2010 Second Quarter in Review
Looking back at the global economy in the second quarter of 2010, economic conditions continued improving broadly amid the recovery trend from the second half of 2009. Although the pace of economic recovery in Europe has remained decidedly modest largely due to sluggish consumer spending triggered by the financial concerns of Greece and other Southern European nations, along with deteriorating unemployment conditions, the United States continued to record a recovery in consumer spending along with steady export growth, while Japan saw a rapid increase in exports, mainly to Asian countries. The Asian economies, such as those of China and India, along with other emerging countries, continued to display solid growth.

As for the markets in which Canon operates amid these conditions, within the office equipment market, as had occurred earlier with color-model network digital multifunction devices (MFDs), demand for monochrome models also finally headed toward recovery. Additionally, the market for laser printers achieved a turnaround compared with the previous year. As for the consumer products market, demand for digital single-lens reflex (SLR) cameras displayed healthy growth throughout most all global markets, while demand for compact digital cameras recovered in developed countries and grew steadily in emerging markets, such as those in Asia. With regard to inkjet printers, demand indicates a steady recovery trend with the market size expanding compared with the year-ago period. In the industry and others market, market conditions for semiconductor lithography equipment and liquid crystal display (LCD) lithography equipment were marked by an upturn in order placements, owing to improved sentiment within the semiconductor-device and LCD-panel markets. The average values of the yen during the second quarter and first half of the year were ¥91.96 and ¥91.35 to the U.S. dollar, respectively, year-on-year appreciations of approximately ¥5 and ¥4, and ¥116.34 and ¥120.20 to the euro, year-on-year appreciations of approximately ¥17 and ¥7.

Amid the effects of the strong yen, net sales for the quarter totaled ¥970.4 billion (U.S.$11,027 million), an increase of 22.2% from the year-ago period, and ¥1,725.9 billion (U.S.$19,612 million) for the first six months, a jump of 16.5%, owing to strong sales of such consumer products as digital SLR cameras, a strong recovery in sales of laser printers among office products, the turnaround within the industry and others market, and the impact of consolidation arising from corporate acquisitions, such as that of Océ N.V. Although the appreciation of the yen had a significant impact, the quarterly gross profit ratio rose 5.5 points year on year to 49.0%, and improved 5.4 points to 48.9% for the first half, mainly reflecting the launch of new products and ongoing cost-cutting efforts, along with heightened production turnover accompanying ramped up production. As a result, gross profit rose by 37.6% to ¥475.4 billion (U.S.$5,402 million) for the second quarter and increased by 31.0% to ¥843.9 billion (U.S.$9,590 million) for the six months ended June 30, 2010. Despite the impact of consolidation, Group-wide efforts to thoroughly cut spending contributed to an improvement in the operating expenses to sales ratio of 0.5 points to 37.3% for the quarter, and of 1.8 points to 37.3% for the first half of the year. Consequently, operating profit climbed approximately 2.5 fold to ¥113.4 billion (U.S.$1,289 million) for the quarter, and approximately 3.1 fold to ¥200.3 billion (U.S.$2,276 million) for the combined six-month period. Other income (deductions) recorded an increase due to an improvement in foreign currency exchange losses and earnings on investments in affiliates, leading to income before income taxes for the second quarter of ¥112.7 billion (U.S.$1,280 million), an approximately 3.2-fold increase year on year, and ¥201.5 billion (U.S.$2,290 million) for the six months ended June 30, 2010, an approximately 3.5-fold leap from the corresponding period of the previous year. Net income attributable to Canon Inc. surged approximately 4.3 fold to ¥67.6 billion (U.S.$769 million) for the quarter, and 3.7 fold to ¥124.4 billion (U.S.$1,414 million) for the first half.

Basic net income attributable to Canon Inc. stockholders per share for the quarter was ¥54.67 (U.S.$0.62), an increase of ¥42.03 (U.S.$0.48) compared with the corresponding quarter of the previous year, and ¥100.68 (U.S.$1.14) for the first half of 2010, a year-on-year increase of ¥73.67 (U.S.$0.84).

Results by Segment
Looking at Canon's quarterly performance by business sector, within the Office Business Unit, while sales volume of color network digital MFDs increased by 39% boosted by the recovery in demand for office equipment along with the introduction of new image RUNNER ADVANCE-series products, sales volume for monochrome models increased by 21% reflecting the recovering market conditions. Laser printers, which suffered sluggish sales in the corresponding quarter of the previous year largely due to an adjustment of inventory levels, realized a significant increase in sales volume of 103%, almost double that of the previous year. Consequently, despite the significant effects of the strong yen, second-quarter sales for the segment totaled ¥521.9 billion (U.S.$5,931 million), growing 31.3% year on year, and ¥931.1 billion (U.S.$10,580 million) for the six months ended June 30, 2010, an increase of 19.9%. Operating profit increased 98.0% to ¥83.8 billion (U.S.$952 million) for the second quarter, and 72.8% to ¥155.9 billion (U.S.$1,771 million) for the combined six months of the year, mainly as a result of expanded sales and the sharp rise in the gross profit ratio.

