Canon releases Q3 results

Operating Results and Financial Conditions - 2022 Third Quarter in Review

Looking back at the third quarter of 2022, the pace of economic recovery slowed amid rising global inflation and interest rates, despite personal consumption underpinned by easing of restrictions on economic activities.

In the United States, the economy showed signs of a slowdown due to inflation and tightened financial measures. However, economic recovery continued due to a robust increase in personal consumption. In Europe, the economy slowed down due to increased energy prices and continuous hikes of interest rates in response to the prolonged Ukraine crisis. In China, the speed of recovery of personal consumption declined due to restrictions implemented under its Zero-COVID strategy again. In other emerging countries, the economy recovered moderately, mainly in India and Southeast Asia. In Japan, in spite of a resurgence of coronavirus disease (“COVID-19”) infections happening amid inflationary pressure caused by depreciation of the yen, the economy continued to recover moderately, mainly in terms of personal consumption resulting from eased restrictions.

In the markets in which Canon operates, demand for office multifunction devices (MFDs) remained firm, while demand for laser printers and inkjet printers declined due to the decreased demand from customers working from home. For cameras, demand remained solid, mainly for mirrorless cameras and lenses. For  medical equipment, demand mainly for diagnostic imaging unit products recovered outside Japan, although demand in Japan declined this year due to a drop-off after government spending concluded last year. Demand remained high for semiconductor lithography equipment amid favourable market conditions, while demand for such devices as memory declined. For FPD (Flat Panel Display) lithography equipment, demand tend to decline due to decreased demand from customers working from home amid the COVID-19 pandemic and the current economic slowdown.

The average values of the yen during the third quarter and the first nine months of the year were ¥138.40 and ¥128.26 against the U.S. dollar, respectively, a year-on-year depreciation of approximately ¥28 and year-on-year depreciation of approximately ¥20, and ¥139.40 and ¥136.07 against the euro, respectively, a year-on-year depreciation of approximately ¥10 and year-on-year depreciation of approximately ¥6.

As for the third quarter, despite concerns about the impact of inflation and rising interest rates, sales for mirrorless cameras and network cameras remained solid and sales for office MFDs recovered steadily. Net sales for the third quarter increased by 19.5% year-on-year to ¥996.1 billion due to the price adjustment of products and depreciation of the yen. Net sales for the first nine months of the year increased by 12.4% year-on-year to ¥2,874.2 billion. Gross profit as a percentage of net sales decreased by 1.3 points to 45.3% due to the increase in the ratio of hardware caused by stabilisation of production supply including printers, in addition to the increased costs of parts and logistics. However, third-quarter gross profit increased by 16.3% year-on-year to ¥451.0 billion, mainly due to the depreciation of the yen. Although operating expenses increased by 12.3% year-on-year to ¥369.6 billion as a result of increased operating expenses denominated in foreign currencies due to the depreciation of the yen, the expense to sales ratio decreased by 2.5 points to 37.1% due to the promotion of efficiency for operations although sales activities increased. As a result, operating profit as a measure of the performance of business activities increased by 38.7% year-on-year to ¥81.4 billion. Other income (deductions) decreased by ¥22.9 billion year-on-year to a loss of ¥2.3 billion, 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, although income before income taxes decreased by 0.3% year-on-year to ¥79.1 billion, net income attributable to Canon Inc. increased by 9.7% year-on-year to ¥54.1 billion. Operating profit for the first nine months of the year increased by 24.0% to ¥256.1 billion, while income before income taxes increased by 0.4% to ¥232.0 billion and first nine months net income attributable to Canon Inc. increased by 2.7% to ¥159.1 billion. Basic net income attributable to Canon Inc. shareholders per share was ¥52.90 for the third quarter, a year-on- year increase of ¥5.74, and ¥153.70 for the first nine months, a year-on-year increase of ¥5.54.

Results by Segment

Looking at Canon’s third quarter performance by business unit, in the Printing Business Unit, unit sales increased compared with the previous year due to the recovery of demand for office MFDs following  improvements in the supply of semiconductor chips. Revenue from services and consumables increased moderately compared with the previous year due to the recovery in work in office. As for laser printers and inkjet printers, unit sales increased significantly compared with the previous year due to recovery from stagnant production activities. However, consumables decreased compared with the previous year as demand from customers working from home slowed down. 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 ¥551.5 billion, a year-on-year increase of 20.1%, while income before income taxes decreased by 29.9% year-on-year to ¥43.5 billion, due to the increased costs of parts and logistics and the increase in the ratio of hardware caused by stabilisation of production supply. Sales for the combined first nine months of the year totalled ¥1,623.8 billion, a year-on-year increase of 14.5%, while income before income taxes totalled ¥169.1 billion, a year-on-year decrease of 7.4%.

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 strong 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. 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 products supply. As for professional video production equipment, sales of Cinema EOS-series including the new EOS R5 C, professional video cameras and broadcast lenses, were strong. These factors resulted in total sales for the business unit of ¥202.9 billion, a year-on-year increase of 32.0%, while income before income taxes increased by 108.1% year-on-year to ¥36.8 billion mainly as a result of improved profitability due to an enhanced product

mix. Sales for the combined first nine months of the year totaled ¥561.0 billion, a year-on-year increase of 18.8%, while income before income taxes totaled ¥83.4 billion, a year-on-year increase of 47.3%.

