I.

Brief reviews of Canon’s financial management

Canon's financial strategy focuses on maintaining a healthy financial position by

carefully managing its cash flow. This is because Canon believes that financial
soundness is essential in preparing the company for unexpected events should they
occur, pursuing dynamic management over the long run whilst keeping a variety of
available options at hand. Canon's shareholders' equity ratio is often held as a key
indicator of claiming financial soundness. Reaching the end of 2022, Canon had
already achieved a ratio of 61.1% due to a turnaround in performance. Based on that
firmly established achievement, Canon aims to further increase this ratio by five
percentage points to 65% or more by 2025, the final year of the current five-year
management plan and the final stage in their strategic phase VI.

As mentioned above, Canon thoroughly focuses on the business’s cash flow

management to maintain a healthy financial constitution. For instance, Canon
generally keeps its capital expenditures within the range of depreciation. Additionally,
Canon proactively invests in research and development (R&D) to enhance the
corporation’s innovative level and drive new business growth, while carefully
targeting these investments across the Group and maintaining an investment level of
around ¥300 billion per year, which represents about 8% of net sales.

Since Canon reinvests in growth within the scope of the cash it generates, its
management is generally debt-free. However, this has not always been the case as in
2016, Canon borrowed money from financial institutions to finance the acquisition of
the medical business, which is now a pillar of Canon's new businesses. Canon is
repaying these borrowings while maintaining sufficient corporate liquidity, and this
borrowing is expected to be fully repaid in 2023.

At a time when almost every industry-oriented business group is making every effort
to expand profits under the principle of putting profit as their top priority, Canon is
also pursuing balance sheet management rigorously. In other words, the company is
working to manage inventories and trade receivables more efficiently by finding ways
to reduce these accounts. Regarding the management of business operations, they
have set three easy-to-follow key indicators as guidelines: net sales, profit, and cash
flow. Additionally, Canon has implemented a framework in which the Finance &
Accounting Headquarters centrally manages indicators such as return on equity (ROE)
to improve capital profitability and turnover.

II. Canon’s turnover results in recent years

 When the term “turnover” is mentioned, under the context of corporate operations, we
often refer to the revenue generated from sales, or net sales. “Net sales” and “Sales
turnover” are essentially the same thing because they both refer to the total amount of
revenue generated from the sales of goods or services during a specific time period,
usually a quarter or a year. The following part will present a summary table of
Canon’s summary of operations in recent years.

Summary of Operations
Millions of Yen
2022 Change 2021 Change 2020
Net sales 4,031,414 +14.7% 3,513,357 +11.2% 3,160,243
Operating profit 353,399 +25.4% 281,918 +155.0% 110,547
Income before income taxes 352,440 +16.4% 302,706 +132.4% 130,280
Net income attributable to 243,961 +13.6% 214,718 +157.7% 83,318
Canon Inc.
Source: Canon Annual Report 2022

As observed on the table, Canon is having an overall noticeable increase in the net
sales criterion. This means that the sales turnover of Canon Inc. has been getting
bigger over the years, with its growth rate changing from 11,2% to 14,7% in 2021
and 2022, respectively.

Other areas like operating profit, income before income taxes, and net income
attributable to Canon Inc. also witnessed a considerable increasing trend as all figures
grew larger than in previous years. In general, judging from this summary, we can say
that Canon is operating at a profit, as these profitability indexes have all increased
over the years.

III. Canon’s operating expenses in 2022

The main operating expenses are employee salaries, research and development,
advertising, and other marketing costs. In 2022, operating expenses rose by 9.5%
year-over-year to ¥1,474,403 million. This was due to a weakening yen, which made
operating expenses in foreign currencies more expensive, and to an increase in selling
expenses as sales grew. However, operating expenses as a percentage of net sales
decreased by 1.8 points to 36.5% due to ongoing efforts to control costs and improve
management structure.
III. How does Canon manage its corporate finance?

A strong and logically built corporate finance management strategy is pivotal

for almost every business, especially for multinational corporations like Canon
the need for such a management strategy is deemed more desirable than ever.
Having a sound financial management plan means companies will manage their
assets and debts more effectively, and in turn, create more profitability for the
company when operating in a particular market.

Regarding this document, we will analyze how Canon Inc. manages its finances
as followed, namely the Investment Decision, The Financing Decision, and the
Global Money Management using financial summaries and consolidated
statements of cash flows as our sources of analysis.