Within the Consumer Business Unit, sales volumes of such new digital SLR cameras as the competitively priced EOS Digital Rebel T1i (EOS 500D) and the new EOS Digital Rebel T2i (EOS 550D), along with the EOS 5D Mark II and EOS 7D advanced-amateur models, sustained healthy growth. As for compact digital cameras, the Company launched four new ELPH (IXUS)-series models and five new PowerShot-series models, boosting sales volumes particularly in emerging markets. Consequently, sales volume for digital cameras recorded a year-on-year increase of 9%. With respect to inkjet printers, sales displayed solid growth, particularly in Asia, amid the market recovery, contributing to an increase in sales volume of 4%. Although the appreciation of the yen had a strong impact, sales for the segment rose 9.8% year on year to ¥364.0 billion (U.S.$4,137 million), and 14.0% to ¥654.3 billion (U.S.$7,435 million) for the six-month period. Operating profit increased by 71.6% to ¥66.9 billion (U.S.$761 million) for the quarter, and 101.3% to ¥114.3 billion (U.S.$1,298 million) for the first half, largely reflecting increased sales and the rise in the gross profit ratio.

In the Industry and Others Business Unit, independent business-related sales of Group subsidiaries increased in line with the turnaround in business conditions while sales volume of LCD lithography equipment grew appreciably, stimulated by the revival of the market. Sales volume of semiconductor lithography equipment, while remaining at a low level, also gained modestly. As a result, sales for the segment grew 27.5% to ¥108.9 billion (U.S.$1,238 million) for the quarter and 11.6% to ¥191.3 billion (U.S.$2,173 million) for the combined six months. Operating loss improved by ¥2.7 billion (U.S.$31 million) to ¥5.4 billion (U.S.$62 million) for the quarter and totaled ¥8.4 billion (U.S.$95 million) for the six-month period, a turnaround of ¥15.4 billion (U.S.$175 million) year on year owing to expanded sales combined with a reduction in expenses.

Cash Flow

During the first half of 2010, cash flows from operating activities totaled ¥348.6 billion (U.S.$3,961 million), an increase of ¥159.9 billion (U.S.$1,817 million) from the year-ago period, mainly due to the significant increase in profit. Although investments, such as for the acquisition of shares of Océ N.V. to strengthen the printing business, increased substantially, capital investment was focused on items relevant to introducing new products, which led to a year-on-year decrease of cash flows from investing activities of ¥41.3 billion (U.S.$470 million) to ¥177.0 billion (U.S.$2,011 million). Accordingly, free cash flows totaled ¥171.6 billion (U.S.$1,950 million), an increase of ¥201.2 billion (U.S.$2,287 million) from the corresponding year-ago period.

Cash flows from financing activities recorded an outlay of ¥150.6 billion (U.S.$1,711 million), mainly arising from the dividend payout coupled with the partial repayment of borrowings of Océ N.V. Cash and cash equivalents decreased by ¥23.3 billion (U.S.$265 million) to ¥771.7 billion (U.S.$8,769 million) from the end of the previous year due to the foreign currency translation adjustments stemming from the strong yen.

Outlook
As for the outlook in the third quarter and thereafter, although developed countries, especially in Europe, face uncertainty regarding future prospects due to such factors as fiscal challenges and employment problems, those economies appear to be steadily headed for recovery with China and other emerging nations, which are expected to fuel global growth, likely to continue enjoying healthy expansion.

In the businesses in which Canon is involved, within the office equipment market, demand for such products as color network digital MFDs and laser printers are projected to head toward a full-fledged recovery. With respect to the consumer products market, demand for digital SLR cameras and compact digital cameras is expected to achieve solid growth while sales of inkjet printers will likely expand gradually in response to the economic turnaround. As for the industry and others market, demand for semiconductor lithography equipment is expected to regain momentum as device makers begin investing again while demand for LCD lithography equipment is also expected to increase sharply as LCD panel manufacturers gear up to boost production.

With regard to currency exchange rates for the third quarter onward, on which Canon’s performance outlook is based, despite the effects of the financial concerns of Greece and other Southern European nations, along with uncertainty over future interest rate policies for major countries and other factors, Canon anticipates exchange rates for the period of ¥90 to the U.S. dollar and ¥110 to the euro, representing appreciations of approximately ¥1 against the U.S. dollar, and approximately ¥23 against the euro compared with the previous year. Upon taking into consideration current business sentiment based on these foreign exchange rate assumptions, Canon maintains its previous projections: net sales of ¥3,750.0 billion (U.S.$42,614 million), a year-on-year increase of 16.9%; operating profit of ¥360.0 billion (U.S.$4,091 million), a year-on-year increase of 65.9%; income before income taxes of ¥360.0 billion (U.S.$4,091 million), a year-on-year increase of 64.1%; and net income attributable to Canon Inc. of ¥240.0 billion (U.S.$2,727 million), a year-on-year increase of 82.3%.