As for the Medical Business Unit, sales of diagnostic ultrasound systems and clinical chemistry analyzers were strong mainly in Europe and Asia although demand in Japan declined this year due to a drop-off after government spending concluded last year. These factors resulted in total sales for the business unit of ¥126.1 billion, a year-on-year increase of 9.0%, while income before income taxes decreased by 35.2% year-on-year to ¥6.6 billion as a result of the increased costs of parts and logistics. Sales for the combined first nine months of the year totalled ¥362.5 billion, a year-on-year increase of 3.0%, while income before income taxes totalled ¥21.6 billion, a year-on-year decrease of 15.9%.

As for the Industrial and Others Business Unit, regarding semiconductor lithography equipment, unit sales increased compared with the previous year as a result of maximising production capacity amid strong sales for a wide range of products such as power device and logic. For FPD lithography equipment, unit sales were flat compared with the previous year thanks to minimizing the impact of both caused by decreased demand from customers working from home amid the COVID-19 pandemic, as well as economic slowdown. For OLED display manufacturing equipment, sales decreased compared with the previous year as panel manufacturers were

in the midst of considering investment plans in response to diversifying OLED panel applications. These factors resulted in total sales for the business unit of ¥154.5 billion, a year-on-year increase of 18.5%, while income before income taxes totalled ¥16.3 billion, a year-on-year increase of 992.6% due to the increased unit sales of semiconductor lithography equipment. Sales for combined first nine months of the year totalled ¥424.1 billion, a year-on-year increase of 7.9%, while income before income taxes totalled ¥44.9 billion, a year-on-year increase of 70.9%.

Cash Flow

During the first nine months of 2022, cash flow from operating activities decreased by ¥161.5 billion year-on-year to ¥188.5 billion as a result of higher inventory levels of main products for shopping season in the fourth quarter, and increased payment of income taxes due to increased taxable income. Cash flow used for investing activities decreased by ¥16.0 billion year-on-year to ¥132.4 billion due to the absence of major M&A transactions and the increased sales of fixed assets resulting from optimization of a branch office capacity at overseas sales subsidiaries, while capital investment to improve efficiency and productivity remained consistent and purchases of securities increased. Accordingly, free cash flow decreased by ¥145.5 billion compared with

the previous year to ¥56.1 billion.

Cash flow from financing activities, despite an increase in short-term loans, recorded an outlay of ¥29.6 billion mainly due to repurchases of treasury stock and dividend payout, which increased ¥30.4 billion year-on-year.

Owing to these factors, as well as the impact from foreign currency exchange adjustments, cash and cash equivalents increased by ¥63.9 billion to ¥465.3 billion from the end of the previous year.

Outlook

The outlook for the global economy from the fourth quarter onwards is expected to maintain a recovery trend.  However, although the shortage of semiconductor chips is gradually improving, the outlook remains uncertain due to risks such as the prolonged Ukraine crisis, curbing of consumption as inflation progresses and curbing investment due to rising interest rates.

In the markets in which Canon operates, demand for office MFDs is expected to remain solid. However, there are concerns that the demand for laser printers and inkjet printers would be affected by the decrease of demand from customers working from home and the current economic slowdown. As for mirrorless cameras, demand is expected to remain solid due to the need for high-quality visual expression. For network cameras, the market is expected to maintain stable growth due to the growing demand for video analysis and high value-added products. In addition, the market for professional video production equipment is expected to grow, supported by increasing demand for video content due to the spread of online video streaming. As for the medical equipment market, demand is expected to remain solid due to a recovery in large investments previously held back due to the COVID-19 pandemic mainly for diagnostic imaging unit products. For semiconductor lithography equipment, demand from a wide range of fields such as logic is expected to continue. For FPD lithography equipment, there are concerns about a delay of investments of panel manufacturers due to the decrease of demand for work from home amid the COVID-19 pandemic.

With regard to currency exchange rates on which Canon bases its performance outlook, Canon anticipates exchange rates of ¥148 to the U.S. dollar and ¥144 to the euro, representing depreciation of approximately ¥23 against the U.S. dollar and depreciation of approximately ¥8 against the euro as the previous year. For the U.S. dollar and the euro, Canon expects the yen to depreciate by ¥5 and depreciate by ¥2 from its previous forecast, respectively.

Upon taking into consideration of the current economic forecast, although the Printing Business unit is expected to be sluggish amid the inflation and hikes of interest rates, demand for other business units are expected to remain firm. Considering the situation of recent exchange rates and continued efforts to maximise production and supply competitive products in the market, Canon revised the forecast upward to full-year consolidated net sales of ¥4,090.0 billion, a year-on-year increase of 16.4%; operating profit of ¥385.0 billion, a year-on-year increase of 36.6%. Meanwhile, taking into account valuation losses on securities and currency exchange losses,

Canon projects income before income taxes of ¥367.0 billion, a year-on-year increase of 21.2%; and net income attributable to Canon Inc. of ¥250.0 billion, a year-on-year increase of 16.4%.