1. The Investment Decision

Equity price risk

Regarding the investment decision, Canon considers equity price risk as an indicator
to make an investment decision. Canon prefers to hold marketable securities as part of
the company’s current assets. These securities are oftentimes very liquid and have a
low risk of default. Canon also owns investments that are part of its noncurrent assets
and they are held in the long term to make available for any future use. In this sense,
Canon is not interested in the short-term profitability when purchasing or selling
marketable securities or investments. The following table shows the maturities and
fair values of marketable securities and investments with original maturities of more
than three months as of December 31, 2022.

2. The Financing Decision

Liquidity and capital resources
Canon's basic policy for financial strategies is to maintain a sound financial position
through consistent cash flow management. In other words, Canon is committed to
generating and maintaining a strong cash flow. This allows the company to invest in
new growth opportunities, repay debt, and maintain its financial flexibility. Canon
pursues two basic principles of cash flow management:

1. Canon strives to generate more cash flow and enhance a highly profitable structure
by further improving the profitability of existing businesses and accelerating the
growth of new businesses.

2. 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. This means that Canon is careful not to overspend on capital
investments. The company wants to make considerate movements so that the amount
of cash flow is sufficient to cover the depreciation and amortization expenses that
come along with those investments.

However, Canon plans to actively engage in large-scale M&A for growth strategies
and is also willing to raise external funds as needed. According to Canon’s Annual
Report 2022, the company made the movements of raising funds and using funds
wisely to achieve the highest profitability. The activities are described below:

+ Raising Funds (Cash inflow)

Canon is largely self-funded, but it may also borrow money or raise capital from
investors to support its growth and strategic initiatives. When making funding
decisions, Canon takes into account the following factors: the terms, currencies, and
methods available, based on the current financial market conditions. The company
then selects the most appropriate financing instrument from a variety of options.

+ Use of Funds (Cash outflow)

- The principal use of cash is determined under the following priorities:
• Investment for growth such as capital investment, R&D, M&A, etc. :
Canon sees Mergers and Acquisitions (M&A) as an option to expand into new
branches of business. The selection of investment targets is based on the growth
potential and size of the market, and on the market being highly compatible with
Canon's business domains and technologies.

• Return to shareholders:
Canon pays back profits to shareholders mainly in the form of dividends while taking
into consideration medium to long-term business prospects, planned future
investments, cash flows, 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.

3. Global Money Management

Foreign operations and foreign currency transactions

Canon performs marketing activities in a myriad of global subsidiaries and generates

revenue in local currencies in the regions where it sells its products, but its costs of
goods sold are generally in yen. This exposes Canon to foreign exchange risk, as the
value of the yen can fluctuate compared to other exchanging currencies. When the yen
appreciates because of inflation, the value of Canon's revenue decreases in yen terms,
which can hurt its net sales and gross profit margin.

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.

Foreign currency exchange rate and interest rate risk

Canon operates internationally, exposing it to the risk of changes in foreign currency

exchange rates. To hedge the risk of changes in foreign currency exchange rates,
Canon uses derivative financial instruments. Canon uses foreign exchange contracts to
manage certain foreign currency exchange exposures principally from the exchange of
U.S. dollars and euros into Japanese yen. These contracts are primarily used to hedge
the foreign currency exposure of forecasted intercompany sales and intercompany
trade receivables which are denominated in foreign currencies. Following Canon’s
policy, a specific portion of foreign currency exposure resulting from forecasted
intercompany sales is hedged using foreign exchange contracts which principally
mature within three months.

The following table provides information about Canon’s major derivative financial
instruments related to foreign currency exchange transactions existing as of December
31, 2022. All of the foreign exchange contracts described in the following table have a
contractual maturity date in 2023.

Despite the likelihood of operating in a volatile economic environment in the future,

Canon will work its way to improve the company’s overall performance by leveraging
its collective strengths and focusing on key initiatives like product development,
global market expansion, productivity enhancement, and promoting digital
transformation. In other words, Canon is committed to improving its performance and
transforming its business portfolio to adapt to an ever-changing global economic
environment.

https://global.canon/en/ir/annual/canon-annual-report-2022.pdf
https://global.canon/en/ir/annual/canon-annual-report-2022-03.pdf