¥339,996 million in 2022. This favorable impact consisted of approximately ¥245,939 million of favorable impact for the U.S. dollar denominated sales and favorable impact of ¥56,297 million for the euro denominated sales, and favorable impact of ¥37,760 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. In 2022, Canon was affected by rising prices of parts and materials, as well as by rising transportation costs due to the high demand for international freight transport. Under these conditions, the ratios of cost of sales to net sales for 2022 and 2021 were 54.7% and 53.7%, respectively. Cost of sales as a percentage of net sales increased by 1.0 points. Gross profit Canon’s gross profit in 2022 increased by 12.3% to ¥1,827,802 million from 2021. However, the gross profit to net sales ratio decreased by 1.0 points to 45.3%. The increase in the gross profit was mainly due to price adjustment of products and the depreciation of the yen. However, the decrease in gross profit to net sales ratio was mainly due to the increase in the ratio of hardware sale caused by stabilization of production supply including printers, in addition to the increased costs of parts and logistics. Operating expenses The major components of operating expenses are payroll, R&D, advertising expenses and other marketing expenses. Operating expenses in 2022 increased by 9.5% year on year to ¥1,474,403 million as a result of increased operating expenses denominated in foreign currencies due to the depreciation of the yen, as well as an increase in selling expenses accompanying a growth in sales. However, operating expenses as a percentage of net sales decreased by 1.8 points to 36.5% due to continued efficiency-focused cost control and improvements to management structure. Operating profit Operating profit in 2022 increased by 25.4% from 2021 to a total of ¥353,399 million. The operating profit to net sales ratio increased by 0.8 points to 8.8% from 2021. 39 Table of Contents Other income (deductions) Other income (deductions) for 2022 was a loss of ¥959 million, a decrease of ¥21,747 million from 2021 mainly due to deterioration of valuation gains and losses on securities and currency exchange losses from liabilities, incurred by group finance, denominated in foreign currencies, caused by the depreciation of the yen. Income before income taxes Income before income taxes in 2022 was ¥352,440 million, an increase of 16.4% from 2021, and constituted 8.7% of net sales. Income taxes Income taxes in 2022 increased by ¥20,490 million from 2021. The effective tax rate for 2022 was 26.2%, which was lower than the statutory tax rate in Japan. This resulted from a combination of factors such as the increase in tax credits of R&D expenses and the lower effective tax rates at foreign subsidiaries compared to the statutory tax rate in Japan. Net income attributable to Canon Inc. As a result, net income attributable to Canon Inc. in 2022 increased by 13.6% to ¥243,961 million, which represents 6.1% of net sales. Segment information Canon operates four segments: the Printing Business Unit, the Imaging Business Unit, the Medical Business Unit and the Industrial Business Unit. • The Printing Business Unit mainly includes office MFDs, document solutions, laser MFPs, laser printers, inkjet printers, image scanners, calculators, digital continuous feed presses, digital sheet-fed presses and large format printers. • The Imaging Business Unit mainly includes interchangeable—lens digital cameras, interchangeable lenses, digital compact cameras, compact photo printers, MR Systems, network cameras, video management software, video content analytics software, digital camcorders, digital cinema cameras, broadcast equipment and projectors. • The Medical Business Unit mainly includes CT systems, diagnostic ultrasound systems, diagnostic X-ray systems, MRI systems, clinical chemistry analyzers, digital radiography systems and ophthalmic equipment. • The Industrial Business Unit mainly includes semiconductor lithography equipment, FPD lithography equipment, OLED display manufacturing equipment, vacuum thin-film deposition equipment and die bonders. 40 Table of Contents Operating results by segment Please refer to the table of sales by segment in Note 23 of the Notes to Consolidated Financial Statements. Canon’s sales by segment are summarized as follows: 2022 Change 2021 (Millions of yen, except percentage data) Printing 2,261,938 +16.7 % 1,938,847 Imaging 803,480 +22.9 653,532 Medical 513,331 +6.9 480,362 Industrial 329,232 -2.5 337,721 Others and Corporate 223,021 +19.5 186,593 Eliminations (99,588 ) — (83,698 ) Total 4,031,414 +14.7 % 3,513,357 Note: Based on the realignment of Canon’s internal management structure, from 2022, Canon has changed the name and structure of segments from Industrial and Others Business Unit and Corporate and eliminations to Industrial Business Unit, Others and Corporate and Eliminations. Sales by segment amounts for the year ended December 31, 2021 also have been reclassified. Printing Business Unit 2022 Change 2021 (Millions of yen, except percentage data) Net sales: Office 890,888 +17.8 % 756,366 Prosumer 1,002,462 +12.8 889,091 Production 362,052 +25.5 288,555 External customers total 2,255,402 +16.6 1,934,012 Intersegment 6,536 +35.2 4,835 Total 2,261,938 +16.7 1,938,847 Operating cost and expenses 2,049,964 +19.7 1,713,154 Operating profit 211,974 -6.1 225,693 Income before income taxes 225,780 -3.1 232,952 Within the Printing Business Unit, unit sales increased compared with the previous year due to the recovery of office MFDs production, thanks to supplies of semiconductor chips improving in the second half of the year. Sales of services and consumables increased moderately compared with the previous year due to a recovery of increase of in-office work. As for laser printers and inkjet printers, unit sales increased significantly compared with the previous year due to the recovery from stagnating production activities resulting from COVID-19 infections. However, consumables decreased compared with the previous year due to decreased demand from customers working from home. For equipment in the production printing market, sales increased compared with the previous year due to strong sales of the varioPRINT iX series of high-speed cut-sheet color inkjet presses, while revenue from services also increased. These factors resulted in total sales for the business unit of ¥2,261,938 million, a year-on-year increase of 16.7%, while income before income taxes decreased by 3.1% year-on-year to ¥225,780 million, due to the increase in costs of parts and logistics, despite price adjustment of products. 41 Table of Contents Imaging Business Unit 2022 Change 2021 (Millions of yen, except percentage data) Net sales: Cameras 509,464 +17.7 % 432,885 Network cameras and Others 293,593 +34.3 218,609 External customers total 803,057 +23.3 651,494 Intersegment 423 -79.2 2,038 Total 803,480 +22.9 653,532 Operating cost and expenses 676,850 +17.8 574,814 Operating profit 126,630 +60.9 78,718 Income before income taxes 128,033 +63.2 78,462 As for the Imaging Business Unit, unit sales of interchangeable-lens digital cameras were above those of the same period of the previous year due to continued robust demand for full-frame mirrorless cameras including the EOS R5 and EOS R6 as well as favorable reviews of the new EOS R7 and EOS R10 APS-C-size mirror-less cameras, despite stagnant production activities caused by a shortage of components. Unit sales of lenses increased owing to strong sales of RF-series interchangeable-lenses that expanded the product lineup. As for network cameras, sales increased significantly, mainly as a result of strengthening sales activities in response to diversifying market needs in addition to the recovery of product supply. As for professional video production equipment, sales of Cinema EOS-series cameras, including the new EOS R5 C, as well as professional video cameras and broadcast lenses, were strong. These factors resulted in total sales for the business unit of ¥803,480 million, a year-on-year increase of 22.9%, while income before income taxes increased by 63.2% year-on-year to ¥128,033 million mainly as a result of improved profitability due to an enhanced product mix. Medical Business Unit 2022 Change 2021 (Millions of yen, except percentage data) Net sales: External customers total 513,028 +6.9 % 480,029 Intersegment 303 -9.0 333 Total 513,331 +6.9 480,362 Operating cost and expenses 482,326 +7.0 450,942 Operating profit 31,005 +5.4 29,420 Income before income taxes 31,895 -7.0 34,296 As for the Medical Business Unit, demand in Japan declined this year due to a drop-off after an uptick from government spending, which concluded in 2021, and delays of installation work at medical institutions overseas. However, demand of large systems such as Computed tomography (CT) systems and Magnetic resonance imaging (MRI) systems which was restricted due to the COVID-19 pandemic recovered overseas, mainly in Europe and the United States. Canon achieved steady sales by addressing the tight supply of components against a backdrop of record-high orders. Sales of diagnostic ultrasound systems were also strong. These factors resulted in total sales for the business unit of ¥513,331 million, a year-on-year increase of 6.9%, the highest recorded sales in the history of the business unit. Income before income taxes decreased by 7.0% year-on-year to ¥31,895 million due to an increase in other income (deductions) accompanying a corporate acquisition transaction occurred in the prior year. 42 Table of Contents Industrial Business Unit 2022 Change 2021 (Millions of yen, except percentage data) Net sales: Optical equipment 240,332 +11.3 % 215,890 Industrial equipment 80,485 -28.3 112,274 External customers total 320,817 -2.2 328,164 Intersegment 8,415 -11.9 9,557 Total 329,232 -2.5 337,721 Operating cost and expenses 271,213 -7.4 292,854 Operating profit 58,019 +29.3 44,867 Income before income taxes 59,213 +30.7 45,301 As for the Industrial Business Unit, regarding semiconductor lithography equipment, unit sales increased compared with the previous year as a result of maximizing production capacity amid strong sales for a wide range of products such as power devices and sensors. For FPD lithography equipment, performance remained high despite a decrease in unit sales compared with the previous year when the business unit caught up with the delayed equipment installation, although this was mitigated by the minimized impacts of both decreased demand from customers working from home amid the COVID-19 pandemic and the economic slowdown in the current year. For OLED display manufacturing equipment, sales decreased compared with the previous year as panel manufacturers reconsidered investment plans in response to diversifying OLED panel applications. These factors resulted in total sales for the business unit of ¥329,232 million, a year-on-year decrease of 2.5%, while income before income taxes totaled ¥59,213 million, a year-on-year increase of 30.7% following the increased unit sales of semiconductor lithography equipment. Sales by geographic area Please refer to the table of sales by geographic area in Note 23 of the Notes to Consolidated Financial Statements. A summary of net sales by geographic area in 2022 and 2021 is provided below: 2022 Change 2021 (Millions of yen, except percentage data) Japan 864,808 +4.1 % 830,378 Americas 1,255,405 +29.6 968,839 Europe 1,034,008 +15.5 894,898 Asia and Oceania 877,193 +7.1 819,242 Total 4,031,414 +14.7 % 3,513,357 Note: This summary of net sales by geographic area is determined by the location where the product is shipped to the customers. A geographical analysis indicates that net sales in 2022 are summarized as follows. In Japan, net sales increased by 4.1% from the previous year mainly owing to an increase in sales of RF-series interchangeable-lenses. In the Americas, net sales increased by 29.6% from the previous year mainly owing to an increase in unit sales of office MFDs and depreciation of the yen. 43 Table of Contents In Europe, net sales increased by 15.5% from the previous year mainly owing to an increase in sales of RF-series interchangeable-lenses and depreciation of the yen. In Asia and Oceania, net sales increased by 7.1% from the previous year mainly owing to an increase in unit sales of office MFDs and depreciation of the yen. 2021 compared with 2020 Summarized results of operations for 2021 and 2020 are as follows: 2021 Change 2020 (Millions of yen, except per share amounts and percentage data) Net sales Products and Equipment 2,804,680 +12.6 % 2,489,829 Services 708,677 +5.7 670,414 3,513,357 +11.2 3,160,243 Operating profit 281,918 +155.0 110,547 Income before income taxes 302,706 +132.4 130,280 Net income attributable to Canon Inc. 214,718 +157.7 83,318 Net income attributable to Canon Inc. shareholders per share: Basic 205.35 +158.7 79.37 Diluted 205.29 +158.7 79.35 Note: See notes to Item 3A “Selected Financial Data”. Sales In the current business term, on a global basis, the economic recovery continued. In such an environment, although production activity stagnated due to a resurgence of COVID-19 infections and a shortage of semiconductor chips, Canon’s consolidated net sales in 2021 totaled ¥3,513,357 million, an increase of 11.2% from the previous year largely due to a recovery of demand in each segment. Net sales of products and equipment totaled ¥2,804,680 million, a year-on-year increase of 12.6%, while net sales of services totaled ¥708,677 million, a year-on-year increase of 5.7%. Overseas operations are significant to Canon’s operating results and generated 76.4% of total net sales in 2021. Such sales are denominated in the applicable local currencies 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 ¥109.93 against the U.S. dollar, a year-on-year depreciation of approximately ¥3, and ¥129.94 against the euro, a year-on-year depreciation of approximately ¥8. The effects of foreign exchange rate fluctuations positively affected net sales by approximately ¥110,830 million in 2021. This favorable impact consisted of approximately ¥38,624 million of favorable impact for the U.S. dollar denominated sales and favorable impact of ¥47,967 million for the euro denominated sales, and favorable impact of ¥24,239 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 44 Table of Contents 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. In 2021, Canon promoted cost reduction such as a common platform of office MFDs, although Canon was affected by rising prices of parts and materials, mainly semiconductor chips and resin materials, as well as by rising transportation costs due to the high demand for international freight transport. Under these conditions, the ratios of cost of sales to net sales for 2021 and 2020 were 53.7% and 56.5%, respectively. Cost of sales as a percentage of net sales decreased by 2.8 points. Gross profit Canon’s gross profit in 2021 increased by 18.3% to ¥1,627,792 million from 2020. The gross profit to net sales ratio also increased by 2.8 points to 46.3%. The increase in the gross profit and gross profit to net sales ratio were mainly due to the cost reduction mentioned above, recovery of services and consumables due to a recovery in office occupancy rates, maintained levels of sales volumes and price levels for the EOS R5 and EOS R6 full-frame mirrorless cameras, expansion of the lineup to 26 lenses through the addition of 8 new products of RF-series interchangeable lenses which is a dedicated lens for full-frame mirrorless cameras and currency exchange rate fluctuations. Operating expenses The major components of operating expenses are payroll, R&D, advertising expenses and other marketing expenses. Operating expenses in 2021 increased by 6.4% year on year to ¥1,345,874 million, mainly due to a rebound from the previous year, when sales activities were severely restricted due to the spread of COVID-19 infections and currency exchange rate fluctuations. However, operating expenses as a percentage of net sales decreased by 1.7 points to 38.3% due to the promotion of structural reform of sales organizations, as well as reducing business trips through the use of video conferencing systems. As a result, Canon managed to appropriately control expenses in response to the growth in net sales and to control the growth of expenses. Operating profit Operating profit in 2021 increased by 155.0% from 2020 to a total of ¥281,918 million. The operating profit to net sales ratio increased by 4.5 points to 8.0% from 2020. Other income (deductions) Other income (deductions) for 2021 was ¥20,788 million, an increase of ¥1,055 million from 2020 mainly due to such factors as valuation gain on securities. Income before income taxes Income before income taxes in 2021 was ¥302,706 million, an increase of 132.4% from 2020, and constituted 8.6% of net sales. Income taxes Income taxes in 2021 increased by ¥37,529 million from 2020. The effective tax rate for 2021 was 23.7%, which was lower than the statutory tax rate in Japan. This resulted from a combination of factors such as the increase in tax credits of R&D expenses, the lower effective tax rates at foreign subsidiaries compared to the statutory tax rate in Japan and the reversal of the valuation allowances recognized by foreign subsidiaries owing to the improvement of the entities’ profitability. 45 Table of Contents Net income attributable to Canon Inc. As a result, net income attributable to Canon Inc. in 2021 increased by 157.7% to ¥214,718 million, which represents 6.1% of net sales. Net income attributable to Canon Inc. as a percentage of net sales increased by 2.6 points from 2019 before COVID-19 infections due to the structural reform and measures to improve profitability. Segment information Canon operates four segments: the Printing Business Unit, the Imaging Business Unit, the Medical Business Unit and the Industrial Business Unit. • The Printing Business Unit mainly includes office MFDs, document solutions, laser MFPs, laser printers, inkjet printers, image scanners, calculators, digital continuous feed presses, digital sheet-fed presses and large format printers. • The Imaging Business Unit mainly includes interchangeable-lens digital cameras, interchangeable lenses, digital compact cameras, compact photo printers, MR Systems, network cameras, video management software, video content analytics software, digital camcorders, digital cinema cameras, broadcast equipment and projectors. • The Medical Business Unit mainly includes CT systems, diagnostic ultrasound systems, diagnostic X-ray systems, MRI systems, clinical chemistry analyzers, digital radiography systems and ophthalmic equipment. • The Industrial Business Unit mainly includes semiconductor lithography equipment, FPD lithography equipment, OLED display manufacturing equipment, vacuum thin-film deposition equipment and die bonders. Operating results by segment Please refer to the table of sales by segment in Note 23 of the Notes to Consolidated Financial Statements. Canon’s sales by segment are summarized as follows: 2021 Change 2020 (Millions of yen, except percentage data) Printing 1,938,847 +7.4 % 1,804,427 Imaging 653,532 +20.7 541,314 Medical 480,362 +10.2 436,074 Industrial 337,721 +22.0 276,806 Others and Corporate 186,593 +10.3 169,140 Eliminations (83,698 ) — (67,518 ) Total 3,513,357 +11.2 % 3,160,243 Note: Based on the realignment of Canon’s internal management structure, from 2022, Canon has changed the name and structure of segments from Industrial and Others Business Unit and Corporate and eliminations to Industrial Business Unit, Others and Corporate and Eliminations. Sales by segment amounts for the years ended December 31, 2021 and 2020 also have been reclassified. 46 Table of Contents Printing Business Unit 2021 Change 2020 (Millions of yen, except percentage data) Net sales: Office 756,366 +4.7 % 722,480 Prosumer 889,091 +7.4 828,198 Production 288,555 +15.3 250,220 External customers total 1,934,012 +7.4 1,800,898 Intersegment 4,835 +37.0 3,529 Total 1,938,847 +7.4 1,804,427 Operating cost and expenses 1,713,154 +3.4 1,657,319 Operating profit 225,693 +53.4 147,108 Income before income taxes 232,952 +53.1 152,184 Within the Printing Business Unit, unit sales of office MFDs increased compared with the previous year as the imageRUNNER ADVANCE DX series saw solid demand and demand for MFDs continued to recover despite the shortage of semiconductor chips. Sales of services and consumables increased due to a recovery in office occupancy rates. For equipment in the production printing market, the varioPRINT iX series of high-speed sheet-fed color inkjet presses earned favorable reviews, and sales of services and consumables increased due to the recovery. As for laser printers, unit sales decreased compared with the previous year due to stagnation of production activity resulting from the resurgence of COVID-19 infections in Southeast Asia. However, sales of consumables increased significantly compared with the previous year, during which time demand had decreased. For inkjet printers, unit sales were below those of the previous year due to stagnation of production activity in Southeast Asia. However, unit sales of refillable ink tank printers were above those of the previous year due to solid global demand. Total sales were above those of the previous year due to a focus on higher-priced models. In addition, profitability improved due to a cost reduction as a result of common platformization and product mix as a result of increase of service profit due to a recovery in office occupancy rates, although operating costs increased due to a rebound from the previous year, when sales activities were severely restricted due to the spread of COVID-19. These factors resulted in total sales for the business unit of ¥1,938,847 million, a year-on-year increase of 7.4%, while income before income taxes increased by 53.1% year-on-year to ¥232,952 million. Imaging Business Unit 2021 Change 2020 (Millions of yen, except percentage data) Net sales: Cameras 432,885 +24.7 % 347,240 Network cameras and Others 218,609 +13.7 192,320 External customers total 651,494 +20.7 539,560 Intersegment 2,038 +16.2 1,754 Total 653,532 +20.7 541,314 Operating cost and expenses 574,814 +7.3 535,584 Operating profit 78,718 +1,273.8 5,730 Income before income taxes 78,462 +1,484.5 4,952 As for the Imaging Business Unit, unit sales of interchangeable-lens digital cameras were the same level as the previous year, despite the shortage of semiconductor chips. The price level was maintained even after more than a year since the EOS R5 and EOS R6 full-frame mirrorless cameras were released. In addition, unit sales of RF-series interchangeable lenses increased significantly due to the synergistic effects with the cameras. As for network cameras, despite the continued impact of COVID-19, sales increased mainly as a result of strengthening sales activities for such diversified applications as monitoring of congested and confined spaces as well as conventional market needs including crime prevention and disaster monitoring tools. In addition, profitability 47 Table of Contents improved due to the accelerated shift to highly profitable products such as EOS R system cameras and interchangeable lenses, although operating costs increased due to a rebound from the previous year, when sales activities were severely restricted due to the spread of COVID-19. These factors resulted in total sales for the business unit of ¥653,532 million, a year-on-year increase of 20.7%, while income before income taxes increased by 1,484.5% year-on-year to ¥78,462 million. Medical Business Unit 2021 Change 2020 (Millions of yen, except percentage data) Net sales: External customers total 480,029 +10.3 % 435,368 Intersegment 333 -52.8 706 Total 480,362 +10.2 436,074 Operating cost and expenses 450,942 +9.8 410,830 Operating profit 29,420 +16.5 25,244 Income before income taxes 34,296 +34.3 25,544 As for the Medical Business Unit, although the resurgence of COVID-19 infections and the shortage of semiconductor chips and shipping containers had an impact on production and installation, sales remained solid due to returning routine examinations at medical institutions. Sales of CT systems and diagnostic ultrasound systems increased mainly due to capitalizing on opportunities with medical institutions in Japan supported by the government and recovering demand in the North America. In addition, profitability improved due to a cost reduction as a result of volume discount based on business expansion. These factors resulted in total sales for the business unit of ¥480,362 million, a year-on-year increase of 10.2%, while income before income taxes increased by 34.3% year-on-year to ¥34,296 million, recording highs for both sales and income before income taxes for the Medical Business Unit. Industrial Business Unit 2021 Change 2020 (Millions of yen, except percentage data) Net sales: Optical equipment 215,890 +49.5 % 144,387 Industrial equipment 112,274 -11.4 126,762 External customers total 328,164 +21.0 271,149 Intersegment 9,557 +68.9 5,657 Total 337,721 +22.0 276,806 Operating cost and expenses 292,854 +17.4 249,346 Operating profit 44,867 +63.4 27,460 Income before income taxes 45,301 +61.0 28,137 As for the Industrial Business Unit, regarding semiconductor lithography equipment, unit sales increased compared with the previous year due to strong demand in a wide range of products such as sensors and memory. For FPD lithography equipment, demand for panels used in devices including laptops, tablets and high-resolution display panels remained strong. As a result, unit sales increased significantly compared with the previous year, when equipment installation stagnated due to circumstances related to COVID-19. In addition, these products are mostly manufactured at the domestic manufacturing facilities where impacts of COVID-19 related production disruption were very limited resulting in continuous production activities with better cost reduction. These factors resulted in total sales for the business unit of ¥337,721 million, a year-on-year increase of 22.0%, while income before income taxes totaled ¥45,301 million, a year-on-year increase of 61.0%. 48 Table of Contents Sales by geographic area Please refer to the table of sales by geographic area in Note 23 of the Notes to Consolidated Financial Statements. A summary of net sales by geographic area in 2021 and 2020 is provided below: 2021 Change 2020 (Millions of yen, except percentage data) Japan 830,378 +3.0 % 806,305 Americas 968,839 +13.7 852,451 Europe 894,898 +12.5 795,616 Asia and Oceania 819,242 +16.1 705,871 Total 3,513,357 +11.2 % 3,160,243 Note: This summary of net sales by geographic area is determined by the location where the product is shipped to the customers. A geographical analysis indicates that net sales in 2021 are summarized as follows. In Japan, net sales increased by 3.0% from the previous year mainly owing to an increase in sales of CT systems and diagnostic ultrasound systems mainly due to capitalizing on opportunities with medical institutions. In the Americas, net sales increased by 13.7% from the previous year mainly owing to an increase in sales of most products mainly due to the recovery from the decline of the demand caused by COVID-19. In Europe, net sales increased by 12.5% from the previous year mainly owing to an increase in sales of most products mainly due to the recovery from the decline of the demand caused by COVID-19. In Asia and Oceania, net sales increased by 16.1% from the previous year mainly owing to an increase in sales of most products mainly due to the recovery from the decline of the demand caused by COVID-19. Foreign operations and foreign currency transactions Canon’s marketing activities are performed by subsidiaries in various regions in local currencies, while the cost of sales is generally in yen. Given Canon’s current operating structure, appreciation of the yen has a negative impact on net sales and the gross profit to net sales ratio. To reduce the financial risks from changes in foreign exchange rates, Canon utilizes derivative financial instruments, which consist principally of foreign currency exchange contracts. The operating profit on foreign operation sales is usually lower than that from domestic operations because foreign operations consist mainly of marketing activities. Marketing activities are generally less profitable than production activities, which are mainly conducted by the Company and its domestic subsidiaries. Please refer to the table of geographic information in Note 23 of the Notes to Consolidated Financial Statements. B. Liquidity and capital resources Canon’s basic policy for financial strategies is to maintain a sound financial position through consistent cash flow management, and the two basic principles of cash flow management are as follows: • Canon strives to improve a highly profitable structure by further improving the profitability of existing businesses and accelerating the growth of new businesses. 49 Table of Contents • Canon strives to maintain financial soundness by keeping total capital investments for medium-term business expansion and growth within the range of depreciation and amortization expenses. However, Canon plans to actively engage in large-scale M&A for growth strategies, and also raises external funds as needed. Raising Funds (Cash-In) Canon is basically funded by net cash provided by operating activities. In procuring funds, Canon considers terms, currencies and methods in light of financial market conditions, and selects the most appropriate instrument from a variety of options. Use of Funds (Cash-Out) The principal use of cash is determined in accordance with the following priorities. • Investment for growth such as capital investment, R&D, M&A, etc.: Canon values M&A as an option for early development and expansion of new businesses. The selection of investment targets is based on the growth potential and size of the market, and on the market being highly compatible with the Canon’s business domains and technologies. • Return to shareholders: Canon returns profits to shareholders stably and aggressively, mainly in the form of a dividend, taking into consideration medium- to long-term business prospects, planned future investments, cash flow and other factors. • Repayment of borrowings: Canon has been repaying borrowings steadily to have sufficient financial strength, following investment for growth and return to shareholders. Cash flows (Millions of yen) 50 Table of Contents Cash and cash equivalents decreased by ¥39,294 million to ¥362,101 million in fiscal 2022 compared to the previous year. Canon’s cash and cash equivalents are primarily denominated in Japanese yen and in U.S. dollars, with the remainder denominated in other currencies. Net cash provided by operating activities decreased by ¥188,425 million to ¥262,603 million in fiscal 2022 compared to the previous year as a result of higher inventory levels of key devices and main products, and an increase in required working capital. The major component of Canon’s cash inflow is cash received from customers, and the major components of Canon’s cash outflow are payments for parts and materials, selling, general and administrative expenses, R&D expenses and income taxes. For fiscal 2022, cash inflow from cash received from customers decreased due to increase of trade receivable by sales improvement. There were no significant changes in Canon’s collection rates. Cash outflow for payments for parts and materials increased due to an increase of inventory, especially key devices and main products, compared with the inventory in fiscal 2021. Cash outflow for payments for income taxes increased due to an increase in taxable income. Net cash used in investing activities decreased by ¥26,436 million to ¥180,820 million in fiscal 2022 mainly due to a decrease in acquisitions of business and the increased sales of fixed assets resulting from optimization of branch office capacity at overseas sales subsidiaries, while capital investment to improve efficiency and productivity remained consistent and purchases of securities increased. Purchases of fixed assets increased by ¥11,177 million to ¥188,527 million in fiscal 2022 and purchases of securities increased by ¥19,396 million to ¥21,558 million in fiscal 2022. Canon defines “free cash flow” as cash flows from operating activities less cash flows from investing activities. For fiscal 2022, free cash flow decreased by ¥161,989 million to ¥81,783 million as compared with ¥243,772 million for fiscal 2021. Note: “Free cash flow” is a non-GAAP measure. Refer to the “Non-GAAP Financial Measures” section for the explanation and the reconciliation to the reported GAAP measure. Canon’s management places importance on cash flow management and frequently monitors this indicator. Furthermore, Canon’s management believes that this indicator is significant in understanding Canon’s current liquidity and the alternatives of use in financing activities because it takes into consideration its operating and investing activities and believes that such indicator is beneficial to investors. Canon refers to this indicator together with relevant U.S. GAAP financial measures shown in its consolidated statements of cash flows and consolidated balance sheets for cash availability analysis. Outstanding balances of loans for the acquisition of Toshiba Medical Systems Corporation (Currently, Canon Medical Systems Corporation) (Millions of yen) 51 Table of Contents Net cash used in financing activities totaled ¥146,844 million in fiscal 2022, mainly due to a decrease of long-term loans by ¥120,000 million as a result of the repayment of loans which was provided for the acquisition of Toshiba Medical Systems Corporation (currently, Canon Medical Systems Corporation) and the dividend payout of ¥119,326 million. The Company paid dividends in fiscal 2022 of ¥115.00 per share. To the extent Canon relies on external funding for its liquidity and capital requirements, it generally has access to various funding sources, including the issuance of additional share capital, issuance of corporate bond or loans. While Canon has been able to obtain funding from its traditional financing sources and from the capital markets, and believes it will continue to be able to do so in the future, there can be no assurance that adverse economic or other conditions will not affect Canon’s liquidity or long-term funding in the future. Canon’s long-term debt mainly consists of bank borrowings and finance lease obligations. In order to facilitate access to global capital markets, Canon obtains a credit rating from S&P Global Ratings (“S&P”). In addition, Canon maintains a rating from Rating and Investment Information, Inc. (“R&I”), a rating agency in Japan, for access to the Japanese capital market. As of February 28, 2023, Canon’s debt ratings are: S&P: A (long-term), A-1 (short-term); and R&I: AA (long-term). Canon does not have any rating downgrade triggers that would accelerate the maturity of a material amount of its debt. A downgrade in Canon’s credit ratings or outlook could, however, increase the cost of its borrowings. As part of its ongoing business, Canon does not participate in transactions that create relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Canon provides guarantees for its employees, affiliates and other companies. The guarantees for the employees are principally made for their housing loans. The guarantees for affiliates and other companies are made for their lease obligations and bank loans to ensure that those companies operate with less financial risk. Canon would have to perform under a guarantee if the borrower defaults on a payment within the contract terms. The contract terms are 1 year to 12 years in case of employees with housing loans, and 1 year to 6 years in case of affiliates and other companies with lease obligations and bank loans. The maximum amount of undiscounted payments Canon would have had to make in the event of default is ¥1,535 million at December 31, 2022. The carrying amounts of the liabilities recognized for Canon’s obligations as a guarantor under those guarantees at December 31, 2022 were not significant. The following table summarizes Canon’s contractual obligations at December 31, 2022. Payments Due By Period Total Less than 1 year 1-3 years 3-5 years More than 5 years (Millions of yen) Contractual obligations: Long-Term Debt: Loan from the banks 54,000 54,000 — — — Other debt 3,589 1,172 1,414 756 247 Operating Lease Obligations 123,609 35, 535 46,776 23,349 17,949 Purchase commitments for : Property, Plant and Equipment 101,351 101,351 — — — Parts and Raw Materials 287,591 287,591 — — — Other long-term liabilities Contribution to Defined Benefit Pension Plans 34,658 34,658 — — — Total 604,798 514,307 48,190 24,105 18,196 52 Table of Contents Note: See Note 9, 11, 19 and 20 in the Notes to Consolidated Financial Statements for further details. The table does not include provisions for uncertain tax positions and related accrued interest and penalties, as the specific timing of future payments related to these obligations cannot be projected with reasonable certainty. See Note 12, Income Taxes in the Notes to Consolidated Financial Statements for further details. Canon provides warranties of generally less than one year against defects in materials and workmanship on most of its consumer products. Estimated product warranty related 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 primarily 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. As of December 31, 2022 accrued product warranty costs are included in accrued expenses and amounted to ¥20,887 million. Canon’s management believes that current financial resources, cash generated from operations and Canon’s potential capacity for additional debt and/or equity financing will be sufficient to fund current and future capital requirements. Canon’s management policy in recent periods to optimize inventory levels is intended to maintain an appropriate balance among relevant imperatives, including minimizing working capital requirement, avoiding undue exposure to the risk of inventory obsolescence, and maintaining the ability to sustain sales despite the occurrence of unexpected disasters. Canon’s total inventory turnover measured in days were 69, 66, and 60 days at the end of the fiscal years 2022, 2021, and 2020, respectively. The inventory turnover in 2022 increased due to an increase in inventories of products in process at plants and in transit to dealers, in order to focus on securing electronic parts, raw materials and important parts amid a shortage of semiconductor components and international logistics disruption. Canon is committed to cash flow management in order to strengthen its financial base. While actively investing to expand its business performance, Canon is also ensuring stable free cash flow by keeping total capital investments within the range of depreciation and amortization. Increase in property, plant and equipment on an accrual basis in 2022 amounted to ¥156,593 million compared with ¥151,914 million in 2021 and ¥132,302 million in 2020. For 2023, Canon projects its increase in property, plant and equipment will be approximately ¥210,000 million. Employer contributions to Canon’s worldwide defined benefit pension plans were ¥31,705 million in 2022, ¥43,782 million in 2021 and ¥26,965 million in 2020. Employer contributions to Canon’s worldwide defined contribution pension plans were ¥24,346 million in 2022, ¥22,660 million in 2021, and ¥16,334 million in 2020. In addition, employer contributions to the multiemployer pension plan of certain subsidiaries were ¥4,720 million in 2022, ¥4,822 million in 2021 and ¥ ¥4,224 million in 2020. Working capital in 2022 decreased by ¥26,951 million to ¥790,561 million, compared with ¥817,512 million in 2021 and ¥462,954 million in 2020. The decrease was primarily due to an increase in short-term loans (including the current portion of long-term debt). Canon believes its working capital will be sufficient for its requirements for the foreseeable future. Canon’s capital requirements are primarily dependent on management’s business plans regarding the levels and timing of purchases of fixed assets and investments. The working capital ratio (ratio of current assets to current liabilities) for 2022 was 1.58 compared to 1.77 for 2021 and to 1.35 for 2020. Return on assets (net income attributable to Canon Inc. divided by the average of total assets) was 5.0% in 2022, compared to 4.6% in 2021 and 1.8% in 2020. It improved from the previous fiscal year due to an increase in net income as a result of improved business performance. 53 Table of Contents Return on Canon Inc. shareholders’ equity (net income attributable to Canon Inc. divided by the average of total Canon Inc. shareholders’ equity) was 8.1% in 2022 compared with 7.9% in 2021 and 3.2% in 2020. It improved from the previous fiscal year due to a significant increase in net income, although shareholders’ equity increased due to an increase in retained earnings resulting from an increase in profit and an increase in foreign currency translation adjustments resulting from the depreciation of the yen. In Phase VI, one of Canon’s management policies is to thoroughly implement cash flow management, and Canon is restrengthening its financial base. In fiscal 2022, loans decreased by ¥120,000 million due to the repayment of loans which was provided for the acquisition of Toshiba Medical Systems Corporation (currently, Canon Medical Systems Corporation). On the other hand, short-term loans were increased in response to the increase in required working capital. As a result, the debt to total assets ratios were 8.2%, 6.8% and 10.9% as of December 31, 2022, 2021 and 2020, respectively. Canon had short-term loans, current operating lease liabilities, long-term debt, and noncurrent operating lease liabilities of ¥417,413 million, ¥320,971 million, ¥506,172 million as of December 31, 2022, 2021, and 2020, respectively. Canon Inc. shareholders’ equity to total assets ratios were 61.1%, 60.5% and 55.7% as of December 31, 2022, 2021 and 2020, respectively. Canon maintains strong financial base by increase in shareholders’ equity through an increase in retained earnings resulting from net income attributable to Canon, and an increase in accumulated other comprehensive income due to the depreciation of the yen. Non-GAAP Financial Measures Canon has reported its financial results in accordance with U.S. GAAP. In addition, Canon has discussed its results using the combination of two GAAP cash flow measures, Net cash provided by operating activities and Net cash used for investing activities, which Canon refers to as “Free Cash Flow” which is a non-GAAP measure. Canon believes this measure is beneficial to an investor’s understanding of its current liquidity and the alternatives of uses of financing activities because it takes into consideration its operating and investing activities. A reconciliation of this non-GAAP financial measure and the most directly comparable measure calculated and presented in accordance with GAAP is set forth on the following table. Free Cash Flow Years ended December 31 2022 2021 (Millions of yen) Net cash provided by operating activities 262,603 451,028 Net cash used in investing activities (180,820 ) (207,256 ) Free cash flow 81,783 243,772 C. Research and development, patents and licenses Since its founding, Canon has diversified its business and increased its competitiveness by developing and diversifying core competence management that comprises various core competence technologies (“core technologies”) to create industry-leading core products, fundamental technologies that form the basis of technology accumulation and basic technologies for value which are technology and expertise that support the 54 Table of Contents Canon brand accumulated during the Company’s growth and the basis of commercialization technology. Canon’s key R&D strategies are as follows: • Reinforce fundamental technologies and value creation technologies • Create future businesses based on strong core technologies and fundamental technologies • Enhance innovation-type R&D in response to the demands of the current age Canon strives to implement the above R&D strategies as follows: • Reinforce fundamental technologies and value creation technologies: Contribute to higher efficiency of existing businesses by further evolving value creation technologies. Alongside this, extract the essence of a wide range of core technologies possessed by existing businesses, deepen fundamental technologies and inject them into core technologies of new businesses. In doing so, Canon will further strengthen the competitiveness of existing businesses and growing new businesses. • Create future businesses based on strong core technologies and fundamental technologies: Promote development of new business areas through technology diversification. For example, Canon will develop devices that utilize materials technology -the foundation of ink and toner materials- as well as materials with unique properties, and work on development of next-generation technologies that lead to business creation. • Enhance innovation-type R&D in response to the demands of the current age: Build upon trends such as DX and carbon neutrality, promote R&D that leads to corporate value improvement. In particular, focus on cyber-physical systems that closely integrate cyberspace, which enables the combination of various services, with physical (real world) space, the point of contact with people. Create various innovations by developing cyber-physical business models and products that stay one step ahead through developing advanced cyber technology with utilizing world-class core technologies in the physical field and business alliances. R&D expenses were ¥306,730 million in fiscal 2022 and ¥287,338 million in fiscal 2021. The R&D expenses to net sales ratios were 7.6% in fiscal 2022 and 8.2% in fiscal 2021. Canon believes that new products protected by a robust patent portfolio will not easily allow competitors to surpass them, and will give the Company an advantage in establishing standards in the market and industry. Canon obtained the fifth greatest number of patents in the United States in 2022, according to the annual ranking list, released by IFI CLAIMS ® Patent Services. D. Trend information Under the corporate philosophy of kyosei—living and working together for the common good—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 corporation targeting continued growth and development. Based on this basic management policy, Canon launched the Excellent Global Corporation Plan in 1996 and, from Phase I to Phase V, has worked to strengthen its management base and improve corporate value. Under Phase V of the “Excellent Global Corporation Plan,” which covered the years from 2016 to 2020, the four new businesses to serve as Canon’s new growth drivers, namely, Commercial Printing, Network Cameras, Medical, and Industrial Equipment fully emerged and the basic framework for promoting transformation of the business portfolio was completed. Then in 2021, the initial year of Phase VI of the Excellent Global Corporation Plan, 55 Table of Contents Canon sought to further facilitate the transformation of its business portfolio by reorganizing its product-oriented business divisions into industry-oriented business groups, thereby establishing a framework for enhancing business competitiveness and creating new drivers of growth. In 2021 and 2022, the business environment remained challenging due to the spread of COVID-19, supply chain disruptions caused by the tight supply of components and pressures on distribution, the conflict between Russia and Ukraine, lockdowns in Shanghai, and accelerating inflation worldwide. However, by harnessing the efforts of the entire Canon Group, including procurement and logistics operations, and backed by strong product competitiveness in each of its businesses, Canon achieved sales and profit growth for the second consecutive year. Although it is likely that Canon will continue to operate under a volatile economic environment this year as well, Canon will seek to achieve greater performance while leveraging the collective strength of its development, procurement, production, and sales. In so doing, Canon will accordingly focus on the following measures under the basic policy of Phase VI of striving to “accelerate its corporate portfolio transformation by improving productivity and creating new businesses.” 1. Further strengthen competitiveness of industry-oriented business groups Canon will strengthen and expand its four industry-oriented business groups to promote business portfolio transformation. (1) Printing Group Even though companies have been shifting to paperless documents due to a greater dispersion of workplaces caused by the COVID-19 pandemic, as well as due to advances in digital transformation (DX), Canon is likely to see solid demand for printing devices given that paper remains an instrumental means of work-related conceptualization and information sharing. In order to support hybrid work styles that combine office- and tele-work, there is a need to provide a print environment that is free from restrictions on where to work by utilizing the cloud. Leveraging the advantage of having two digital printing technologies, namely electrophotography and inkjet, the Canon Group will offer new solutions for the DX era in both office and home printing. Furthermore, in the field of digital commercial printing of catalogs, posters and other material, which is poised for growth amid a shift from analog to digital, Canon is expanding sales of printing presses, recognized for their image quality and productivity, which have been further enhanced by incorporating feedback from printing companies, its customers. Furthermore, in the field of industrial printing, which includes labels and packaging, Canon plans to fully enter the market by developing new products while taking advantage of the wealth of technology, knowledge and customer relationships held by Edale Limited, a UK-based company that Canon acquired in 2022. (2) Imaging Group Although the overall market for digital cameras has shrunk significantly due to widespread use of smartphones, Canon expects demand to remain solid as current users of interchangeable-lens cameras are mainly professionals and enthusiasts who seek high-quality images. To address the needs of these users, Canon will continuously introduce cameras, from entry-class to professional level models that offer enhanced features as well as interchangeable lenses. In doing so, Canon, as a leading camera company, seeks to stimulate the market. Canon is currently expanding its lineup of mirrorless cameras with its sights set on establishing its position as No. 1 in that field. 56 Table of Contents In the network camera field, where surveillance applications are likely to keep driving growth due to escalating needs for safety and security, Canon also anticipates substantial growth accompanying an expanding range of applications for such cameras in areas other than surveillance. For instance, this is likely to include applications with respect to facilitating in-store marketing, implementing production control at manufacturing sites, and helping people avoid crowds and contact in places where individuals gather. Canon seeks to achieve market-exceeding growth by offering an abundant lineup of camera bodies and solutions with providing total services encompassing everything from video input to video management and analytics, cooperating with Canon Group companies such as Axis, Milestone Systems, BriefCam, and Arcules. Canon will take steps to create new businesses by coming up with applications for optical-related technologies involving lenses, sensors, and image processing, cultivated by the Company thus far. (3) Medical Group Canon aims to contribute to medical treatment worldwide not only through diagnostic imaging systems, but also by broadening its business sphere, to include healthcare IT and in-vitro diagnostics. Canon is Japan’s leading manufacturer of diagnostic imaging systems and accordingly deem it necessary to establish a similar presence overseas in order to achieve growth going forward. First, to become the No. 1 company worldwide in CT systems, Canon aims to achieve early commercialization of the next-generation of CT scanners that utilize photon-counting technology. To such ends, Canon developed an X-ray CT system equipped with a photon-counting detector that uses the technology of Canada-based Redlen Technologies, which Canon acquired two years ago. Having installed it at the National Cancer Center of Japan, Canon is accelerating the development of this system. Furthermore, with the aim of achieving a market share of over 10% in the United States, which is highly influential market worldwide, Canon established a new company in January 2023 in the suburbs of Cleveland to focus on marketing. As such, Canon will work to achieve substantial growth in part by increasing its presence as Canon engages in joint research with U.S. medical institutions and promotes stronger relationships with medical practitioners who serve as key opinion leaders. Moreover, to achieve high growth, Canon will spread the benefits to markets not only in the United States, but also to markets worldwide. In the healthcare IT field, Canon supports the provision of high-quality diagnoses and efficient medical treatment by making it possible to integrate, process, and analyze data collected in clinical settings. Furthermore, in the in-vitro diagnostics field, Canon will expand its business domain to include testing reagents and other areas around testing equipment. (4) Industrial Group As applications for semiconductors and displays continue to expand, prompted by innovation particularly with respect to AI, IoT, 5G, and other technologies, Canon anticipates continuing market growth and subsequently expect demand for manufacturing equipment to rise. As for semiconductor lithography equipment, with its sights set on addressing growing demand, Canon aims to increase its market share by further enhancing product competitiveness and bolstering production capacity. Unlike conventional lithography technology that uses light to expose circuit patterns, the nanoimprint lithography manufacturing equipment being developed by Canon enlists a simple process of stamping a circuit pattern from a mold imprinted with such patterns. Nanoimprint lithography enables semiconductor manufacturers to reduce costs significantly because it eliminates the necessity of complex processes for etching minute circuit patterns. It also helps to reduce impact on the global environment as it consumes significantly less power given that it does not require powerful lasers and it does not need large vacuum systems or cooling systems. In the panel market, IT panels used in PCs and tablets are likely to drive growth going forward. As such, Canon will continue to provide FPD lithography equipment and OLED display manufacturing equipment that help panel manufacturers, its customers, boost productivity. 57 Table of Contents Furthermore, Canon aims to expand the industrial business domain by developing new equipment that integrates core technologies of the group in the areas of ultra-precision positioning, ultra-precision processing and vacuum systems. 2. Rebuild the global production system Canon has been expanding its manufacturing facilities throughout Asia since the 1970s, but is now reviewing and reorganizing such production sites against the backdrop of supply chain interruptions and geopolitical risks. In its return to domestic production, which has been promoted up until now, Canon has taken a two-pronged approach of shifting to automation and in-house production, effectively achieving thorough cost reduction by integrating design, production technology, and manufacturing sites, thereby gaining competitive edge with respect to costs that is unmatched by overseas production. 3. Strengthen product development based on proprietary technologies Whereas Canon has been turning to M&A initiatives as a means of developing new businesses in recent years, Canon seeks to create new businesses going forward by further reinforcing product development centered on proprietary technologies. Under its framework of business groups largely reorganized by industry, Canon has been working on developing new products and solutions by combining respective technologies in a manner that gives rise to a sort of chemical reaction. In addition, the Frontier Business Promotion Headquarters has been bringing together Canon’s technologies from across the Canon Group with the aim to create new businesses in the fields of life science, materials, and solutions. In order to achieve these goals, it is important to develop the technology experts who are responsible for product development, and Canon will promote this through a system to certify world-class engineers as “Top Scientists” who lead the development of cutting-edge technologies, and a system to train software engineers by reskilling employees. For the discussions of the trend by business segment, see “Item 4 B. Business overview” and “Item 5 A. Operating Results”. 58 Table of Contents