Millions of yen, thousands of U.S. dollars, except per share amounts)
Three months ended September 30, 2010 Three months ended September 30, 2009 Change(%) Three months ended September 30, 2010
Net sales ¥ 913,151 ¥ 774,324 + 17.9 $ 10,870,845
Operating profit 104,424 59,989 + 74.1 1,243,143
Income before income taxes 108,826 63,548 + 71.3 1,295,548
Net income attributable
to Canon Inc. ¥ 68,195 ¥ 36,734 + 85.6 $ 811,845
Net income attributable to Canon Inc. stockholders per share:
- Basic ¥ 55.07 ¥ 29.76 + 85.0 $ 0 .66
- Diluted 55.07 29.76 + 85.0 0.66

I. Operating Results and Financial Conditions
2010 Third Quarter in Review
Looking back at the global economy in the third quarter of 2010, economic conditions continued to improve broadly throughout the world. In Japan, consumer spending showed signs of recovery thanks to the effects of such efforts as domestic economic stimulus measures, while in the United States, consumer spending grew steadily despite the unemployment rate remaining at a relatively high level and other concerns. While Europe recorded growth in exports, the pace of economic recovery remained modest as financial concerns within the region were not fully eased. The Asian economies, such as China and India, along with other emerging countries, recorded stable expansion.
As for the markets in which Canon operates amid these conditions, within the office equipment market, demand for network digital multifunction devices (MFDs) recovered, mainly for color models.
Additionally, laser printers have rebounded steadily compared with the previous year. As for the consumer products market, demand for digital single-lens reflex (SLR) cameras maintained solid growth across global markets. Although sales of compact digital cameras grew sluggishly in developed countries, demand in emerging markets, such as those in Asia, displayed healthy growth, leading to solid expansion overall.
With regard to inkjet printers, demand continued to recover at a steady pace. In the industry and others market, market conditions for semiconductor lithography equipment were marked by an upturn in order placements, owing to improved sentiment within the semiconductor device market, whereas demand for
liquid crystal display (LCD) lithography equipment remained relatively unchanged compared with the previous-year level. The average values of the yen during the third quarter and first nine months of the year were ¥85.79 and ¥89.40 to the U.S. dollar, respectively, year-on-year appreciations of approximately ¥8 and ¥5, and ¥110.61 and ¥116.30 to the euro, year-on-year appreciations of approximately ¥23 and ¥13.
Amid the impact of the sharp appreciation of the yen, net sales for the quarter totaled ¥913.2 billion (U.S.$10,871 million), an increase of 17.9% from the year-ago period, and ¥2,639.0 billion (U.S.$ 31,417
million) for the first nine months, an increase of 17.0%, owing to a substantial recovery in sales of laser printers among office products, continued robust sales of such consumer products as digital SLR cameras,
the turnaround within the industry and others market, and the effects of consolidation arising from corporate acquisitions, such as that of Océ N.V. Although the strong yen had a significant impact, the quarterly gross profit ratio rose 3.8 points year on year to 48.9%, and improved 4.8 points to 48.9% for the nine-month period, 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
27.9% to ¥446.9 billion (U.S.$5,320 million) for the third quarter and increased by 29.9% to ¥1,290.8 billion (U.S.$15,367 million) for the nine months ended September 30, 2010. Despite the impact of
aggressive sales-promotion spending and consolidation, continued Group-wide efforts to thoroughly reduce spending contributed to an operating expenses to sales ratio of 37.5% for the quarter, approximately the same level as for the corresponding period for the previous year, and an improvement of 1.2 points to
37.4% for the nine-month period. Consequently, operating profit recorded growth of 74.1% to ¥104.4 billion (U.S.$1,243 million) for the quarter, and increased approximately 2.4 fold to ¥304.7 billion (U.S.$3,627 million) for the nine-month period. Other income (deductions) recorded an increase largely
due to an improvement in foreign currency exchange gains and losses, leading to income before income taxes for the third quarter of ¥108.8 billion (U.S.$1,296 million), an increase of 71.3% year on year, and
¥310.3 billion (U.S.$3,694 million) for the nine months ended September 30, 2010, an approximately 2.6-fold leap from the corresponding period of the previous year. Net income attributable to Canon Inc. grew by 85.6% to ¥68.2 billion (U.S.$812 million) for the quarter, and jumped 2.7 fold to ¥192.6 billion (U.S.$2,293 million) for the nine-month period.

Basic net income attributable to Canon Inc. stockholders per share for the quarter was ¥55.07 (U.S.$0.66), an increase of ¥25.31 (U.S.$0.30) compared with the corresponding quarter of the previous year, and ¥155.79 (U.S.$1.85) for the first nine months of 2010, a year-on-year increase of ¥99.02 (U.S.$1.18).

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 38% boosted by the recovery in demand for office equipment along with the introduction of new imageRUNNER ADVANCE-series products, sales volume
for monochrome models increased by 24%, 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, recorded an increase in sales volume of 61%. Consequently, despite the significant effects of the strong yen, third-quarter sales for the segment totaled ¥506.9 billion (U.S.$6,035 million),
growing 25.6% year on year, and ¥1,438.0 billion (U.S.$17,119 million) for the nine months ended September 30, 2010, an increase of 21.9%. Operating profit increased 30.3% to ¥76.3 billion (U.S.$908 million) for the third quarter, and 56.0% to ¥232.2 billion (U.S.$2,764 million) for the combined nine-month period, mainly as a result of expanded sales and the rise in the gross profit ratio.
Within the Consumer Business Unit, sales volumes of such new digital SLR cameras as the new EOS Digital Rebel T2i (EOS 550D) and the competitively priced EOS Digital Rebel T1i (EOS 500D), along with the EOS 5D Mark II and EOS 7D advanced-amateur models, sustained healthy growth. As for
compact digital cameras, the Company launched a new ELPH (IXUS)-series model and four new PowerShot-series models, boosting sales volumes particularly in emerging markets. Consequently, sales volume for digital cameras realized a year-on-year increase of 10%. With respect to inkjet printers,
although sales displayed solid growth, particularly in Asia, sales volume decreased slightly from the year-ago level. Amid the strong yen environment, sales for the segment rose 3.3% year on year to ¥324.8 billion (U.S.$3,866 million), and 10.2% to ¥979.1 billion (U.S.$11,656 million) for the first nine months.
Operating profit increased by 14.0% to ¥58.8 billion (U.S.$700 million) for the quarter, and by 59.7% to ¥173.0 billion (U.S.$2,060 million) for the nine-month period, largely reflecting increased sales and the rise
in the gross profit ratio owing to the effects of cost reductions.
In the Industry and Others Business Unit, semiconductor-related independent business sales by Group subsidiaries grew while sales volume of LCD lithography equipment increased appreciably. Sales volume
of semiconductor lithography equipment, while remaining at a low level, also gained modestly. As a result, sales for the segment increased 31.7% to ¥109.8 billion (U.S.$1,307 million) for the quarter, and 18.2% to ¥301.0 billion (U.S.$3,584 million) for the combined nine months. Operating profit totaled ¥4.4 billion (U.S.$52 million) for the quarter, a turnaround of ¥21.6 billion (U.S.$257 million) year on year while for the nine-month period, operating loss totaled to ¥4.0 billion (U.S.$47 million), a turnaround of ¥37.0 billion
(U.S.$441 million) from the year-ago period owing to expanded sales combined with an improved gross profit ratio.

Cash Flow
During the combined nine months of 2010, cash flows from operating activities totaled ¥519.4 billion (U.S.$6,184 million), an increase of ¥144.9 billion (U.S.$1,725 million) from the year-ago period, mainly due to the continued 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 in cash flows
from investing activities of ¥43.0 billion (U.S.$512 million) to ¥243.2 billion (U.S.$2,895 million).
Accordingly, free cash flows totaled ¥276.2 billion (U.S.$3,288 million), an increase of ¥187.9 billion (U.S.$2,237 million) from the corresponding year-ago period.
Cash flows from financing activities recorded an outlay of ¥268.0 billion (U.S.$3,190 million), mainly arising from the dividend payout, the repurchases of treasury stock, and the partial repayment of borrowings of Océ N.V. Cash and cash equivalents decreased by ¥35.6 billion (U.S.$424 million) to ¥759.4
billion (U.S.$9,040 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 fourth quarter, although developed countries face uncertainty regarding future prospects due to such factors as employment problems and fiscal challenges, these economies appear to be
steadily headed toward recovery while China and other emerging nations, which are expected to fuel global growth, are 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 is projected to head toward a recovery. With respect to the consumer products market, demand for digital SLR cameras is expected to achieve solid
growth while sales of compact digital cameras are anticipated to expand modestly. Demand for inkjet printers is likely to 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 significantly as LCD panel manufacturers boost production.
With regard to currency exchange rates for the fourth quarter, on which Canon’s performance outlook is based, despite the uncertainty over future interest rate policies for major countries and other factors along
with the effects of the fiscal concerns in Europe, Canon anticipates exchange rates for the period of ¥80 to the U.S. dollar and ¥115 to the euro, representing appreciations of approximately ¥10 against the U.S.
dollar, and approximately ¥18 against the euro compared with the previous year. Upon taking into consideration current business sentiment based on these foreign exchange rate assumptions, Canon has revised its previous projections as follows: net sales of ¥3,710.0 billion (U.S.$44,167 million), a
year-on-year increase of 15.6%; operating profit of ¥390.0 billion (U.S.$4,643 million), a year-on-year increase of 79.7%; income before income taxes of ¥390.0 billion (U.S.$4,643 million), a year-on-year increase of 77.8%; and net income attributable to Canon Inc. of ¥245.0 billion (U.S.$2,917 million), a
year-on-year increase of 86.1%.