Daikin Industries Ltd.
Annual Report 2013

Plain-text annual report

Annual Report 2013 Fiscal Year Ended March 31, 2013 Creating Products and Solutions that Offer Comfort and Amenity together with Environment-Friendliness The Daikin Group’s operations center on air-conditioning systems and have grown to encom- pass such offerings as fluorochemical refrigerant gases, resins, and elastomers; chemicals; and other products and systems that are providing benefits in a wide range of fields. Having begun undertaking M&A transactions and establishing joint ventures throughout the world from an early date, Daikin has made rapid progress in creating global production, marketing, and service networks while endeavoring to be “a truly global and excellent company” that makes significant contributions to the realization of sustainable growth in the global economy. Today, the industrialized and emerging countries are facing shared challenges regarding the prevention of global warming and conservation of energy. Japan is striving to balance its sup- plies of and demand for electric power, and this project is increasing the need for electric power conservation measures. Since air conditioning accounts for a large share of electric power con- sumption along with associated CO2 emissions, “energy control” has become one of the Daikin Group’s most-important missions. All of us in the Daikin Group are committed to generating outstanding technologies, products, and solutions that effectively enhance the comfort and amenity of life for people throughout the world while also promoting greater harmony with the global environment. By doing our utmost in these ways to earn high levels of trust and confidence throughout global society, we are building a solid foundation for sustained increases in Daikin’s profit-earning power and corporate value. Contents Financial Highlights 2 At a Glance 3 A Message from the CEO 4 Interview with the COO 6 Review of Operations Corporate Governance 20 Consolidated Statement of Comprehensive Income 37 Directors, Auditors, and Executive Officers 22 Consolidated Statement of Changes in Equity 37 Compliance and Risk Management 23 Consolidated Statement of Cash Flows 38 Corporate Social Responsibility (CSR) 24 Notes to Consolidated Financial Statements 39 Financial Section 26 Independent Auditors’ Report 61 Air Conditioning—The Japanese Market 12 Ten-Year Financial Highlights 26 Corporate Data 62 Air Conditioning—The Global Market 14 Financial Review 28 Chemicals 16 Oil Hydraulics 18 Defense 19 DAIKIN INDUSTRIES, LTD. Consolidated Balance Sheets 34 Consolidated Statement of Income 36 Our Group Philosophy 1. Create New Value by Anticipating the Future Needs of Customers 2. Contribute to Society with World-Leading Technologies 3. Realize Future Dreams by Maximizing Corporate Value 4. Think and Act Globally 5. Be a Flexible and Dynamic Group 1. Flexible Group Harmony 2. Build Friendly yet Competitive Relations with Our Business Partners to Achieve Mutual Benefit 6. Be a Company that Leads in Applying Environmentally Friendly Practices 7. With Our Relationship with Society in Mind, Take Action and Earn Society’s Trust 1. Be Open, Fair, and Known to Society 2. Make Contributions that Are Unique to Daikin to Local Communities 8. The Pride and Enthusiasm of Each Employee Are the Driving Forces of Our Group 1. The Cumulative Growth of All Group Members Serves as the Foundation for the Group’s Development 2. Pride and Loyalty 3. Passion and Perseverance 9. Be Recognized Worldwide by Optimally Managing the Organization and its Human Resources, under Our Fast & Flat Management System 1. Participate, Understand, and Act 2. Offer Increased Opportunities to Those who Take on Challenges 3. Demonstrate Our Strength as a Team Composed of Diverse Professionals 10. An Atmosphere of Freedom, Boldness, and “Best Practice, Our Way” Forward-Looking Statements This annual review contains statements regarding the future plans and strategies of Daikin Industries, Ltd. (the Company), as well as the Company’s future performance. These statements are not statements of past facts but are based on judgments made by the Company on the basis of information known at the time. Therefore, readers should refrain from drawing conclusions based only on these statements regarding the future performance of the Company. The actual future performance of the Company may be influenced by economic trends, strong competition in the industrial sectors where it conducts its operations, foreign currency exchange rates, and changes in taxation and other systems. For these reasons, these forward-looking statements are subject to latent risk and uncertainty. ANNUAL REPORT 2013 1 e c n a G a l t A / s t h g i l h g H i l i a c n a n F i O E C e h t m o r f e g a s s e M A O O C e h t h t i w w e i v r e t n I s n o i t a r e p O f o w e i v e R e c n a n r e v o G e t a r o p r o C n o i t c e S l i a c n a n F i Financial Highlights Daikin Industries, Ltd. and Consolidated Subsidiaries Years Ended March 31 Operating Results (for the year): Net sales Gross profi t Operating income Net income Cash Flows (for the year): Net cash provided by operating activities Net cash used in investing activities Free cash fl ow (Note) Net cash provided by (used in) fi nancing activities Financial Position (at year-end): Total assets Total shareholders’ equity Per Share Data (yen): Net income (basic) Shareholders’ equity Cash dividends Cash fl ow per share Ratios (%): Gross profi t margin Operating income margin Return on shareholders’ equity (ROE) Shareholders’ equity ratio Note: Free cash flow = Net cash provided by operating activities + net cash used in investing activities. Millions of yen 2012 2013 ¥1,218,701 371,902 81,193 41,172 ¥1,290,903 388,046 88,627 43,585 ¥44,967 (62,955) (17,988) (1,113) ¥103,161 (218,386) (115,225) 143,520 ¥1,160,564 502,309 ¥1,735,836 618,118 ¥ 141.37 1,725.64 36.00 (62) ¥ 149.73 2,123.10 36.00 (396) 30.52% 6.66 8.30 43.28 30.06% 6.87 7.78 35.61 Net Sales, Gross Profit, and Gross Profit Margin Operating Income and Operating Income Margin (¥ billion) 1,500 1,200 900 600 300 0 (%) 35 28 21 14 7 0 (¥ billion) 100 80 60 40 20 0 ROE (%) 10 (%) 10 8 6 4 2 0 8 6 4 2 0 2009 2010 2011 2012 2013 2009 2010 2011 2012 2013 2009 2010 2011 2012 2013 Net Sales Gross Profit Gross Profit Margin Operating Income Operating Income Margin 2 DAIKIN INDUSTRIES, LTD. At a Glance Air-Conditioning Percentage of Net Sales Air-Conditioning 86.8% Chemicals 9.6% Defense 1.5% Oil Hydraulics 1.8% Net Sales and Operating Income (Loss) Major Products & Services Description (¥ billion) 1,200 1,000 800 600 400 200 0 70.9 1,120.0 (¥ billion) 120 100 80 60 40 20 0 2009 2010 2011 2012 2013 Chemicals (¥ billion) (¥ billion) 250 200 150 100 50 0 16.5 124.4 25 20 15 10 5 0 -5 -10 2009 2010 2011 2012 2013 Oil Hydraulics (¥ billion) (¥ billion) 0.2 23.9 30 20 10 0 2009 2010 2011 2012 2013 0.6 18.9 Defense (¥ billion) 20 15 10 5 0 2009 2010 2011 2012 2013 30 20 10 0 -10 -40 (¥ billion) 0.8 0.6 0.4 0.2 0 (cid:129) Room air-conditioning systems (cid:129) Heat-pump hot-water-supply and room-heating systems (cid:129) Packaged air-conditioning systems (cid:129) Multiple air-conditioning systems for office buildings (cid:129) Air-conditioning systems for facilities and plants (cid:129) Medium- and low-temperature air-conditioning systems (cid:129) Absorption refrigerators (cid:129) Humidity-adjusting external air-processing units (cid:129) Air purifiers (cid:129) Water chillers (cid:129) Air-handling units (cid:129) Marine-type container refrigeration Since becoming the first in Japan to manufacture pack- aged air-conditioning systems, in 1951, Daikin has supported comfortable living based on the strengths of technologies that it has itself nurtured as the world’s sole manufacturer to create a full line of products from refrigerants to air conditioners. (cid:129) Fluorocarbons (cid:129) Fluoroplastics (cid:129) Fluoro coatings (cid:129) Fluoroelastomers (cid:129) Fluorinated oils (cid:129) Oil- and water-repellent products (cid:129) Mold release agents (cid:129) Pharmaceuticals and intermediates (cid:129) Semiconductor-etching products (cid:129) Dry air suppliers In 1933, Daikin was the first in Japan to engage in research on fluorinated refrigerants. Today, our activities range from research and development to commercialization, and we offer a lineup of more than 1,800 fluorine compounds. (cid:129) Oil hydraulic pumps (cid:129) Oil hydraulic units (cid:129) Oil hydraulic valves (cid:129) Cooling equipment and systems (cid:129) Hydrostatic transmissions (cid:129) Centralized lubrication units and systems Daikin’s unique hydraulic technologies offer outstanding energy-conservation perfor- mance and are contributing to the development of industry by unleashing the potential of power control. (cid:129) Warheads (cid:129) Warheads for guided missiles (cid:129) Home-use oxygen therapy equipment Daikin’s superior machining and quality control technolo- gies are used in the production of defense-related products and other industries where high levels of precision and performance are critical. ANNUAL REPORT 2013 3 e c n a G a l t A / s t h g i l h g H i l i a c n a n F i O E C e h t m o r f e g a s s e M A O O C e h t h t i w w e i v r e t n I s n o i t a r e p O f o w e i v e R e c n a n r e v o G e t a r o p r o C n o i t c e S l i a c n a n F i A Message from the CEO Tackling One Challenge after Another Despite a harsh operating environment during the fiscal year under review, Daikin made steady progress in implementing key strategies for attaining its FUSION 15 five-year strategic management plan targets and also achieved a third consecutive fiscal year of growth in both sales and profitability. Striving to realize growth in our corporate value, we will continue vigorously addressing one new challenge after another going forward. Fiscal 2013 (ended March 31, 2013) was a year in which the management environment became even harsher than we had anticipated, owing to such developments as economic sluggishness in Europe and a slowdown in the emerging economies’ expansion, as well as such factors as the increasing opacity of China’s economic outlook. Emphasizing the sustained generation of short-term profits, the Daikin Group strove to promote greater sales of products centering on air-conditioning products in Japan and overseas markets. As a result of this along with our continued progress in comprehensive cost-cutting programs, thorough attention to marketing price strategies, and relentless quality reform measures, the Group was able to achieve growth in both sales and profitability for a third consecutive fiscal year. Determined to position Daikin for sustained growth over the medium-to-long term, we reinforced the foundation for realizing the objectives of the FUSION 15 strategic management plan, which covers the five fiscal years through March 31, 2016. Specifically, we prepared to rapidly expand our business in emerging economy markets through such initiatives as those to augment local manufacturing operations in China and India; strengthen marketing sys- tems in such countries as Turkey, Vietnam, and Indonesia; and steadily implement other market cultivation mea- sures. In Japan, we launched the first air conditioner in the world to employ the highly environment-friendly and efficient refrigerant R32 and other high-value-added products that made an important contribution to performance in fiscal 2013. We have continued closely monitoring households’ and companies’ rising consciousness of electric power conservation needs, and we are providing such customers with the energy conservation solutions that they seek. In addition, in November 2012, we acquired Goodman Global Group, Inc., a leading air-conditioner manufac- turing company based in the United States. Goodman has the top share of the U.S. market for household air condi- tioners, and it also has abundant growth potential regarding commercial-use air conditioners. By taking advantage of synergies between Goodman and other Daikin Group units, we intend to earn a solid position as one of the top players in the North American air-conditioning market in the near future. As the central third year of FUSION 15’s five-year term, fiscal 2014 is an extremely important year during which we must make sure to prepare a solid foundation for the attainment of the strategic management plan’s final objectives. Our fundamental growth strategies will be focused on speeding up “expanding our business in emerging economy countries and volume-zone markets,” “developing solutions businesses that meet customer needs in each region of the world,” and “generating environment-related innovation business.” By assiduously implementing these strategies, we are earnestly striving to create a rock-solid foundation that enables Daikin to become the leading company in glob- al air-conditioning markets and fully live up to its stakeholders’ expectations regarding growth in corporate value. June 2013 Noriyuki Inoue Chairman of the Board and CEO 4 DAIKIN INDUSTRIES, LTD. ANNUAL REPORT 2013 5 Interview with the COO e c n a G a l t A / s t h g i l h g H i l i a c n a n F i O E C e h t m o r f e g a s s e M A O O C e h t h t i w w e i v r e t n I s n o i t a r e p O f o w e i v e R e c n a n r e v o G e t a r o p r o C n o i t c e S l i a c n a n F i 6 DAIKIN INDUSTRIES, LTD. Focusing on Growth and Profitability During the fiscal year under review, Daikin maintained robust short-term profitability and moved dynamically ahead with measures based on growth strategies articulated in its FUSION 15 strategic management plan. In fiscal 2014—the central third year of FUSION 15’s five-year term—we are determined to make considerable additional progress in expanding our business scale while thoroughly strengthening our profit-generation capabilities. June 2013 Masanori Togawa President and COO Q1: The fiscal year under review (fiscal 2013, ended March 31, 2013) was your second year as Daikin’s president and COO, and you faced an operating environment replete with situations requiring difficult decisions. Looking back at the year, could you tell us your thoughts regarding Daikin’s performance and related issues? As a result of those efforts, our consolidated net sales grew 5.9% from the level in the previous fiscal year, to ¥1,290.9 billion, and our operating income was up 9.2%, to ¥88.6 billion. Reflecting foreign exchange gains associated with the correction of the yen’s excessive strength near the end of the fiscal year, our ordinary income surged 15.2%, to ¥94.1 billion. And although we recorded a ¥12.7 billion write-down of investment securities, our net income increased to ¥43.6 billion, a year-on- Togawa: We faced a management environment that was harsh- year rise of 5.9%. Fiscal 2013 was the third consecutive year in er than originally anticipated owing to such situations as the which we achieved growth in both sales and profitability. weakness of the European economy and the slackening of Moreover, rather than simply managing to maintain strong growth in emerging country economies. Because of that, making short-term profitability, we also moved vigorously ahead with sure that various measures required to maintain robust short- longer-term management tasks. We began the implementation term profitability were effectively implemented was the task of numerous new measures designed to elevate our requiring the most-intensive efforts. profitability over the medium-to-long term. Specifically, in air-conditioning business, we strove to expand The Daikin Group is currently midway through the implementa- sales in Japan, the United States, China, and other Asian countries tion of the FUSION 15 strategic management plan, which covers and achieve rapid business growth in such emerging economies the five fiscal years through fiscal 2016, ending March 31, 2016, as those of India, Vietnam, and Turkey. At the same time, we con- and we are making steady progress toward realizing the plan’s tinued moving quickly ahead with such profit structure enhance- objectives of boosting net sales and operating income to levels ment measures as a comprehensive cost reduction program in excess of ¥2 trillion and ¥200 billion, respectively. encompassing fundamental reevaluation of our fixed costs along with measures to ensure the thorough implementation of selling price adjustment policies. ANNUAL REPORT 2013 7 e c n a G a l t A / s t h g i l h g H i l i a c n a n F i O E C e h t m o r f e g a s s e M A O O C e h t h t i w w e i v r e t n I s n o i t a r e p O f o w e i v e R e c n a n r e v o G e t a r o p r o C n o i t c e S l i a c n a n F i Q2: Regarding medium- to long-term mea- sures, you are steadily advancing toward the target of completing the implementation of mea- sures emphasized within FUSION 15 by fiscal 2016. Please explain the progress Daikin made in this respect during fiscal 2013. Q3: How do you expect your acquisition of U.S.-based Goodman to promote the Daikin Group’s development going forward? Togawa: Goodman is an air-conditioner manufacturer with the top share of North America’s residential air-conditioner market. It has one of the largest marketing networks in North America Togawa: The principal growth strategies emphasized by FUSION (more than 900 directly operated outlets and approximately 15 include those designed to “expand our business in emerging 60,000 affiliated dealers), and its thorough efforts to rationalize economy countries and volume-zone markets,” “develop solu- its distribution and marketing systems have enabled it to attain tions businesses that meet customer needs in each region of the a high level of profit-earning power. Goodman’s strong product world,” “generate environment-related innovation business,” and lineup with respect to ducted residential unitary (central) HVAC “accelerate growth through alliances, partnerships, and M&A systems—the main type of HVAC product in the North American transactions.” market—as well as furnace heating equipment and commercial During fiscal 2013, our progress expanding business in HVAC equipment gives it the potential for realizing additional emerging economy countries was particularly noteworthy in business expansion in both the residential HVAC market, where the Asian region, where we implemented strategies focused on demand is projected to recover to approximately six million units volume-zone markets by augmenting our local manufacturing by 2015, and the commercial HVAC market, which is projected operations (China and India) and establishing marketing compa- to maintain steady growth. nies (Indonesia and Vietnam). Regarding solutions business, we The acquisition of Goodman with its huge presence in the have finally been making substantive progress in building HVAC United States positions the Daikin Group to accelerate the full- (heating, ventilation, and air-conditioning) solutions designed to scale development of its business in the U.S. residential air- contribute to the realization of “zero energy residences, office conditioning equipment market—which accounts for most of the buildings, and stores” (energy conservation and generation) suit- U.S. air-conditioning equipment market, the world’s largest mar- able for the advent of the “smart city” era, and tangible benefits ket for such equipment—and the light commercial air-condition- from our efforts in this field are beginning to emerge. With ing market for medium-scale office buildings. By coordinating the respect to environmental innovation, we launched the Urusara operations of Goodman with those of McQuay International, a 7 room air conditioner—the first air conditioner in the world to U.S.-based Daikin subsidiary that offers medium- to large-scale employ the environment-friendly HFC refrigerant R32 and winner HVAC systems, and Daikin AC (Americas), Inc., a U.S.-based of the Minister of Economy, Trade and Industry Prize, the top Daikin subsidiary that provides Japanese-style ductless HVAC prize in the 2012 Energy Conservation Award program—and systems, the Daikin Group can operate as a comprehensive other air-conditioner products with outstanding energy conser- air-conditioning equipment manufacturer prepared to serve all vation performance in the Japanese market and were thereby kinds of markets from the residential market through the large- able to expand our share of Japan’s residential air-conditioner scale office building market. This puts us in a strong position to market. Each of these achievements is considerably bolstering quickly become the No. 1 air-conditioning company in North the foundation for our attainment of FUSION 15’s final-year America and thereby become the global leading company in the objectives. air-conditioning field. We are also striving to achieve further growth in the sales and We performed our initial estimates of synergies stemming from profitability of our air-conditioning business in the industrialized the Goodman acquisition at the time of the completion of the countries. During fiscal 2013, we acquired Goodman Global acquisition process in November 2012. Based on those esti- Group, Inc., which has a leading share of the U.S. residential mates, we are anticipating approximately ¥24 billion of cumula- air-conditioner market, and we also progressed with the imple- tive synergy benefits in terms of operating income during the first mentation of business structure reforms in Europe designed to three years following the acquisition and approximately ¥250 bil- adjust our operations in line with the slack conditions seen in lion of benefits over the first decade following the acquisition. European economies. In China, Japanese companies are facing We have been making smooth progress in realizing those special challenges amid an operating environment made more benefits. In fiscal 2014, the first year in which Goodman’s per- difficult by the deceleration of economic growth to the 7%-8% formance will be included in the Daikin Group’s consolidated level, but we were able to achieve positive results from large- statement of income, we are anticipating that such measures as scale sales promotion programs that made the most of our those to integrate the procurement functions of Goodman and powerful marketing network. 8 DAIKIN INDUSTRIES, LTD. McQuay will contribute roughly ¥2 billion of profit. Since May 2013, we have begun marketing ductless products through Goodman’s marketing routes, and we have begun full-scale par- ticipation in the light commercial market through the launch of ducted rooftop units for medium-scale commercial applications. We are also giving priority to the expedited implementation of various other Goodman-related business projects with a high level of potential for contributing to Group profitability. For exam- ple, we are developing high-value-added products for the premi- um zone of the U.S. ducted unitary residential air-conditioning market and are planning to launch those products in early 2014, Summary of FUSION 15 (cid:2) Development Direction and Quantitative Targets FUSION 15—Designed to Maximize Our Corporate Value as a “Global and Excellent Company” FY2011 actual results FY2014 plan FY2016 goals Net sales ¥1,160.3 billion ¥1,600.0 billion Operating income (%) ¥75.5 billion (6.5%) ¥130.0 billion (8.1%) Over ¥2,000.0 billion Over 10% and we are also arranging for Goodman plants to handle the Overseas business ratio (%) 61% 65% Over 70% local manufacturing in the United States of ductless products, including multi-split air-conditioning systems for office buildings and room air conditioners. On a nonconsolidated basis, our fiscal 2014 performance targets call for Goodman to record ¥206.0 billion in net sales, up 6% from the previous year on a local currency basis, and achieve an operating income ratio of 13%. After deductions for such items as the depreciation of goodwill, we are anticipating that Goodman will contribute roughly ¥13.5 billion to the Daikin Group’s consolidated operating income. While replacement demand in the U.S. residential air-conditioner market for the types of products regarding which Goodman is particularly strong is recovering only gradually, demand for new installations has become active, so demand for Goodman products is robust overall. Viewing these kinds of market trends as opportunities for business expansion, we intend to launch new energy-conserving versions of ductless (Daikin) products and ducted unitary (Goodman) products and undertake vigorously sales promotion campaigns for those products that leverage the capabilities of Goodman’s powerful dealer network. While we are likely to face such new challenges as intensifying competition with other com- (cid:2) Air-conditioning business: Daikin aims to achieve ¥1.9 trillion in net sales and a 10% share of the HVAC&R market in FY2016. (cid:2) Chemicals business: Daikin aims to become a global No. 1, excellent com- pany that leads applications development and expands the fluorochemicals market. (cid:2) Details of 11 Group-wide Core Strategy Themes [Four New Growth Strategy Themes: Innovation that incorporates the changes of the era as growth] (1) Fully enter emerging markets and the volume zones. (2) Develop a solutions business that meets customer needs. (3) Expand environment-related innovation business. (4) Accelerate growth through alliances, partnerships, and M&A. [Four Management Constitution Reform Themes: Sophistication of the management platform to succeed in the new era] (1) Innovate product development, production, procurement, and quality capabilities. (2) Strengthen global marketing function. (3) Comprehensively develop capacity to utilize IT. (4) Fundamentally reinforce profitability. [Three Themes to Enhance HR Capabilities Based on People-Centered Management] (1) Implement and sophisticate People-Centered Management, a source of Daikin Group’s competitiveness. (2) Accelerate development of measures to secure and develop quality HR that go beyond past measures. panies and increases in the cost of new product development (3) Speed up management localization and promote two-way communication programs, we are determined to maintain Goodman’s high level between the head office and local bases. of profit-generating power. ANNUAL REPORT 2013 9 e c n a G a l t A / s t h g i l h g H i l i a c n a n F i O E C e h t m o r f e g a s s e M A O O C e h t h t i w w e i v r e t n I s n o i t a r e p O f o w e i v e R e c n a n r e v o G e t a r o p r o C n o i t c e S l i a c n a n F i Q4: Even compared to the other initiatives emphasized by FUSION 15, your plans for deepening Daikin’s presence in emerging economy markets with great growth potential going forward are attracting considerable attention. Could you explain the specifics of your business development plans in individual target countries? Togawa: To attain our FUSION 15 targets, it will be crucial to accelerate our business expansion in emerging economies as well as further elevate our profitability in those markets, and our business expansion projects have been progressing smoothly in such countries as India, Vietnam, Indonesia, and Turkey. Looking at principal initiatives in individual countries during households financially positioned to purchase room air condi- tioners. While the operating environment in Australia continues to be harsh, we are planning to realize a V-shaped recovery in per- formance in that country by working to augment our lineup of residential air-conditioner products and concurrently striving to strengthen our sales promotion campaigns for commercial-use air conditioners with particular attention to promoting our products at early architectural design stages. Q5: On the other hand, the Japanese market is becoming mature, and there appears to be a need to create new paths for demand growth. What is Daikin’s strategic vision for mature markets? fiscal 2014, in India, we are planning to begin full-scale manufac- Togawa: Measures for strengthening our solutions business turing of room air conditioners, add models employing the new are a key part of our strategy for promoting the Daikin Group’s refrigerant R32 to our lineup, and accelerate the addition of new development over the medium-to-long term. Aiming to achieve dealers and marketing routes with an eye to elevating our market further growth and strengthen profitability in the mature share. In Vietnam, we are expediting our measures to develop Japanese air-conditioning market, we are implementing structur- new dealers and broaden the scope of marketing from large cit- al and organizational reforms in our applied (large-scale commer- ies to regional cities, and we expect that our vigorous sales pro- cial) air-conditioning equipment business and solutions business, motion campaigns will be facilitated by the government’s move and our new organizational structure for those operations began to relax its restrictive monetary policies. In Indonesia, the directly operating from April 2013. By leveraging our core competitive operated marketing company we recently acquired began oper- strengths regarding air-conditioning equipment to address ating in June 2012, and it is expanding its sales of products cen- peripheral service needs—such as those related to the engineer- tered on residential air conditioners. Having acquired another ing, installation, and operation of air-conditioning systems along marketing company focused on commercial air-conditioning with instrumentation and control systems—we are seeking to products in July 2013, we have prepared a solid foundation for provide levels of energy conservation, environmental friendliness, implementing our strategy aimed at becoming the No. 1 air- and amenity that are unattainable through the supply of equip- conditioning company in the Indonesian market. In Turkey, we ment alone. We are aiming to build a highly profitable cyclical- acquired a company two years ago that has begun manufactur- type business format encompassing equipment sales together ing room air conditioners tailored to local needs and is also with installation, maintenance, and renovation services. strengthening its marketing network for its mainstay multi-split air-conditioning systems for office buildings. We are moving ahead with deliberations regarding the possibili- ty of following up our recent start of local marketing company operations in Brazil with an additional plan for local manufac- turing operations in that country, and we are also engaged Q6: Could you explain the recent performance of Daikin’s chemicals business along with the challenges you are facing in that business and your strategies for developing that business going forward? in full-scale market research programs in connection with our Togawa: During fiscal 2013, the net sales and operating income consideration of plans to establish presences in additional of our chemicals business fell below the previous year’s levels as promising markets in North Africa, Central Asia, Myanmar, a result of the large impact of selling price declines stemming and elsewhere. from the protraction of slack demand in semiconductor-related In addition, we believe that of all the regions in which we have markets and the softening of conditions in refrigerant gas mar- been developing our air-conditioning business, the region with kets. At this point, we have fallen behind our time schedule for the greatest potential for additional sales growth is the Asia- attaining the realization of the chemicals business objectives of Oceania region. In Thailand, we are engaged in a marketing pro- the FUSION 15 strategic management plan. In fiscal 2014, we motion campaign targeting a powerful resurgence of demand are accelerating our development of fluorochemical applications associated with such factors as the expansion of direct invest- designed to enable the use of fluorochemicals in place of other ments from overseas and growth in the number of middle-class materials, striving to expand our business in the Chinese market 10 DAIKIN INDUSTRIES, LTD. and other Asian markets projected to grow over the medium-to- In Japan, Europe, and China, we will be intensifying our mar- long term, and speedily moving ahead with the implementation keting promotion programs for air-conditioning equipment and of other recovery strategies. solutions, accelerating our applications development programs One key focus of our application development programs is the for chemical products, and taking other measures designed use of composite technologies for enhancing the painting appli- to bolster our marketing power. In emerging countries, we will cation, adhesion, and mixing of fluorochemicals, and we are also emphasize measures for elevating profitability levels. In Japan, emphasizing new approaches to promoting greater sales of fluo- we will thoroughly implement selling price policies that reflect the rochemical resins in China’s volume-zone market in ways that depreciation of the yen, sustain our comprehensive programs for enable us to overcome competition from local chemical makers. reducing all kinds of costs, including fixed costs, and endeavor Aiming to maintain our short-term profitability, we are promot- to maximize our free cash flow through such measures as those ing fluorochemical sales in robust markets for automotive appli- to streamline inventories. cations as well as in next-generation product fields while When it was initially drafted, FUSION 15 called for us to gener- concurrently moving ahead with comprehensive cost reduction ate ¥130 billion in consolidated operating income during fiscal programs. Specifically, we are targeting environment-friendli- 2014. In view of such situations as the weakness of demand for ness-related applications for individual automobile makers by air conditioners in Europe and the delay of recovery in demand accelerating our efforts to promote the inclusion of our fluoro- for fluorochemicals, however, we adjusted our fiscal 2014 operat- chemical products in initial automobile design specifications with ing income forecast downward to ¥125 billion at the start of the respect to such components as fluoroelastomers used in fuel fiscal year. It remains difficult to project future trends in our oper- hoses and fluorochemical additives used in the electrolyte solu- ating environment, but we are maintaining a flexible posture and tions of lithium-ion batteries. We are campaigning to promote are ready to rapidly implement suitable responses to whatever greater sales of Daikin’s unique high-value-added products, such may happen in the environment—whether it be a further deterio- as OPTOOL anti-smudge surface coating agents used in smart- ration of conditions or a sharp recovery. In other words, we are phone touch panels and other products, ZEFFLE anti-fouling selectively employing defensive and aggressive policies where and weather-resistant coatings, and fluororesin films used to they are appropriate as we aim to ensure a substantial increase in protect solar cells. In response to major changes in industrial profitability. Although the operating environment may make our structure, we are preparing to establish new presences in such original ¥130 billion operating income target extremely difficult to environmental protection-related business fields as those associ- attain at this point, we remain intent on doing our best to over- ated with shale gas/oil production and water filters. come the various challenges that must be surmounted to achieve Q7: Could you tell us about any general strate- gic adjustments you may have in mind for fiscal 2014? In addition, please explain how you deter- mined the level of cash dividends applicable to fiscal 2013. that target, and that will be a principal objective as we make adjustments to our management strategies during the year. Regarding returns to shareholders, Daikin has a fundamental policy of maintaining the ratio of cash dividends to net assets (DOE) at 2.0% or higher and is seeking to set stable levels of divi- dends based on a comprehensive consideration of such factors as the Company’s consolidated performance, financial position, Togawa: We are aiming to further elevate our Groupwide profit and funding requirements. We are also striving to maintain inter- figures and profit-to-sales ratio during fiscal 2014 by proactively nal reserves sufficient to further strengthen our management promoting additional business expansion and augmenting our constitution while accelerating global business development, fundamental profitability strengthening measures. As the third of speeding up the development of products that help protect the the five years covered by our FUSION 15 strategic management natural environment, and making strategic investments designed plan, fiscal 2014 represents the midpoint of our current medium- to augment our business expansion and upgrade our competitive term strategy, and our performance during the year will be an power. In light of all these factors, dividends applicable to fiscal extremely important determinant of our success in attaining 2013 amounted to ¥36 per share, unchanged from the previous FUSION 15’s ultimate objectives. Accordingly, we will be striving year. to further speed up the implementation of our fundamental I greatly appreciate the understanding and confidence Daikin’s growth strategies focused on “expanding business in emerging stakeholders have shown to date, and I am hoping for your economy countries and volume-zone markets,” “developing continued support going forward. solutions businesses that meet diverse customer needs,” and “generating environment-related innovation business.” ANNUAL REPORT 2013 11 e c n a G a l t A / s t h g i l h g H i l i a c n a n F i O E C e h t m o r f e g a s s e M A O O C e h t h t i w w e i v r e t n I s n o i t a r e p O f o w e i v e R e c n a n r e v o G e t a r o p r o C n o i t c e S l i a c n a n F i Review of Operations Air Conditioning—The Japanese Market Overview of Operations in Fiscal 2013 Promoting Sales Based on Environment- Friendliness and High-Value-Added Features them easy for seniors to use, and they also incorporate built-in humidity sensors and functions that facilitate the adjustments required to achieve optimally comfortable room temperatures. During fiscal 2013, the Japanese economy benefited from a Daikin’s sales promotion campaigns for such high- sustained gradual recovery in capital investments and hous- value-added products as Urusara 7 and RakuAir, organization ing construction starts. These fundamental trends, rising of energy conservation events in major cities, and other demand associated with electric power conservation, and the efforts helped boost shipments of the Group’s residential positive effects of a government subsidy program combined air-conditioner products at a rate exceeding the rate of to support continued robust demand for commercial air- growth in market demand, and the Group’s net sales of those conditioning products. products were above the level in the previous fiscal year. In May 2012, the Daikin Group launched two new lines Against the backdrop of growing concerns regarding of commercial air-conditioning equipment that offer further pollen and PM 2.5 fine atmospheric particulates (suspended improvement in energy-saving performance—the SkyAir particles with diameters of 2.5 micrometers or less), overall series of air conditioners for buildings, stores, and offices and demand in the Japanese market for residential air purifiers the Ve-up series of variable refrigerant volume (VRV) air-con- increased. The Daikin Group achieved considerable growth in ditioning systems. These new products enabled the Group to its sales of such products through such initiatives as the July meet additional new and replacement demand, and Daikin’s 2012 launch of new models in its Uruoi Hikari Kurieru line of commercial air-conditioning equipment sales in Japan air purifiers, which feature a dual air purification method— surpassed the level in the previous fiscal year. using Daikin’s unique Flash Streamer technology and an Overall demand in Japan’s residential air-conditioning active plasma ionizer—that clearly differentiates them from market was boosted by growth in new housing starts, competing products. an increase in demand for energy-saving air conditioners associated with a general rise in energy conservation consciousness, and favorable weather conditions. In November, 2012, the Daikin Group launched the Urusara 7, the first room air conditioner in the world to use R32, a Initiatives in Fiscal 2014 Addressing Electric Power Conservation Needs and Pioneering New Markets highly environment-friendly new HFC refrigerant with a low In fiscal 2014, the Daikin Group believes it will be important global warming potential (GWP). In recognition of Urusara 7’s to increase the proactiveness and effectiveness of its efforts high energy conservation performance level and the techno- to address Japan’s electric power conservation needs. While logical innovation underlying that performance, Urusara 7 diverse and increasingly dynamic measures are being taken was awarded the Minister of Economy, Trade and Industry to facilitate tangible progress toward zero-energy residences, Prize, the top prize in the 2012 Energy Conservation Award office buildings, and stores, Daikin plans to promote the program. In April 2012, Daikin launched the RakuAir line of realization of zero-energy structures going forward by foster- room air conditioners employing easy-to-use remote control- ing the development of HVAC (heating, ventilation, air lers. Designed based on analyses of user psychology, the conditioning) solutions business as a principal pillar of its new remote controllers offer distinctive features that make air-conditioning operations in Japan. 12 DAIKIN INDUSTRIES, LTD. The Urusara 7 room air conditioner is the first air conditioner in the world to employ the environment-friendly HFC refrigerant R32. In the commercial air-conditioning market, the Daikin the wake of high-profile findings with respect to the dangers Group is promoting sales of offerings highly differentiated of PM 2.5 particles. from competing products on the basis of their high levels of While Japan’s air-conditioning market is becoming increas- energy-conservation performance, such as offerings in the ingly mature, Daikin believes it can identify and develop addi- Eco-ZEAS80 line, and Daikin is concurrently striving to devel- tional growth fields in Japan going forward. Examples of such op a cyclical-type business format involving the provision of fields include the communication industry’s data centers, solutions that encompass equipment sales together with which are growing in step with the increasingly widespread installation, maintenance, and renovation services. use of smartphones and tablets; agricultural production Daikin is sustaining its efforts to expand its share of the plants, which are aiming to ensure food safety and realize residential air-conditioning market through measures cen- international competitiveness; housing facilities for seniors tered on such highly differentiated products as Urusara 7 and that offer nursing and other services; and facilities designed RakuAir. The Group is also seeking to increase its annual in line with the “smart city” concept for realizing zero-energy sales of residential air purifiers to above the one million unit structures. HVAC solutions that help reduce electric power mark by emphasizing the outstanding performance of prod- and energy consumption are an important requirement in all ucts in its Uruoi Hikari Kurieru line, and it anticipates that those fields, and Daikin plans to achieve additional growth these efforts will be facilitated by the increasing attention air in its Japanese air-conditioning business operations by quality issues have received throughout Japanese society in proactively pioneering those new markets. ANNUAL REPORT 2013 13 e c n a G a l t A / s t h g i l h g H i l i a c n a n F i O E C e h t m o r f e g a s s e M A O O C e h t h t i w w e i v r e t n I s n o i t a r e p O f o w e i v e R e c n a n r e v o G e t a r o p r o C n o i t c e S l i a c n a n F i to strengthen sales networks and bolster product lineups. Despite harsh market conditions, Daikin’s proactive expan- sion of sales promotion measures led to a year-on-year rise in its overall sales in China. In the Asia/Oceania region, the impact of unseasonable weather and other factors restrained sales in the major mar- ket of Australia to roughly the same level as in the previous fiscal year. However, sales growth in such emerging countries as Thailand, India, Vietnam, and Indonesia (where a new marketing company was established in June 2012) caused Daikin’s overall sales in the region to surpass the level in the previous fiscal year. Regarding the Americas region, demand for large-scale (applied) air-conditioning systems in North America was flat, but Daikin was able to increase its sales of such systems in the Americas region by augmenting its sales of new products, expanding its service business operations, and broadening the scope of marketing operations in Central America and South America. In the North American ductless air-conditioner mar- ket, the Group stepped up its efforts to elevate the awareness of the Daikin brand on the parts of dealers and construction - related companies and was thereby able to achieve a further increase in sales of VRV building-type multi-split air-condition- ing systems. Sales of residential air-conditioning systems as well as air-conditioning systems for small and medium-sized shops were above the level in the previous year. A Group company in Turkey has begun manufacturing air-conditioner products designed to match local needs. Initiatives in Fiscal 2014 Europe: Strengthening Business Structures and Expanding Room Heating System Business While demand in Europe is projected to remain weak during fiscal 2014, Daikin is emphasizing measures to strengthen its regional businesses over the medium term, aiming to fundamentally upgrade its competitive power through such initiatives as those to reform and reinforce the marketing cap- abilities and cost-competitiveness of all 12 Group marketing Air Conditioning—The Global Market Overview of Operations in Fiscal 2013 Sustained Business Expansion in China, the United States, and Emerging Countries During fiscal 2013, Daikin’s air-conditioning business units continued to face harsh conditions in the important European region market but sustained strong sales in other regions of the world. The Group’s overall sales in the global market surpassed the level in the previous fiscal year. In the European region, the strong impact of widespread recessionary economic conditions caused a year-on-year decline in Daikin’s sales of residential air conditioners. Regarding commercial air conditioners, the weakness of sales in EU countries was offset by sales growth in the Middle East, Turkey, and other emerging countries, and overall sales of mainstay VRV multi-split type commercial air-conditioning systems were maintained at approximately the same level as in the previous fiscal year. Operations in Turkey continued to contribute to consolidated performance, reflecting the strong performance of a local subsidiary acquired in July 2011. With respect to heat-pump water and room heating systems, demand was down in the major markets of France as well as the United Kingdom, but Daikin’s efforts to expand its marketing channels in the central Europe, Italy, Greece, and other new markets enabled it to achieve year-on-year growth in unit sales volume. With respect to China, demand was robust in the suburbs of major cities and in regional cities but fell in major cities. As a result, Daikin moved further ahead with its development of commercial air-conditioning equipment marketing agencies in suburbs and in China’s central and western regions and other inland regions. Regarding residential air-conditioning prod- ucts, the Group moved ahead with the pioneering of new market segments by expanding its marketing network for residential multi-type air conditioners in all regions of China and by developing special models with specifications tailored to match needs in China. Regarding large-scale (applied) air-conditioning systems, the Group also took measures 14 DAIKIN INDUSTRIES, LTD. companies in Europe. The Group is also proceeding with the implementation of strategies for expanding sales of Asia/Oceania Region: Full-Scale Local Manufacturing in India volume-zone residential air-conditioning products in southern European markets and increasing sales of high-value-added Daikin is working to promote greater sales and further offerings throughout the Europe region. In addition to moving strengthen its profitability in the strategically emphasized ahead with the expansion of marketing channels for room markets of India, Vietnam, and Indonesia, seeking to greatly heating systems throughout the region, Daikin is launching increase the overall level of its sales in the Asia/Oceania region. new room heating offerings tailored to local market needs, In India, the Group inaugurated full-scale local manufacturing such as compact Altherma heat-pump water and room heat- operations for room air conditioners and expanded its product ing systems in France and combustion-type heating products lineup with the addition of models that use R32, a highly in Germany and Italy. China: Multi-Dimensional Measures for Elevating Marketing Power and Product Power While the outlook for a recovery in demand in China remains somewhat opaque, Daikin is working to expand its nation- wide marketing network—increasing the number of outlets from 12,000 to 14,000—and accelerate its marketing pro- grams in regional cities and inland regional cities. While the environment-friendly new HFC refrigerant with a low global warming potential (GWP). In Vietnam, the Group is creating additional marketing outlets and accelerating its business development programs in regional cities. In Indonesia, a newly established local marketing subsidiary is playing a central role in creating additional marketing outlets at a rapid pace. North America: Accelerating Business Expansion Based on Synergies with Goodman demand associated with large-scale projects is declining, the Overall demand for air-conditioning products in the North Group is seeking to increase its sales by emphasizing retail America region is projected to recover slowly but steadily. sales. The Group reevaluated all its commercial and residen- Regarding applied products, Daikin is launching new prod- tial offerings and undertook a full model change transition for ucts, reinforcing its marketing network, and working to more than 1,000 products in March 2013. Regarding its expand its solutions business. General awareness of the ener- mainstay VRV systems, also, Daikin is striving to increase its gy-saving characteristics of ductless air conditioners is rising market share by introducing new models that feature over- in the region, and the Group is expanding its lineup of such whelmingly superior energy-conservation performance. In the products as well as its related marketing and servicing sys- relatively mature markets of major cities, the Group is cultivat- tems. The Group is placing strong strategic emphasis on ing replacement demand by proposing solutions packages measures to generate synergies between Daikin’s environ- that include services. The Group is also establishing air- mental technologies and the dealer network of Goodman business operations related to air purifiers and total heat Global Group, Inc., which was acquired in fiscal 2013. exchangers, for which demand is expected to surge along Besides seeking to meet residential replacement demand, with the general rise in the awareness of the dangers of PM Daikin is bolstering its lineup of high-value-added products 2.5 fine atmospheric particulates. and working to expand its sales in the newly constructed housing market. Additional initiatives are being made to estab- lish a full-scale presence in the light commercial market for systems used in medium-sized buildings. All these measures are designed to quickly realize Daikin’s objective of becoming Daikin is further expanding and strengthening its marketing network throughout China. the No. 1 air-conditioning company in North America. Daikin’s sales of residential air conditioners in the United States have been surging since the acquisition of Goodman Global Group, Inc. ANNUAL REPORT 2013 15 e c n a G a l t A / s t h g i l h g H i l i a c n a n F i O E C e h t m o r f e g a s s e M A O O C e h t h t i w w e i v r e t n I s n o i t a r e p O f o w e i v e R e c n a n r e v o G e t a r o p r o C n o i t c e S l i a c n a n F i Chemicals Overview of Operations in Fiscal 2013 OPTOOL Products: A Principal Chemicals Segment Sales Growth Driver was down in China and other Asian countries, but Daikin moved ahead with the marketing of products for new appli- cations in the U.S. and European markets. In addition, sales of OPTOOL anti-smudge surface coating agents used in In fiscal 2013, the Chemicals segment recorded year-on-year smartphone touch panels and other products were up by a decreases in sales and operating income. considerable margin. This achievement reflected the benefits Among principal fluoropolymer sector products, the Daikin of efforts to develop applications in fields where fluorochemi- Group achieved robust sales of such melt resins as fluorinat- cals had not previously been used, thoroughly coordinate ed ethylene propylene (FEP) and ethylene tetrafluoroethylene Group operations and promote information sharing globally, (ETFE) in the U.S. market for LAN cable applications, the and closely monitor changes in needs related to end users’ Chinese market for communications terminal electrical supply chains and quickly respond to those changes. As a cables, and other parts of the global market for electric result, overall sales of offerings in the chemical products cable-related applications. In China, despite the slowing of sector rose to above the level in the previous year. economic expansion and deceleration in demand associated Sales of fluorocarbon gas refrigerant products were down with infrastructure investment and exports, the Group was considerably from the fiscal year owing to the impact of price able to maintain strong sales owing to its sales promotion declines accompanying the softening of market conditions campaigns for polytetrafluoroethylene (PTFE) resins in in Japan, China, and other Asian countries, and this fluoro- volume-zone market segments. On the other hand, demand carbon gas sales drop had a large impact on the overall in semiconductor-related and other markets of Japan, else- performance of the Chemicals segment. where in Asia, and the United States was sluggish. Sales of fluororubber products were down owing to the impact of factors that included a decrease in automobile-related demand in Europe. As a result, total sales of fluoropolymers were below the level of the previous year. Initiatives in Fiscal 2014 Aiming for Sales/Profit Growth Centered on Newly Developed Applications Regarding the chemical products sector, demand for water While Daikin anticipates that demand level recoveries will be and oil repellents associated with apparel-related applications delayed to various degrees in individual product segments during fiscal 2014, the Group is accelerating its use of com- posite technologies for enhancing the painting application, adhesion, and mixing of fluorochemicals while concurrently emphasizing measures to promote the sales of environment - friendly products designed to facilitate the realization of such objectives as fuel efficiency increases and exhaust gas emission reductions. In China, Daikin is anticipating that the expansion of the automobile-related market and a resurgence of infrastructure investments will support robust growth in demand for such products as fluororubbers, PTFE, and weather-resistant coatings, and the Group is launching new offerings and Fluororesins are used to manufacture automobile components with outstanding heat resistance and low fuel permeability. 16 DAIKIN INDUSTRIES, LTD. undertaking marketing promotion campaigns targeting the Regarding new markets, Daikin is addressing opportunities volume-zone segments of Chinese markets for such prod- associated with emerging markets for information terminal ucts. The FUSION 15 strategic management plan has set applications of its oil- and water-repellent coating agents the goal of increasing annual Chemicals segment sales in as well as applications of R32 HFC refrigerant and other China to roughly ¥100 billion. In addition to leveraging the products. The Group is examining numerous opportunities for benefits of previous efforts to strengthen marketing pro- inaugurating environment-related business associated with oil grams designed to be effective in Chinese markets, bolster and gas production—particularly in the United States, which cost-competitiveness, and progressively boost capabilities for is experiencing a boom in the employment of unconventional developing products that match local needs, Daikin is seek- methods for exploiting shale oil resources—and it is moving ing to attain this goal by focusing on new applications and ahead with the development of new product applications making the most of its new local manufacturing base—the related to all aspects of global oil and gas production Changshu Plant, which began manufacturing DAIEL fluoro- activities. rubber products and ZEFFLE weather-resistant coatings With respect to new products, plans call for the develop- in fiscal 2014. ment of additional products targeting volume-zone market Other important strategic themes for Chemicals segment segments as well for the use of Daikin’s unique technologies operations are expanding operations in new regions, initiating to develop and launch numerous new highly differentiated business in new markets, and developing applications for offerings. new products. In addition to these initiatives, aiming to ensure it can In line with its strategy of targeting emerging economy increase its sales and profitability during fiscal 2014, Daikin is country markets, Daikin has begun the full-scale development implementing such measures as those focused on strength- of operations in South Korea, where it recently established a ening short-term profitability through the thorough application local marketing base, and is moving ahead with measures for of product pricing policies, the reduction of raw materials expanding marketing operations to end users in India, Brazil, procurement costs amid softening market conditions, and and ASEAN member countries. In particular, Daikin plans to the lowering of fixed-cost levels. establish a local base in India and undertake the full-scale development of its operations in that country. Used here on a railway station building, ZEFFLE Infrared Reflective Coating is a fluorochemical coating that is highly resistant to weathering. ANNUAL REPORT 2013 17 e c n a G a l t A / s t h g i l h g H i l i a c n a n F i O E C e h t m o r f e g a s s e M A O O C e h t h t i w w e i v r e t n I s n o i t a r e p O f o w e i v e R e c n a n r e v o G e t a r o p r o C n o i t c e S l i a c n a n F i Oil Hydraulics Overview of Operations in Fiscal 2013 Strong Sales of Oil Hydraulic Equipment Used in Construction Machinery and Motor Vehicles Initiatives in Fiscal 2014 Attaining FUSION 15 Targets through Emphasis on Chinese Business Fiscal 2014 is the third of the five years covered by the Daikin’s oil hydraulic equipment is used to enable the smooth FUSION 15 strategic management plan, and the Daikin operation of power shovels and other construction equip- Group is implementing various strategically emphasized ment, processing equipment in factories, as well as tractors measures aimed at making steady progress toward the goal and other small-scale motor vehicles. The Daikin Group is of increasing Oil Hydraulics segment sales to ¥30 billion leveraging energy-conservation technologies accumulated in by fiscal 2016, the final year of FUSION 15. its air-conditioning operations to develop and manufacture The strategically emphasized measures receiving top priori- hydraulic pumps, hydraulic units, and other oil hydraulic prod- ty are those focused on strengthening business in China. In ucts that help improve the performance of machinery and view of the particular importance of cost-competitiveness in vehicles with respect to high-precision operations, noise Chinese markets, the Oil Hydraulics segment is collaborating reduction, compactness, and energy conservation. In addi- with the Group’s Air Conditioning segment to progressively tion, by integrating oil hydraulic control technologies and increase the local procurement of materials and components invertor motor technologies to create hybrid hydraulic and augment the internal production of cast metal compo- systems, the Group is developing unique products that nents and other components at the plant of Daikin Hydraulics contribute to the protection of the natural environment. (Suzhou) Co., Ltd. In fiscal 2013, Daikin’s industrial machinery-related oil Regarding industrial machinery-related oil hydraulic equip- hydraulic equipment business maintained robust sales in the ment business, the Group is emphasizing the realization of U.S. market, although slack demand in European, Japanese, global business growth through measures to newly enter and other Asian markets kept sales below the level in the pre- such markets as those of South Korea and countries in vious year. Sales of oil hydraulic equipment used in construc- Europe and the ASEAN countries. In the mainstay Japanese tion machinery and motor vehicles were up year on year, market, Daikin is striving to accelerate the expansion of its reflecting the strength of domestic and overseas demand. customer base by integrating the operations of marketing, In January 2013, the Daikin Group moved to strengthen technical, and manufacturing units to further enhance its mar- its oil hydraulic transmission operations targeting China’s agri- keting power and engineering power as a means of better cultural machinery market by reorganizing those operations meeting such customer needs as those related to electric within a newly established joint venture, Daikin-Sauer- power and energy conservation as well as low-cost Danfoss, Ltd. The Group’s maintenance, repair, and opera- operations. tions (MRO) business in the U.S. market has continued to In addition to the above-mentioned initiatives, Daikin is realize a smooth increase in sales. seeking to utilize the business know-how of Chicago-based subsidiary All World Machinery Supply, Inc., to expand the scope of reliably profitable MRO business in the United States by establishing presences in Latin American and Asian markets. 18 DAIKIN INDUSTRIES, LTD. Defense Overview of Operations in Fiscal 2013 Achievement of Year-on-Year Sales Growth During fiscal 2013, orders from Japan’s Ministry of Defense for artillery shells and guided missile components increased despite the reduction of Japan’s defense budget. With respect to business in civil-sector fields, the segment main- tained strong sales of mainstay home-use oxygen therapy equipment offerings. Aiming to better differentiate its offerings from competing products, Daikin launched five-liter oxygen- concentration devices that are roughly as compact as previ- ously marketed three-liter oxygen-concentration devices in December 2012, and the new products have been highly evaluated in the market. As a result, the Defense segment’s overall sales surpassed the previous year’s level. Initiatives in Fiscal 2014 Pioneering Chinese Markets for Civil-Sector Offerings While the restriction of Japan’s defense budget is projected to present challenges during fiscal 2014, Daikin is working to overcome those challenges by reducing fixed and variable costs as a means of strengthening profit-earning capabilities while also implementing a comprehensive reform of all busi- ness processes from materials procurement through product shipments and further reducing inventory levels. In civil-sector fields, the Group is working to expeditiously initiate and expand the marketing of oxygen-concentration devices in China. Having established Daikin Medical Technology (Suzhou) Co, Ltd., Daikin plans to provide home-use oxygen therapy equipment along with a set of related services, in accordance with its business model for such operations in Japan, and it will concurrently accelerate its development of such equipment designed for the volume-zone market segment. ANNUAL REPORT 2013 19 e c n a G a l t A / s t h g i l h g H i l i a c n a n F i O E C e h t m o r f e g a s s e M A O O C e h t h t i w w e i v r e t n I s n o i t a r e p O f o w e i v e R e c n a n r e v o G e t a r o p r o C n o i t c e S l i a c n a n F i Corporate Governance Fundamental Corporate Governance Concept The Daikin Group’s corporate governance systems are designed Accordingly, experience as a top manager in a listed enterprise is a principal nomination criterion for outside director recruitment. to help accelerate decision making and operational execution To ensure that the outside directors can effectively contribute work in anticipation of and response to changes in management to Daikin’s corporate governance system, the outside directors tasks and the management environment while concurrently pro- are assigned assistants in the Management Planning Office who moting consistently high levels of management transparency and strive to provide the outside directors with early notice of Board soundness, thereby seeking to increase the Group’s corporate of Directors meetings. In addition, in the case that an outside value. director is not able to attend a Board of Directors meeting, the Going forward, the Group will be striving to ensure the increas- assistants provide the outside director with related materials and ing sophistication of speedy management, the strengthening of subsequently provide the outside director with an explanation of consolidated management, and still-higher levels of soundness the proceedings of the meeting and provide other assistance. and transparency. In addition, to realize an increase in corporate value, the Group will continually consider and reevaluate its con- Shareholders’ Meeting cepts regarding the most-appropriate forms of corporate gover- nance as it pursues a diverse range of Group-level initiatives aimed at ensuring best practices throughout the Group. Accounting Auditor Management and Operational Execution Systems Rather than adopt a U.S.-style “committees system” that com- pletely separates decision making from operational execution, the Group has adopted an “integrated management” system that calls for directors to bear responsibility for management respon- sibilities as well as for operational execution responsibilities. In view of the special characteristics of the Group’s business, it was judged that this is a more-effective means of accelerating deci- sion making and operational execution. In addition, the Group has introduced an Executive Officer System to accelerate the speed of execution based on autonomous judgments and deci- sions in units handling each region, division, and function. Daikin entrusts the CEO with the responsibility for making management decisions and assigns the COO the responsibility for executing operations. The CEO bears responsibility primarily for decision making with respect to a full range of management issues, including those involving Group companies. The COO bears responsibility primarily for executing operations. This sys- tem is used to give due attention to both decision making and operational execution processes while seeking to accelerate both kinds of processes with respect to all kinds of management tasks, including important management issues. To facilitate speedy decision making based on substantive discussions, the Board of Directors has been designed to include a small number of members. As of June 2013, the Board of Directors included 12 members, including one female external Appointment, dismissal CSR Committee, Corporate Ethics and Risk Management Committee, Development Committee for Operational Adequacy Promotion System, Independent Committee, Information Disclosure Committee Member of the Advisory Council HRM and Compensation Advisory Committee Group Steering Meeting Executive Officers Meeting Group Management Meeting Audit Board of Directors Appointment, supervision Chairman and CEO President and COO Audit & Supervisory Board Audit & Supervisory Board Member Group Auditors Meeting Executive Officers (The rest is abbreviated) Activities by External Directors Name Principal Activities Chiyono Terada Kosuke Ikebuchi Attended 14 out of 16 meetings of the Board of Directors this fiscal year, Chiyono Terada offered timely proposals as needed, based on her abundant experience and deep insight as a corporate manager and especially from her broad and advanced perspective, including proposals concerning management based on the viewpoints of consumers, such as the importance of the brand of the Company, and measures to further promote achievements of female employ- ees. Attended all 16 meetings of the Board of Directors this fiscal year, Kosuke Ikebuchi provided timely proposals as needed, based on his abundant experience and deep insight as a corporate manager and especially from his broad and advanced perspective, including viewpoints concerning manufacturing, such as production innova- tion, cost reduction, and enhancement of reliability and productivity. director and one non-Japanese part-time director. Based on this system, the Board of Directors is making speedy strategic deci- Systems for Supporting Speedy Management The top deliberative unit in the Group’s management system is sions and performing sound supervision for the entire Group. the Group Steering Meeting. This unit determines the direction Daikin’s Board of Directors included two outside directors as of important management policies and strategies in a rapid and of June 2013. Daikin seeks to recruit outside directors who have timely manner, thereby accelerating the resolution of issues. abundant experience and deep insight and can, therefore, offer In addition, the Group Management Meeting aims to thorough- a sophisticated perspective on a broad range of issues as they ly share information on important management policies and the participate in decision making and supervise management. basic strategies of the Group and support and expedite Group 20 DAIKIN INDUSTRIES, LTD. companies’ problem-solving efforts. To further increase the Group’s overall corporate value and ensure the Group lives up to its responsibilities to society, the Group Management Meeting strives to ensure that the Group is characterized by a unified understanding and speedy corporate operations. The Group’s management system also includes such units as an Executive Officers Meeting as well as an Advisory Council that offers opinions and advice regarding management issues from an independent standpoint. Audit System Daikin employs a Board of Corporate Auditors and seeks to nominate two or more outside members to its Board of Corporate Auditors. The principal nomination criteria for outside corporate auditors are the same as those for outside directors and include independence from the Company in terms of not having a rela- tionship of interest with the Company. As of June 2013, Daikin’s four corporate auditors included two outside corporate auditors. The outside corporate auditors attend meetings of the Board of Directors as well as other important meetings and receive reports. In addition, they are able to express diverse opinions. To ensure effective audit functions, the Board of Corporate Auditors receives reports on important issues related to manage- ment and performance when necessary and also investigates relevant units, confirms approval of documents, and regularly exchanges opinions with representative directors, executive offi- cers, and the independent auditors. To strengthen Groupwide auditing and auditing functions for all Group companies, includ- ing overseas subsidiaries, principal Group companies appoint Group auditors. The corporate auditors and Group auditors regularly hold Group Auditors’ meetings and otherwise work to increase the smoothness of information flows. Activities by External Corporate Auditors Name Principal Activities Yoshiyuki Kaneda Hitoshi Murakami Attending all 16 meetings of the Board of Directors and 14 out of 15 meetings for the Board of Auditors this fiscal year, Yoshiyuki Kaneda offered timely proposals as needed, based on his abundant experience and deep insight as a corporate manager, especially in manufacturing technology and production management. Attending all 16 meetings of the Board of Directors and all 15 meetings of the Board of Auditors this fiscal year, Hitoshi Murakami offered timely proposals as needed, based on his abundant experi- ence and deep insight as a corporate manager, especially in risk management. As of June 27, 2013, Hitoshi Murakami retired from his position as a corporate auditor upon the completion of his term. Ryu Yano Appointed in June 2013, Ryu Yano is offering timely proposals as needed, based on his abundant experience and deep insight as a corporate manager, particularly with respect to overseas business. Corporate Officer Remuneration, Etc. To ensure the transparent management of its corporate officer-related personnel and remuneration management processes, Daikin has established the Compensation Advisory Committee, which is chaired by an outside director. This committee engages in discussions and deliberations regarding such issues as those related to corporate officer nomination criteria, corporate officer candidates, and remuneration. The remuneration of directors and corporate auditors is deter- mined so as to fall within the aggregate remuneration ceiling of directors and corporate auditors as determined by a resolu- tion of the general shareholders’ meeting. Based on a report from the Compensation Advisory Committee, the directors’ remuneration is determined by a resolution of the Board of Directors while the corporate auditors’ remuneration is deter- mined by a resolution of the Board of Corporate Auditors. Daikin’s corporate officer remuneration system is designed to accord with the Group’s management policy and respond to shareholders’ expectations by increasing corporate offi- cers’ motivation to promote a sustained increase in Group performance over the medium-to-long term and thereby contributing to a rise in the Group’s corporate value. Directors’ remuneration includes “fixed compensation,” “performance-linked compensation” that reflects the Group’s short-term performance (net sales and operating income) and each director’s job responsibilities, and “stock options” that reflect the Group’s medium- to long-term performance. The performance-linked compensation of Daikin directors is given a somewhat higher ratio of linkage with performance than average to ensure that the incentive effect of that compensa- tion is sufficient. The remuneration of outside directors and corporate auditors includes “fixed compensation” only. Compensation levels are determined based on consider- ation of Daikin’s performance and remuneration levels com- pared to those of other leading manufacturing companies in Japan after analyzing and comparing data from an outside specialized institution on the remuneration of corporate officers active in approximately 200 Japanese companies listed on the First Section of the Tokyo Stock Exchange. Total Compensation for Directors and Corporate Auditors Position Number of Directors and Corporate Auditors Total Compensation (Millions of yen) Directors Corporate Auditors Total 13 4 17 823 89 913 Total Compensation for External Directors and External Corporate Auditors Position Number of Directors and Corporate Auditors Total Compensation (Millions of yen) Total Compensation for External Directors and External Corporate Auditors 4 59 ANNUAL REPORT 2013 21 e c n a G a l t A / s t h g i l h g H i l i a c n a n F i O E C e h t m o r f e g a s s e M A O O C e h t h t i w w e i v r e t n I s n o i t a r e p O f o w e i v e R e c n a n r e v o G e t a r o p r o C n o i t c e S l i a c n a n F i Directors, Auditors, and Executive Offi cers (As of June 27, 2013) Position(s) Responsibilities & Principal Jobs Name Chairman of the Board and CEO President and COO, Member of the Board Noriyuki Inoue Masanori Togawa Member of the Board (external) Chiyono Terada President and CEO of Art Corporation Member of the Board (external) Kosuke Ikebuchi Senior Advisor to the Board and Senior Technical Executive of Toyota Motor Corporation Member of the Board and Senior Executive Officer Member of the Board and Senior Executive Officer Member of the Board and Senior Executive Officer Member of the Board and Senior Executive Officer Guntaroh Kawamura Responsible for Chemicals Business and General Manager of Yodogawa Plant Ken Tayano Responsible for Domestic Air-Conditioning Business, Representative of China Region, Chairman and President of Daikin (China) Investment Co., Ltd., and Member of Global Air-Conditioning Committee Takeshi Ebisu Responsible for Corporate Planning and G Company Masatsugu Minaka Representative of Air-Conditioning Operations in the Europe/Middle East/Africa Region, President of Daikin Europe N.V., and Member of Global Air-Conditioning Committee Member of the Board and Senior Executive Officer Jiro Tomita General Manager of Air-Conditioning Manufacturing Division, Chairman of PD Alliance Promotion Committee, General Manager of Sakai Plant, Member of Technology and Innovation Center Preparation Office, Sub-leader of ATT Project, and AGH Project Leader Member of the Board and Senior Executive Officer Takashi Matsuzaki Responsible for Air-Conditioning Research and Development (including Applied Solution Business and Refrigeration) and Global Procurement, General Manager of Shiga Plant, and Member of Technology and Innovation Center Preparation Office Member of the Board and Executive Officer Koichi Takahashi Responsible for Accounting, Finance, and Budget Operations, General Manager of the Finance and Accounting Division, Chairman of Information Disclosure Committee, Chairman of Development Committee for Operational Adequacy Promotion System, IZS Project Leader Member of the Board (non-resident) Audit and Supervisory Board Member Audit and Supervisory Board Member Audit and Supervisory Board Member (external) Audit and Supervisory Board Member (external) Frans Hoorelbeke Chairman of Daikin Europe N.V. Shigeru Murakami Kenji Fukunaga Yoshiyuki Kaneda Former Officer of Sony Corporation Ryu Yano Director and Chairman of Sumitomo Forestry Co., Ltd. Senior Executive Officer Junichi Sato Representative of Air-Conditioning Operations in Central America and South America (including American Air Filter) and Member of Global Air-Conditioning Committee Senior Executive Officer Yukio Hayashi Responsible for Liaison Business and Defense Division and General Manager of Tokyo Office Senior Executive Officer Kosei Uematsu Responsible for Global Air-Conditioning Business (excluding Japan) and Refrigeration Division and Member of Global Air-Conditioning Committee Senior Executive Officer Shigeki Hagiwara Responsible for Applied Solution Business, Service Operations, and Training and General Manager of Applied Solution Business Division Senior Executive Officer Hiroo Yoshioka Senior Executive Officer Susumu Okano Responsible for Manufacturing Technology and Oil Hydraulics Business, Deputy General Manager of Air-Conditioning Manufacturing Division, and Member of Global Air-Conditioning Committee Responsible for CSR and Corporate Communication, Corporate Ethics, Compliance, Legal Affairs, and IT Development, Department Manager of Corporate Communication Department and Department Manager of Corporate IR Group, and Chairman of CSR Committee and Corporate Ethics and Risk Management Committee Senior Executive Officer Shinya Okada Responsible for Global Environment, GRT Project Leader Senior Executive Officer Yasushi Yamada Responsible for Safety Executive Officer Executive Officer Executive Officer Katsuyuki Sawai Responsible for Human Resources and General Affairs Toshitaka Tsubouchi General Manager of Air-Conditioning Sales Division Osamu Tanaka Deputy General Manager of Air-Conditioning Manufacturing Division (Product Development), and Member of Technology and Innovation Center Preparation Office Executive Officer Hiroo Sakai Responsible for Chemicals Research/Technology Product Commercialization Promotion/Environment/Safety and General Manager of Chemicals Division Executive Officer Executive Officer Executive Officer Executive Officer Yoshikazu Tayama Department Manager of Consolidated Management Administration Group, Finance and Accounting Division Yoshiyuki Uemura Director of Goodman Global Group, Inc., EVP for Cooperation and Strengthening Technological Capabilities, and Director of Daikin Holdings (Houston), Inc. Masayuki Moriyama Director and Vice President of Daikin (China) Investment Co., Ltd. and COO of McQuay China Yoshihiro Mineno General Manager of Global Operations Division, Director (non-resident) of Goodman Global Group, Inc., Director of Daikin Holdings (Houston), Inc., and Sub-leader of GRT Project Executive Officer Hitoshi Jinno Responsible for PL/Quality, Air-Conditioning/Refrigeration/Applied, Manufacturing Excellence in the Newly Emerging Countries, and Deputy General Manager of Air-Conditioning Manufacturing Division 22 DAIKIN INDUSTRIES, LTD. Compliance and Risk Management Compliance In fiscal 2004, the Daikin Group established the Corporate Ethics Committee as an organ for promoting corporate ethics throughout the Group, and this committee was renamed as the Corporate Ethics and Risk Management Committee in fis- cal 2008. This committee meets twice each year, in principle, with the purpose of undertaking the integrated promotion of compliance (business ethics and legal compliance) and risk management throughout the Group. Regarding compliance, each division and Group company (including principal overseas Group companies) appoint “compliance and risk management leaders” (CRLs) who play a central role in the daily gathering of up-to-date information on relevant laws and regulations. The CRLs also adjust inter- nal regulations and manuals to reflect the new information and play a central role in “daily triple check” activities to con- firm that compliance with respect to the regulations and man- uals is rigorous. The results of checks are reported at monthly CRL meetings, and related information is shared at those meetings. In addition, each employee annually performs a “compliance self-assessment check” to confirm that his or her behavior is in accordance with the behavior guidelines articulated in Daikin’s Handbook for Corporate Ethics. Risk Management Regarding risk management, in light of the Daikin Group’s rapid business expansion, Daikin is endeavoring to accurately and quickly execute comprehensive risk assessments (related to such issues as profitability, product quality, safety, manufacturing, and marketing activities, etc.) from a global perspective and institute Groupwide systems for alleviating risks. Each year, after each division conducts its own risk assessment to identify major risks, Daikin drafts and implements individual divisional counter- measures as well as Companywide countermeasures. In preparation for the incidence of major earthquakes, Daikin has built a system for quickly confirming the safety of employees and their families and, therefore, maintains a list of mobile phone contact numbers for all Group employees and their families. The Company is also seeking to ensure employees’ safety by promoting measures to upgrade the resistance to earthquakes of its offices and other facilities. Furthermore, to promote the resumption of operations with maximum expeditiousness in the case that Daikin facilities were to suffer major damage from a natural disaster, the Company has drafted a business continuity plan and is implementing such measures as those to prevent damage to manufacturing facilities and strengthen supply chains. In addition, based on consideration of issues that came to light in connection with the Great East Japan Earthquake, the Company is improving its system for confirming the safety of employees and their families while also placing satellite phones at principal business sites as a means of ensuring emergency communications capabilities. The Company is also taking such initiatives as those to reevaluate its emergency management systems and increase the amount of disaster relief supplies that are stored in preparation for use during emergency situations. Responsibility to Shareholders and Investors To live up to the expectations of shareholders and investors, the Daikin Group believes that it must increase its corporate value. It, therefore, emphasizes free cash flow as a source of corporate value and works to augment its profitability while lowering the levels of its trade receivables and inventories. Stable Levels of Cash Dividends Daikin has a fundamental policy of maintaining the ratio of cash dividends to net assets (consolidated basis) at 2.0% or higher and is seeking to set stable levels of dividends based on a comprehensive consideration of such factors as the Company’s consolidated performance, financial position, and funding requirements. Respect for the Exercise of Voting Rights To enable shareholders to exercise voting rights after due consideration of resolution items, Daikin provides sharehold- ers with invitations to general shareholders’ meetings and ancillary materials a week in advance of the statutory dead- line. Non-Japanese institutional investors are provided with English-language versions of the invitations and ancillary materials, and both English- and Japanese-language versions of the invitations and ancillary materials are also posted on the Company’s website. Furthermore, Daikin has established systems that enable shareholders to exercise their voting rights via personal computers and mobile phones. Information Disclosure Recognizing that it has an important responsibility to increase its management transparency from the perspectives of shareholders and investors, Daikin is proactively working to disclose relevant information by executing diverse kinds of IR activities. For analysts and institutional investors, Daikin holds performance explanation briefings when announcing its second-quarter and full-year financial results, and telephone conference briefings are organized when announcing first-quarter and third-quarter financial results. The Company also undertakes visits to institutional investors in Japan and overseas and organizes meetings with individual investors. Daikin’s website offers access to such legally mandated materials as securities reports (yuka shoken hokoku-sho) as well as other corporate performance-related materials that are posted as soon as they are prepared. Daikin endeavors to post these reports and materials in a fair and timely manner. Daikin has also undertaken diverse management measures in response to the feedback that it receives from its share- holders and investors. ANNUAL REPORT 2013 23 e c n a G a l t A / s t h g i l h g H i l i a c n a n F i O E C e h t m o r f e g a s s e M A O O C e h t h t i w w e i v r e t n I s n o i t a r e p O f o w e i v e R e c n a n r e v o G e t a r o p r o C n o i t c e S l i a c n a n F i Corporate Social Responsibility (CSR) As a global company, the Daikin Group believes that it has the responsibility to expand its business operations while concurrently making contributions to global society. This belief is reflected in the FUSION 15 strategic management plan—covering the five fiscal years through March 31, 2016—which specifies the key objective of “concurrently achieving environmental contributions and business expansion” as well as the key strategy of “strengthening human resource capabilities” as a means of attaining that objective. CSR and Management Strategies To realize sustainable corporate growth, it is important to draft management strategies based on consideration of society’s needs and demands and then proceed to make systematic efforts to address those needs and demands. As a global enter- prise rapidly expanding its business operations, the Daikin Group maintains a strong emphasis on its Group Philosophy and “peo- ple-centered management” policies and has therefore incorporat- ed provisions for addressing CSR issues within its FUSION 15 strategic management plan designed to ensure that it implements all the measures required to fully live up to its responsibilities to society. The Group is committed to responding to society’s expectations and thereby earning the trust and confidence of stakeholders throughout the world. Daikin signed the United Nations Global Compact in 2008 and gives due emphasis to the compact’s core values regarding human rights, labor standards, environmental protection, and anti-corruption efforts. Specific policies for promoting those val- ues are incorporated in the Group Compliance Guidelines and Handbook for Corporate Ethics, which are the foundation of the action guidelines instituted by individual Group companies. This is the method by which Daikin is seeking to ensure that all of its business activities are in harmony with the spirit of the Global Compact. Based on the ISO 26000 international CSR standard, Daikin is also striving to move ahead with CSR programs that are in accord with global CSR standards. (cid:129) Our Group Philosophy (Instituted in 1990) http://www.daikin.com/company/rinen.html (cid:129) Group Compliance Guidelines (Instituted in 2008) http://www.daikin.com/csr/company/idea.html#chap07 CSR Issues Daikin Is Addressing As an enterprise engaged in business operations primarily in the field of air conditioning, the Daikin Group considers cli- mate change to be the most-important CSR issue it should be addressing. Given that it is expanding its operations in geograph- ic regions throughout the world, Daikin also considers it highly important to emphasize contributions to regional development. 24 DAIKIN INDUSTRIES, LTD. Daikin’s Measures for Addressing CSR Issues Issue 1: Climate Change Responding to grow- ing demand for air conditioners in emerging countries Preventing global warming Rapidly rising demand for air conditioners in China, India, Turkey, and other emerging countries accompanied by growth in electric power consumption energy-saving products that match local needs Respond by providing Energy shortages are becoming increasingly serious problems, particularly in Japan following the recent earthquake disaster Pursue progress in the energy conservation perfor- mance of air conditioners, which account for a large share of overall electric power consumption Preventing environ- mental damage from fluorochemicals The greenhouse gas characteristics of alternative fluorochemi- cal refrigerants are considered problematic next-generation refrigerants that do not harm the ozone layer and that have low global warming potential (GWP) Employ Issue 2: Regional Development Promoting regional development by expanding employ- ment and fostering the development of human resources Emerging countries are demanding greater opportunities for Expand employment and human resource development local manufacturing/marketing facilities in emerging countries and offer employment and human resource development opportunities at those facilities CSR Policies within the FUSION 15 Strategic Management Plan The FUSION 15 strategic management plan specifies four emphasized CSR themes—the environment, quality/customer service, human resources, and social contributions—and Daikin is moving ahead with various initiatives regarding those themes. (cid:2) Environment Positioning climate change prevention as its top-priority CSR theme, Daikin is implementing measures associated with the fol- lowing three emphasized themes: (1) globally providing products that help customers conserve energy, (2) minimizing the environ- mental impact of manufacturing operations, and (3) promoting the global spread of a “green-hearted” spirit that cherishes the Earth and emphasizes environmental friendliness (1) Providing energy-saving products: Daikin is aiming to promote the widespread use of invertor products and other environment-friendly products, particularly in emerging countries realizing rapid economic growth, aiming to reduce emerging countries’ annual CO2 emissions by 30 million tons by fiscal 2016. Daikin is aiming to develop technologies and launch products in accordance with the latest refrigerant-related standards and act as a world leader in globally cultivating demand associated with the electric power conservation business. (2) Minimizing environmental impact: Daikin is aiming to reduce greenhouse gas emissions from manufacturing and other Group activities to 67% below the fiscal 2006 level by fiscal 2016. In fiscal 2013, manufacturing volume was almost twice the fiscal 2006 level, but overall Group greenhouse gas emissions were 68% below the fiscal 2006 level. Daikin is also seeking to reduce its water consumption. In fiscal 2013, water consumption per unit of manufacturing output had been reduced to 4% below the fiscal 2011 level in the case of Group companies in Japan and to 25% below the fiscal 2011 level in the case of overseas Group companies. Daikin is seeking to reduce its use of hazardous chemicals. In fiscal 2013, the volume of PRTR (Pollutant Release and Transfer Registry) substances used was 16% below the fiscal 2011 level. (3) Promoting a “green-hearted” spirit: Daikin is promoting bio- diversity programs in numerous locations around the world, such as a reforestation program in Indonesia and environmental pro- tection and renovation programs on Japan’s Shiretoko Peninsula. Working in cooperation with local governments and residents, NGOs, and other organizations, Daikin is engaged in an increas- ingly wide range of activities designed to help maintain ecological balances and restore the vitality of natural environments. (cid:2) Quality/Customer Service Based on the emphasized theme of “providing customers with the highest levels of satisfaction,” Daikin is striving to anticipate societal and regional needs and provide high-quality products that precisely match those needs as means of progressively elevating customer satisfaction (CS). Ensuring quality/safety: Based on consideration of customers’ perspectives, Daikin is endeavoring to ensure that all of its prod- ucts are safe and offer outstanding quality. Daikin has obtained ISO 9001 certification of its quality management systems and is sustaining its efforts at development and manufacturing stages to further elevate product quality levels. Daikin discloses information with the goal of ensuring the safety of customers when they are using Daikin products. In addition, Daikin collects post- marketing information on products and seeks to employ that information to realize additional product quality improvements. Elevating CS levels: Based on the fundamental policy of “realizing optimal after-services with respect to speed, accuracy, and friendliness,” Daikin is endeavoring to attain still-higher levels of CS. In Japan, the Daikin Contact Center accepts all kinds of inquiries, including requests for repairs and technical consulta- tion, 24 hours a day, 365 days a year. In addition, Daikin is work- ing to bolster its local service systems in countries worldwide. (cid:2) Human Resources Because it considers “people” to be the primary source of its competitive power, the Daikin Group emphasizes the implemen- tation of “people-centered management” policies as part of its efforts to create environments that make the most of the poten- tials of each of its employees. In the geographical regions where it operates, Daikin is doing its utmost to employ and foster the development of local human resources, and each Group facility is striving to contribute to the sustainable growth of its region. Human resource development: Daikin’s corporate philosophy states that “The Pride and Enthusiasm of Each Employee Are the Driving Forces of Our Group,” and Daikin considers this to be true with respect to all Group employees regardless of their nationality or the specific Group unit they are employed by. Based on the concept that “people grow by means of work experience,” Daikin is striving to develop the potentials and promote the career development of all employees. In addition to proactively establishing educational and training programs for local staff at each global base, Daikin is seeking to promote a growing number of local staff to managerial positions. Promoting diversity: Daikin has set itself the ambitious goal of building a Group organization that makes the most of the poten- tials of each of its employees—regardless of their age, gender, nationality, or race—and employs diverse people who respect different value systems. Daikin believes that this kind of organiza- tion serves as a primary source of the Group’s dynamic strength. In accordance with this concept and the Group Compliance Guidelines—which state, “We shall respect the human rights of each and every employee and diversity in values and approach to work while striving to create a workplace that is safe and comfortable to work”—Daikin encourages its employees to work in a harmoniously concerted manner that enables individuals to boldly pursue their dreams while maintaining high levels of enthusiasm and ambition. Work-life balance: Daikin emphasizes measures to enable employees to realize optimal work-life balances. As a result of ini- tiatives that include those aimed at providing work environments that enable employees with children to concurrently handle work and child-raising tasks with confidence and peace of mind, Daikin has introduced diverse work systems that offer flexible work modes and time schedules suitable for diverse employees. Occupational safety and health: In accordance with the Group Compliance Guidelines—which state, “We shall take all possible precautions for safe operations and act with a mind-set of ‘Safety First’ to ensure the safety of the workplace”—Daikin endeavors to make sure all its employees and employees of sub- contractors enjoy safe work environments. To this end, and to promote the peace of mind of people in communities near Group facilities, Daikin strives to realize a “zero accident” performance at each of its facilities. (cid:2) Social Contributions Aiming to be a company with deep roots in the many communi- ties throughout the world where it is developing business opera- tions, Daikin organizes numerous kinds of activities that enable participating employees to contribute to local societies. These activities center on the emphasized themes of “environmental protection,” “support for education,” and “art and culture.” Environmental protection: Daikin is moving ahead with programs to protect and revitalize the natural environment at numerous locations worldwide. In addition, overseas Group companies organize their own programs, including tree-planting and nature conservation programs. Support for education: Daikin provides support for the education of young people in each region where it has a presence. Besides offering scholarships and technical training programs, Daikin organizes experiential education events and plant study visits for the students of each region’s primary schools. Art and culture: To promote art and culture, Daikin has estab- lished the Daikin Foundation for Contemporary Arts, which supports exhibitions, lectures, academic research, publishing programs, and other activities of the National Museum of Art, Osaka. In addition, Daikin contributes to the arts overseas through such initiatives as those to sponsor music concerts. ANNUAL REPORT 2013 25 e c n a G a l t A / s t h g i l h g H i l i a c n a n F i O E C e h t m o r f e g a s s e M A O O C e h t h t i w w e i v r e t n I s n o i t a r e p O f o w e i v e R e c n a n r e v o G e t a r o p r o C n o i t c e S l i a c n a n F i Ten-Year Financial Highlights Daikin Industries, Ltd. and Consolidated Subsidiaries Years Ended March 31 Operating Results (for the year): Net sales Gross profi t Selling, general and administrative expenses Research and development expenses (Note 1) Operating income EBITDA (Note 2) Net income Cash Flows (for the year): Net cash provided by operating activities Net cash used in investing activities Free cash fl ow (Note 3) Net cash provided by (used in) fi nancing activities Financial Position (at year-end): Total assets Total interest-bearing liabilities Total shareholders’ equity Per Share Data (yen): Net income (basic) Shareholders’ equity Cash dividends Ratios (%): Gross profi t margin Operating income margin EBITDA margin Return on shareholders’ equity (ROE) Shareholders’ equity ratio 2004 2005 2006 ¥625,080 212,402 165,482 23,817 46,920 68,835 26,869 ¥ 40,306 (31,594) 8,711 2,182 ¥534,726 148,949 234,029 ¥101.57 888.29 14.00 33.98% 7.51 11.01 12.24 43.77 ¥729,414 256,289 196,083 24,583 60,206 83,630 38,083 ¥ 43,970 (42,091) 1,879 3,534 ¥615,596 166,442 271,716 ¥ 144.24 1,031.73 18.00 35.14% 8.25 11.47 15.06 44.14 ¥792,837 269,906 203,359 26,648 66,547 95,816 40,146 ¥ 63,511 (63,420) 91 (4,284) ¥716,440 172,995 340,523 ¥ 152.11 1,293.41 22.00 34.04% 8.39 12.09 13.11 47.53 Notes: 1. R&D expenses are included within general administrative expenses and manufacturing expenses. 2. EBITDA = Operating income + depreciation and amortization. 3. Free cash flow = Net cash provided by operating activities + net cash used in investing activities. Net Sales Operating Income Net Income (¥ billion) 1,500 1,200 900 600 300 0 (¥ billion) 150 120 90 60 30 0 (¥ billion) 80 60 40 20 0 04 05 06 07 08 09 10 11 12 13 04 05 06 07 08 09 10 11 12 13 04 05 06 07 08 09 10 11 12 13 26 DAIKIN INDUSTRIES, LTD. 2007 2008 2009 2010 2011 2012 2013 Millions of yen ¥911,749 312,688 231,934 27,204 80,754 115,315 45,420 ¥ 83,725 (305,251) (221,526) 245,975 ¥1,291,081 441,549 313,451 32,075 128,098 179,469 74,822 ¥103,329 (76,428) 26,902 3,367 ¥1,202,420 363,660 302,266 30,535 61,394 118,325 21,755 ¥ 62,238 (99,302) (37,065) 48,382 ¥1,023,964 319,301 275,263 28,220 44,038 96,462 19,391 ¥129,227 (39,848) 89,379 (34,942) ¥1,160,331 361,665 286,210 30,771 75,455 127,168 19,873 ¥78,411 (23,306) 55,105 (37,623) ¥1,218,701 371,902 290,709 32,987 81,193 131,719 41,172 ¥44,967 (62,955) (17,988) (1,113) ¥1,290,903 388,046 299,419 33,569 88,627 140,151 43,585 ¥103,161 (218,386) (115,225) 143,520 ¥1,161,364 456,074 397,542 ¥1,210,094 356,928 545,641 ¥1,117,418 417,919 471,686 ¥1,139,656 399,313 496,179 ¥1,132,507 372,481 487,876 ¥1,160,564 389,891 502,309 ¥1,735,836 705,871 618,118 ¥ 172.66 1,511.47 28.00 34.30% 8.86 12.65 12.31 34.23 ¥ 262.24 1,867.79 38.00 34.20% 9.92 13.90 15.87 45.09 ¥ 74.51 1,615.98 38.00 30.24% 5.11 9.84 4.28 42.21 ¥ 66.44 1,701.29 32.00 ¥ 68.14 1,672.74 36.00 ¥ 141.37 1,725.64 36.00 ¥ 149.73 2,123.10 36.00 31.19% 4.30 9.42 4.01 43.54 31.17% 6.50 10.96 4.04 43.08 30.52% 6.66 10.81 8.30 43.28 30.06% 6.87% 10.86% 7.78% 35.61% Research and Development Expenses Shareholders’ Equity Total Assets (¥ billion) 40 30 20 10 0 (¥ billion) 800 600 400 200 0 (¥ billion) 1,800 1,500 1,200 900 600 300 0 04 05 06 07 08 09 10 11 12 13 04 05 06 07 08 09 10 11 12 13 04 05 06 07 08 09 10 11 12 13 ANNUAL REPORT 2013 27 e c n a G a l t A / s t h g i l h g H i l i a c n a n F i O E C e h t m o r f e g a s s e M A O O C e h t h t i w w e i v r e t n I s n o i t a r e p O f o w e i v e R e c n a n r e v o G e t a r o p r o C n o i t c e S l i a c n a n F i Financial Review Overview of Net Sales Looking at economic conditions throughout the world during fi scal 2013, the U.S. economy showed signs of recovery, while the European economy remained weak against the backdrop of debt problems and fi scal budget austerity measures. Overall, emerging country economies benefi tted from robust domestic demand but generally lacked vigor as the pace of their expansion slowed amid the deceleration of exports to industrialized countries. In Japan, the perception of an economic slowdown intensifi ed as a result of export weakness accompanying the strong yen and slumping demand overseas. However, the correction of the yen’s excessive strength during the last three months of the fi scal year, increasing demand from the public sector, and other factors have spurred growing expectations of an economic recovery. Although the Daikin Group’s operating environment was made harsh by situations, including the slackness of air-conditioner demand in Europe and a delay in the recovery of demand for fl uorochemicals, particularly fl uorochemicals with semiconductor applications, the Group was able to boost its consolidated sales and profi ts during fi scal 2013, thanks to such factors as the growth of air-conditioner business sales in Japan, China, elsewhere in Asia, and other regions. This strong performance, which followed three consecutive years of growth in that business’s sales and profi ts, refl ected the Group’s efforts to promote the sales of highly differentiated products designed to leverage Japanese customers’ increasingly general consciousness of energy conserva- tion issues, measures to promote the global sales of relatively popular products in relatively robust markets, and concerted Groupwide cost-cutting measures. Moreover, it was achieved despite a decline in the sales and profi ts of the Group’s Chemicals business. Overall, consolidated net sales reached ¥1,290.9 billion, up 5.9% from the level in the previous fi scal year. Gross profi t amounted to ¥388.0 billion, up ¥16.1 billion, and the gross profi t ratio for the fi scal year was 30.1%. Currency Exchange Rates Because of the sharp depreciation of the yen beginning from the third quarter of fi scal 2013, the average currency exchange rate during the fi scal year was ¥83 to one U.S. dollar, compared to the assumed rate of ¥80 to one U.S. dollar, and ¥107 to one euro, compared to the assumed rate of ¥100 to one euro. As a result of these movements in foreign currency exchange rates, Daikin consolidated net sales were estimated to be ¥20.0 billion higher and operating income ¥0.5 billion higher than they would have been without movements in exchange rates. Yen-U.S. dollar rate Yen-euro rate Fiscal 2012 ¥ 79 ¥109 Fiscal 2013 ¥ 83 ¥107 SG&A Expenses and Operating Income As a result of a rise in personnel expenses associated with the acquisition of Goodman, SG&A expenses increased to ¥299.4 billion, but the ratio of SG&A expenses to net sales improved to 23.2%, a decrease of 0.7 percentage point from the previous fi scal year. Operating income grew 9.2%, to ¥88.6 billion, and the operating income ratio rose 0.2 percentage point, to 6.9%. R&D Expenses R&D expenses amounted to ¥33.6 billion and corresponded to 2.6% of net sales. Of this, R&D expenses for air-conditioning and refrigeration equipment operations totaled ¥28,532 million. Regarding residential air-conditioning equipment, Daikin launched the Urusara 7 wall-mounted room air conditioner, which is the fi rst air conditioner in the world to employ the environment-friendly refrigerant R32 and the industry’s fi rst 4.0kW-class product offering energy conservation performance that exceeds the annual performance factor (APF) 7.0 level. With respect to other residential equipment, Daikin launched DESICA HOME AIR, which employs heat-pump technology to overcome the challenges of optimally controlling ventilation and humidity in residences with increasingly high levels of air tightness and thermal insulation, thereby realizing both comfortable living spaces and energy savings. In North America, Daikin launched Smart Source, a water source heat pump unit that offers improved partial load effi ciency as well as low noise, as well as the Revel, a rooftop- mounted, energy-conserving heat pump equipped with an inverter scroll compressor that offers the highest integrated energy effi ciency ratio (IEER) among AHRI-certifi ed products. In China, Daikin expanded its product lineup Domestic and Overseas Sales Operating Income and Operating Income Margin Net Income (¥ billion) 1,500 1,200 900 600 300 0 (¥ billion) 100 80 60 40 20 0 (%) 10 (¥ billion) 50 8 6 4 2 0 40 30 20 10 0 2009 2010 2011 2012 2013 2009 2010 2011 2012 2013 2009 2010 2011 2012 2013 Domestic Overseas sales Operating income Operating income margin 28 DAIKIN INDUSTRIES, LTD. with the introduction of water-cooled screw chillers equipped with large capacity screw compressors as well as the introduction of air-cooled inverter module chillers that have realized higher integrated part load values (IPLVs) through their incorporation of inverter compressors. R&D expenses for Chemicals operations totaled ¥3,889 million. Daikin’s Chemical Research and Development Center is responsible for generating a steady fl ow of new products and major next-generation research themes, and its Technical Service Department is quickly responding to customer requests by implementing medium- and short-term intensive research programs. R&D expenses for oil hydraulics, defense systems, and other operations totaled ¥1,148 million. Other Income (Expenses) and Net Income Refl ecting a rise in foreign exchange gains as well as such other income (expense) items as a ¥12,651 million write-down of investment securities, net income amounted to ¥43,585 million, 5.9% higher than in the previous fi scal year. Dividend Policy and Dividends Applicable to the Fiscal Year The Company provides a stable return to shareholders taking into account consolidated business results, fi nancial position, and funding requirements and other factors based on a policy of maintaining at least a 2.0% consolidated ratio of dividends to net assets. Internal reserves will be applied to strategic investments aimed at expanding business operations and increasing competitiveness by such means as further strengthening management systems, accelerating the development of global businesses, and accelerating the development of environmentally conscious products. For the year ended March 31, 2013, the Company has proposed distributing an annual cash dividend of ¥36 per share (an interim dividend of ¥18 per share and a year-end dividend of ¥18 per share), unchanged from the previous fi scal year. Refl ecting the rise in shareholders’ equity resulting from the sharp depreciation of the yen, the consolidated ratio of dividends to net assets for the fi scal year under review will be 1.9%. Performance by Business Segment (cid:129) Air-Conditioning Refl ecting higher revenues stemming from measures to promote sales of such highly differentiated products as Urusara 7 and Eco-ZEAS80, total sales of the Air-Conditioning and Refrigeration Equipment segment increased to ¥1,119,972 million, up 7.5% from the previous fi scal year. Operating income increased 17.8%, to ¥70,905 million. Japan Industry demand remained robust in Japan’s commercial air-conditioning equipment market owing to a continuing moderate recovery trend in capital investment and construction starts along with rising demand for energy-saving equipment and the effects of the government’s subsidy system. Aiming to offer even greater energy-saving performance, the Group launched the SkyAir series of air conditioners for buildings, stores, and offi ces and the Ve-up series of variable refrigerant volume (VRV) air-conditioning systems in May 2012. These new products enabled the Group to meet additional new and replacement demand, and Daikin’s commercial air-conditioning equipment sales in Japan rose to above the level in the previous fi scal year. In Japan’s residential air-conditioning market, industry demand was boosted by growth in new housing starts, an increase in demand for energy-saving air conditioners associated with a general rise in energy conservation consciousness, and favorable weather conditions. In November, the Group launched the Urusara 7, the fi rst room air conditioner in the world to use R32, a highly environment - friendly new HFC refrigerant with a low global warming potential (GWP). In recognition of Urusara 7’s high energy conservation performance level and the technological innovation underlying that performance, Urusara 7 was awarded the Minister of Economy, Trade and Industry Prize, the top prize in the 2012 Energy Conservation Award program. Daikin’s implementation of sales promotion campaigns for such high-value-added products as RakuAir room air conditioners employing easy-to-use remote controllers along with the Group’s organization of energy-conservation events in major cities helped boost sales to above the level in the previous fi scal year. Pollen and air-pollution issues contributed to a rise in demand for residential air purifi ers, and Daikin achieved considerable year-on- year growth in its sales of such products through such initiatives as the launch of Uruoi Hikari Kurieru air purifi ers, which feature a dual air purifi cation method— using Daikin’s unique Flash Streamer technology and an active plasma ionizer— that clearly differentiates them from competing products. Selling, General and Administrative Expenses Revenues by Segment Segment Profit (Loss) (¥ billion) 320 240 160 80 0 (¥ billion) 1,500 1,200 900 600 300 0 (¥ billion) 100 80 60 40 20 0 -20 2009 2010 2011 2012 2013 2009 2010 2011 2012 2013 2009 2010 2011 2012 2013 Air conditioning Chemicals Other Air conditioning Chemicals Other ANNUAL REPORT 2013 29 e c n a G a l t A / s t h g i l h g H i l i a c n a n F i O E C e h t m o r f e g a s s e M A O O C e h t h t i w w e i v r e t n I s n o i t a r e p O f o w e i v e R e c n a n r e v o G e t a r o p r o C n o i t c e S l i a c n a n F i Unit Sales of Air-Conditioning Systems in the Japanese Air-Conditioning Industry (Fiscal 2013) (1,000 units) Residential use Commercial use First half 5,579 436 Year on year 103% 104% Second half 2,942 343 Year on year 102% 95% Full year 8,521 779 Fiscal 2013 103% 100% Overseas Due to robust sales mainly in China and other regions, overall sales in the overseas air-conditioner business market exceeded those in the previous fi scal year, despite persistently harsh conditions with regard to demand in the mainstay European market. (cid:129) Europe Region—The European air-conditioner market recovered tempo- rarily during the high-demand season of July and August owing to favorable weather in southern Europe, and Daikin’s sales in principal countries increased during the latter half of the fi scal year, refl ecting the Group’s stepped-up visits to dealers and other sales promotion efforts, but the strong impact of Europe’s economic recession restrained the Group’s overall sales of residential air- conditioning systems to below the previous year’s level. Regarding commercial air-conditioning systems, Daikin’s sales were down in EU countries where construction demand was sluggish, but the Group maintained its overall sales of mainstay VRV building-type multi-split air-conditioning systems at roughly the same level as in the previous fi scal year due to business expansion in the Middle East, Turkey, and other emerging countries. In particular, the strong performance of a Turkey-based subsidiary acquired in July 2011 continued to make a major contribution. Business providing residential heat pump water and room heating systems faced challenges—including sluggish demand in the major market of France and a slump in demand for products targeting public housing facilities in the United Kingdom—but the bolstering of sales promotion activities focused on dealers and end users supported a shift to year-on-year sales growth during the latter half of the fi scal year. As a result of this and sales growth achieved throughout the year in such peripheral markets as those of central European countries, Italy, and Greece, overall sales of residential heat pump water and room heating systems were up year on year. As part of its profi tability-strengthening strategy, Daikin implemented various measures during the year to reform its fi xed-cost structure, including moves to unify distribution, IT, and other support operations. (cid:129) China—In China, demand in major cities slowed due to worsening conditions regarding large-scale real estate and new building projects, although robust demand expansion continued in suburbs of major cities as well as regional cities. Amid these circumstances, the Group was able to achieve year-on-year growth in sales of both residential and commercial air-conditioning systems by focusing on retail sales. In its mainstay commercial air-conditioning systems market, the Group launched products designed for retailing, and sustained efforts to develop dealers and cultivate demand associated with specifi c customer groups and applications. Regarding residential air-conditioning products, Daikin moved ahead with the pioneering of new market segments by expanding its marketing network for residential multi-type air conditioners in all regions of China and by assembling a broad product lineup through the development of special models with specifi cations tailored to match needs in China. Despite shrinking demand in the room air-conditioner market, the Group made additional progress in building a new sales network and launching new products and thereby realized a year-on-year sales increase in that market. Although demand for large-scale (applied) air-conditioning systems increased only marginally, Daikin was able to increase its sales of such systems by means of measures to strengthen sales networks and bolster product lineups. Smooth growth was also achieved in service business operations. (cid:129) Asia/Oceania Region—Daikin was able to realize considerable year-on- year growth in its overall sales in the region, despite the impact of unseasonable weather and other factors that restrained sales in the major market of Australia to roughly the same level as in the previous fi scal year. This refl ected robust sales achieved in Thailand owing to favorable weather and demand associated with the recovery from recent fl oods; the contribution of expanded marketing operations in Vietnam and other emerging markets, including Indonesia, where a new marketing company was established during the year; and measures taken in India to expand local manufacturing operations, launch locally devel- oped products, and intensify comprehensive cost reduction campaigns. Composition of Sales Others 3.6% Chemicals 9.6% 30 DAIKIN INDUSTRIES, LTD. Research and Development Expenses Air-Conditioning 86.8% (¥ billion) 40 30 20 10 0 2009 2010 2011 2012 2013 (cid:129) Americas Region—Despite fl at demand for large-scale (applied) air- conditioning systems in North America, Daikin was able to increase its sales of such systems in the Americas Region by augmenting its sales of new products, expanding its service business operations, and broadening the scope of marketing operations in Central America and South America. In the North American ductless air-conditioner market, demand associated with government buildings with high levels of non-centralized air-conditioning needs decreased, but the Group stepped up its efforts to elevate awareness of the Daikin brand on the parts of dealers and construction-related companies, and it was thereby able to achieve a further increase in its sales of building-type multi-split air-conditioning systems. Considerable year-on-year growth was real- ized in sales of residential air-conditioning systems as well as air-conditioning systems for small and medium-sized shops, refl ecting the strength of shipments to wholesalers with whom transactions were recently initiated. (cid:129) Chemicals Daikin maintained robust sales of fl uoropolymer resins in the U.S. market for applications related to LAN cables and other electrical cables as well as in Chinese markets, despite the slowing of China’s economic expansion and decelaration in Chinese demand associated with infrastructure investment and exports. On the other hand, demand in semiconductor-related and other markets of Japan, elsewhere in Asia, and the United States was sluggish. Sales of fl uororubber products were down owing to the impact of an automobile- related demand decrease and inventory adjustments in Europe. As a result, total sales of fl uoropolymers were below the level of the previous year. Regarding the chemical products sector, demand for water and oil repel- lents associated with apparel-related applications was down in China and other Asian countries, particularly in the fi rst half of the fi scal year, although Daikin moved ahead with the development of new applications for the U.S. and European markets. In addition, successful programs to develop new applica- tions for anti-smudge surface coating agents used in smartphone touch panels and other products led to the expansion of surface coating agent sales, contributing to a year-on-year increase in overall sales of offerings in the chemical products sector. Sales of fl uorocarbon gas products were down considerably from the level in the previous fi scal year owing to the impact of price declines accompanying the softening of market conditions in Japan, China, and other Asian countries. The Daikin Group’s total sales in the Chemicals segment decreased 6.4% from the previous year, to ