CAJFF Canon Inc (PK)

SIGNATURES

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

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

The following materials are included.

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

[English summary with full translation of consolidated financial information]

Quarterly Report filed with the Japanese government

pursuant to

the Financial Instruments and Exchange Law of Japan

For the second quarter ended

June 30, 2019

CANON INC.

Tokyo, Japan

CONTENTS

Disclaimer Regarding Forward-Looking Statements

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

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

1

Notes:

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

The Canon Group (consisting of the Company, 369 consolidated subsidiaries, and 8 affiliates accounted for using the equity method, as of June 30, 2019, collectively, the “Group”) is engaged in development, manufacturing, sales, and servicing activities in areas such as office, imaging systems, medical systems, and industrial equipment. No material change in Canon’s business has occurred during the six months ended June 30, 2019.

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

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

Looking back at the global economy in the first half of 2019, the U.S. economy remained solid supported by strong employment conditions, although business activities showed signs of weakness. The European economy continued to slow down due mainly to the downturn caused by sluggish exports in Germany, as well as the confusion surrounding the U.K.’s impending exit from the EU. The Chinese economy was lagging, despite government’s economic stimulus measures, amid decreasing exports caused by trade friction with the United States. The economies of other emerging markets also slowed down. In Japan, a sense of stagnation was deepened due to decreasing exports caused by sluggish overseas demand. The global economy overall showed the trend of further slowdown.

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

The average values of the yen during the second quarter and the first half of the year were ¥109.80 and ¥110.05 against the U.S. dollar, respectively, year-on-year depreciation of approximately ¥1 for both periods, and ¥123.39 and ¥124.25 against the euro, respectively, year-on-year appreciation of approximately ¥7 for both periods.

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[Second quarter results]

During the second quarter, overall unit sales of office MFDs remained at around the same level as the previous year. Although unit sales of monochrome-model office MFDs decreased, unit sales of color-model office MFDs increased steadily. Unit sales of laser printers decreased compared with the same period of the previous year mainly due to the slowdown of the market, although sales were strong for new models. While Canon has been working towards expanded sales of mirrorless cameras, unit sales of interchangeable lens digital cameras decreased compared with the same period of the previous year amid the shrinking market. Looking at inkjet printers, although Canon has been working towards expanding product lineup, ranging from home-use models to business-use models, overall unit sales decreased compared with the same period of the previous year. Sales of medical equipment increased compared with the same period of the previous year, due to expanded sales in United States supported by robust sales of computed tomography (CT) systems. For industrial equipment, sales of semiconductor lithography equipment and manufacturing equipment for organic LED (OLED) panel decreased compared with the same period of the previous year, due to the prolonged sluggishness of capital investments for semiconductor memory and small- and medium-size display panels. On the other hand, sales of network cameras increased steadily. Under these conditions, second-quarter net sales decreased by 10.0% year on year to ¥905.9 billion. The gross profit ratio dropped by 2.3 points to 44.9% and gross profit decreased by 14.4% year on year to ¥406.4 billion mainly due to the negative effects of currency exchange rates and the product mix. Operating expenses decreased by 3.5% year on year to ¥363.3 billion, thanks to efforts to thoroughly manage expenses as well as the positive effect of currency exchange rates. As a result, second-quarter operating profit decreased by 56.0% to ¥43.1 billion. Other income (deductions) decreased by ¥4.2 billion, while income before income taxes decreased by 53.6% year on year to ¥51.1 billion and net income attributable to Canon Inc. decreased by 55.6% to ¥34.5 billion.

Basic net income attributable to Canon Inc. shareholders per share was ¥32.21 for the second quarter, a year-on-year decrease of ¥39.72.

[First-half results]

During the first half, overall unit sales of office MFDs increased compared with the same period of the previous year. Although unit sales of monochrome-model office MFDs decreased, unit sales of color-model office MFDs increased steadily. Unit sales of laser printers decreased compared with the same period of the previous year mainly due to the slowdown of the market, although sales were strong for new models. While Canon has been working towards expanded sales of mirrorless cameras, unit sales of interchangeable lens digital cameras decreased compared with the same period of the previous year amid the shrinking market. Looking at inkjet printers, although Canon has been working towards expanding product lineup, ranging from home-use models to business-use models, overall unit sales decreased compared with the same period of the previous year. Sales of medical equipment increased compared with the same period of the previous year, due to expanded sales in United States supported by robust sales of CT systems. For industrial equipment, sales of lithography equipment and manufacturing equipment for OLED panel decreased compared with the same period of the previous year, due to the prolonged sluggishness of capital investments for semiconductor memory and small- and medium-size display panels. On the other hand, sales of network cameras increased steadily. Under these conditions, net sales for the first half of the year decreased by 10.0% year on year to ¥1,770.3 billion. The gross profit ratio dropped by 1.7 points to 45.0% and gross profit decreased by 13.3% year on year to ¥796.8 billion mainly due to the negative effects of currency exchange rates and the product mix. Operating expenses decreased by 4.2% year on year to ¥713.2 billion, thanks to efforts to thoroughly manage expenses as well as the positive effect of currency exchange rates. As a result, first-half operating profit decreased by 52.3% to ¥83.6 billion. Other income (deductions) decreased by ¥7.2 billion, while income before income taxes decreased by 50.4% year on year to ¥97.2 billion and net income attributable to Canon Inc. decreased by 51.2% to ¥65.8 billion.

Basic net income attributable to Canon Inc. shareholders per share was ¥61.22 for the first half, a year-on-year decrease of ¥63.61.

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Looking at Canon’s first-half performance by business unit, starting with the Office Business Unit, the imageRUNNER ADVANCE Gen3 3rd Edition series, which features enhanced security functions, experienced solid demand. As a result, color models compensated for the shrinking demand for monochrome models and unit sales of office MFDs increased compared with the same period of the previous year. As for laser printers, although sales were strong for new models that achieve low power consumption, compact body designs and high productivity, unit sales of hardware decreased compared with the same period of the previous year due to decreasing sales of low speed models and sales of consumables also decreased. These factors resulted in total sales for the combined first six months of the year totaled ¥853.5 billion, a year-on-year decrease of 5.7%, while income before income taxes totaled ¥90.8 billion, a year-on-year decrease of 22.1%.

Within the Imaging System Business Unit, although the market of interchangeable lens digital cameras continued to shrink, for mirrorless cameras, unit sales were strong owing to the successive introduction of new models equipped with full-frame sensors after the second half of the previous year, which served to increase the company’s presence in the market. For inkjet printers, although Canon has been working to increase sales by expanding its lineup of refillable ink tank models and through the development of business inkjet MFDs, unit sales decreased overall compared with the same period of the previous year mainly due to the shrinking market. As a result, sales for the combined first six months of the year totaled ¥381.0 billion, a year-on-year decrease of 17.8%, while income before income taxes totaled ¥18.4 billion, a year-on-year decrease of 71.0%.

Within the Medical System Business Unit, sales of CT systems were strong in overseas market, mainly due to such newly launched products as the Aquilion Start and Aquilion Genesis. As a result, sales for the combined first six months of the year totaled ¥214.6 billion, a year-on-year increase of 1.3%, while income before income taxes totaled ¥10.0 billion, a year-on-year decrease of 19.6%, mainly due to the product mix.

For the Industry and Others Business Unit, although investments in semiconductor lithography equipment for image sensors and automotive devices were strong, investments in memory devices remained at a low level. Sales of OLED panel manufacturing equipment decreased compared with the same period of the previous year due to the continuing restraint of investments in the smartphone market. Sales of network cameras were strong amid increasing market demand due to diversifying market needs, particularly for Axis. Consequently, sales for the combined first six months of the year totaled ¥368.8 billion, a year-on-year decrease of 15.7%, while income before income taxes totaled ¥12.1 billion, a year-on-year decrease of 67.6%.

Financial Conditions

Total assets decreased by ¥84.9 billion to ¥4,814.6 billion at June 30, 2019, compared to the end of previous year, mainly due to the decrease of cash and cash equivalents and trade receivables, although operating lease right-of-use assets increased due to applying the new accounting standard. Total liabilities increased by ¥33.2 billion to ¥1,914.7 billion at June 30, 2019, compared to the end of previous year, mainly due to the increase of current and noncurrent operating lease liabilities to apply the new accounting standard same as total assets, although trade payables and accrued expenses decreased. Total equity decreased by ¥118.0 billion to ¥2,899.9 billion at June 30, 2019, compared to the end of previous year, mainly due to the dividends to Canon Inc. shareholders, the repurchasing of treasury stock and the increase of accumulated other comprehensive loss resulting from the appreciation of the yen.

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Cash Flows

During the first half of 2019, cash flow from operating activities totaled ¥113.2 billion, a decrease of ¥51.7 billion compared with the same period of the previous year, owing mainly to a decrease of profit. Cash flow used in investing activities increased by ¥21.0 billion year on year to ¥110.8 billion mainly due to an increase of the investment in production equipment. Accordingly, free cash flow totaled positive ¥2.4 billion, a decrease of ¥72.7 billion compared with the corresponding year-ago period.

Cash flow used in financing activities recorded an outlay of ¥107.5 billion, mainly owing to the dividend payout and the repurchasing of treasury stock while an increase of ¥32.1 billion of short-term loan.

Owing to these factors, as well as the impact from foreign currency translation adjustments, cash and cash equivalents decreased by ¥113.2 billion to ¥407.5 billion from the end of the previous year.

Non-GAAP Financial Measures

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

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

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

6

Management Issues to be Addressed

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

Research and Development Expenses

Canon’s research and development expenses for the six months ended June 30, 2019 totaled ¥148.4 billion.

Property, Plant and Equipment

There were no significant changes to the status of existing major property, plant and equipment during the first half of 2019.

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

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

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

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III. Company Information

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

Stock Acquisition Rights

(1) Stock options

The descriptions of the stock option plans as of June 30, 2019 are below.

The Stock Option Plan Approved on March 28, 2019

1. Grantees of share options

The Company’s 4 directors (excluding outside directors) and 31 executive officers.

2. Number of share options

The number of share options that the Board of Directors are authorized to issue is 1,163.

3. Number of shares acquired upon exercise of a share option

The number of shares acquired upon exercise of one share option (the “Allotted Number of Shares”) is 100 common shares, and the total number of shares to be delivered due to the exercise of share options is 116,300 common shares. However, in the case that the Company conducts a share split (including an allotment without consideration ( musho-wariate ) of shares of common stock of the Company; the same shall apply to all references to the share split herein) or share consolidation on and after the date of shareholders’ resolution adopting the proposal at the above-mentioned General Meeting of Shareholders (the “Allotment Date”), the number of shares acquired shall be adjusted in accordance with the following formula, rounding down any fraction of less than one share resulting from such adjustment.

In addition to the above, in any event that makes it necessary to adjust the number of shares acquired, including a merger and company split, on and after the Allotment Date, the Company may make appropriate adjustment to the Number of Shares Acquired within a reasonable range.

4. Cash payment for share options (yen)

The cash payment required for each stock acquisition right shall be ¥1 per share to be acquired upon exercise of each stock acquisition right, multiplied by the number of shares acquired.

5. Period during which share options are exercisable

From April 27, 2019 to April 26, 2049

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6. Issue price and amount of increased stated capital (yen)

The issue price and amount of increased stated capital per share is ¥2,282 and ¥1,141, respectively. The issue price is total amount of the exercise price of each stock acquisition (¥1 per share) and the fair value of the stock acquisition rights at the allotment date. In addition, the amount of capital to be increased due to the issuance of shares upon exercise of the stock acquisition rights shall be a half of the maximum amount of capital increase, etc, which is calculated in accordance with Article 17, Paragraph 1 of the Company Accounting Regulations ( Kaisha Keisan Kisoku ), and any fraction less than ¥1 arising therefrom shall be rounded up to the nearest ¥1.

7. Other conditions for exercise of share options

(i)  Those to whom stock acquisition rights are allotted (the “Holder(s)”) shall be entitled to exercise all the stock acquisition rights together within 10 days (in case the last day is not a business day, the following business day) from the day immediately following the day when they cease to hold any position as a director or an executive officer of the Company.

(ii)  In the event that the Company recognizes any violation of laws and regulations, misconduct of the duties, act conflicting with the duty of due care or duty of loyalty, or any other act equivalent thereto of the Holder, the Company may limit, subject to a resolution by the Board of Directors of the Company, the number of offered stock acquisition rights that may be exercised by such Holder.

8. Restriction on acquisition of share options by transfer

An acquisition of share options by way of transfer requires the approval of the Board of Directors.

9. Treatment of the stock acquisition rights upon restructuring transaction

If the Company conducts a merger (limited to the case where the Company is dissolved due to the merger), or a share exchange or transfer (both, limited to the case where the Company becomes a wholly-owned subsidiary) (collectively, the “Structural Reorganization”), the Company shall, in each of the above cases, allot stock acquisition rights of any of the relevant companies listed in “a” through “e” of Article 236, Paragraph 1, Item 8 of the Company Law (the “Reorganized Company”) to the Holders holding the stock acquisition rights remaining at the time immediately preceding the effective date of the relevant Structural Reorganization (the “Remaining Stock Acquisition Rights”) (the effective date of the relevant Structural Reorganization shall mean, in the case of a merger, the date on which the merger becomes effective; in the case of a consolidation; the date of establishment of a newly-incorporated company through consolidation; in the case of a share exchange, the date on which the share exchange becomes effective; and in the case of a share transfer, the date of establishment of a wholly-owning parent company through the share transfer; hereinafter the same shall apply). Provided, however, that the foregoing shall be on the condition that transfer of such stock acquisition rights by the Reorganized Company in accordance with each of the following items is stipulated in a merger agreement, a consolidation agreement, a share exchange agreement or a share transfer plan.

(i)  Number of stock acquisition rights of the Reorganized Company to be allotted:

A number equal to the number of the Remaining Stock Acquisition Rights held by the Holder shall be transferred to such Holder.

(ii)  Class of shares of the Reorganized Company to be acquired upon exercise of stock acquisition rights:

Common stock of the Reorganized Company.

(iii)  Number of shares of the Reorganized Company to be acquired upon exercise of stock acquisition rights:

To be determined in accordance with 3 above, taking into consideration, among others, the conditions of Structural Reorganization.

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(iv)  Value of assets to be contributed upon exercise of each stock acquisition right:

The value of assets to be contributed upon exercise of each stock acquisition right to be allotted shall be the amount obtained by multiplying (x) the exercise price after reorganization set forth below by (y) the number of shares of the Reorganized Company to be acquired upon exercise of the relevant stock acquisition rights as determined in accordance with (iii) above. The “exercise price after reorganization” shall be one (1) yen per share of the Reorganized Company to be acquired upon exercise of each of its stock acquisition rights.

(v)  Exercise period of stock acquisition rights:

From and including whichever is the later of (x) the commencement date of the period during which the stock acquisition rights may be exercised or (y) the effective date of the Structural Reorganization, to and including the expiration date of the period during which the stock acquisition rights may be exercised as provided.

(vi)  Matters regarding stated capital and capital reserves increased due to the issuance of shares upon exercise of stock acquisition rights:

(a) The increased amount of stated capital to be increased due to the issuance of shares upon exercise of the stock acquisition rights will be one half (1/2) of the maximum amount of increase of stated capital, etc. to be calculated in accordance with Article 17, Paragraph 1 of the Company Accounting Regulations ( Kaisha Keisan Kisoku ). Any fractional amount of less than one (1) yen resulting from such calculation will be rounded up to one (1) yen.

(b) The increased amount of capital reserves to be increased due to the issuance of shares upon exercise of the stock acquisition rights shall be the maximum amount of increases of stated capital, etc., mentioned in (a) above, after the subtraction of increased amount of stated capital mentioned in (a) above.

(vii)  Restrictions on acquisition of stock acquisition rights by transfer:

The stock acquisition rights cannot be acquired through transfer, unless such acquisition is expressly approved by a resolution of the Board of Directors of the Reorganized Company.

(viii)  Conditions for exercise of stock acquisition rights:

(a) Those to whom stock acquisition rights are allotted (the “Holder(s)”) shall be entitled to exercise all the stock acquisition rights together within 10 days (in case the last day is not a business day, the following business day) from the day immediately following the day when they cease to hold any position as a Director or an Executive Officer.

(b) In the event that the Company recognizes any violation of laws and regulations, misconduct of the duties, act conflicting with the duty of due care or duty of loyalty, or any other act equivalent thereto of the Holder, the Company may limit, subject to a resolution by the Board of Directors of the Company, the number of offered stock acquisition rights that may be exercised by such Holder.

(c) Besides the above, other conditions shall be stipulated in an agreement to be executed between the Reorganized Company and the Holder, based on the resolution of the Board of Directors’ meeting of the Reorganized Company.

(ix)  Events regarding the Company’s acquisition of stock acquisition rights:

If a proposal for the approval of a merger agreement under which the Reorganized Company will become an extinguishing company or a proposal for the approval for a share exchange agreement or a share transfer plan under which the Reorganized Company will become a wholly owned subsidiary is approved by the shareholders of the Reorganized Company at a Meeting of Shareholders (or by the Board of Directors if no resolution of a Meeting of Shareholders is required for such approval), the Reorganized Company will be entitled to acquire the share options, without compensation, on a date separately designated by the Board of Directors.

(2) Other stock acquisition rights

Not applicable.

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

Not applicable.

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

Notes:

1: Apart from the above shares, The Dai-Ichi Life Insurance Company, Limited held 6,180,000 shares contributed to a trust fund for its retirement and severance plans.

2: Apart from the above shares, Mizuho Bank, Ltd., held 9,057,000 shares contributed to a trust fund for its retirement and severance plans.

3: Moxley and Co. LLC is a nominee of JPMorgan Chase Bank, which is the depositary of Canon’s ADRs (American Depositary Receipts).

4: Apart from the above shares, the Company owns 269,926,568 shares (20.24% of total issued shares) of treasury stock.

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Note:

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

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

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

Changes in functions of executive officers are below:

The Number of Directors and Executive Officers by Gender

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

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

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IV. Financial Statements (Unaudited)

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

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15

16

17

18

19

20

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CANON INC. AND SUBSIDIARIES

CANON INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)

Recently adopted accounting guidance

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

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

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CANON INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)

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

The carrying amount of non-marketable equity securities without readily determinable fair value totaled ¥5,653 million and ¥4,629 million at June 30, 2019 and December 31, 2018, respectively. The impairment or other adjustments resulting from observable price changes recorded during the six months ended June 30, 2019 and 2018 were not significant.

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

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

Time deposits with original maturities of more than three months are ¥3,920 million and ¥326 million at June 30, 2019 and December 31, 2018, respectively, and are included in short-term investments in the accompanying consolidated balance sheets.

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CANON INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)

Trade receivables are summarized as follows:

Inventories are summarized as follows:

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

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

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

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CANON INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)

Canon provides leasing arrangement to its customers primarily for the sales of office products. Revenue from the sale of these products under sales-type leases is recognized at the inception of the lease. Interest income on sales-type leases and direct-financing leases is recognized over the life of each respective lease using the interest method. Leases not qualifying as sales-type leases or direct-financing leases are accounted for as operating leases and related revenue is recognized ratably over the lease term. When product leases are bundled with maintenance contracts, revenue is allocated based upon the estimated standalone selling prices of the lease and non-lease components. Lease components generally include product and financing while non-lease components generally consist of maintenance contracts and supplies.

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

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

Allowance for Credit Losses

Finance receivables represent financing leases which consist of sales-type leases and direct financing leases resulting from the sales of Canon’s and complementary third-party products. These receivables typically have terms ranging from 1 year to 7 years. Finance receivables are ¥333,472 million and ¥331,011 million at June 30, 2019 and December 31, 2018, respectively.

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

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CANON INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)

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

Canon has a syndication arrangement to sell its entire interests in finance receivables to a third-party financial institution. The transactions under the arrangement are accounted for as sales in accordance with ASC 860 “Transfers and Servicing.” There were no significant transfers of finance receivables for the six months ended June 30, 2019 and 2018. The amount remained uncollected was ¥19,788 million and ¥22,956 million at June 30, 2019 and December 31, 2018, respectively. Canon continues to provide collection and administrative services for the financial institution. The amount associated with the servicing liability measured at fair value was not material at June 30, 2019 and December 31, 2018, respectively. Canon also retains limited recourse obligations which cover credit defaults. The recourse obligation was not material at June 30, 2019 and December 31, 2018, respectively.

Trade payables are summarized as follows:

Short-term loans consisting of bank borrowings at June 30, 2019 and December 31, 2018 were ¥67,959 million and ¥35,887 million, respectively.

Canon has revolving credit facilities expiring in December 2021. The outstanding loans under the credit facilities are ¥360,000 million at a floating interest of 0.08%, are included in long-term debt, excluding current installments in the consolidated balance sheets. Canon has no unused credit facilities as of June 30, 2019.

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CANON INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (continued)

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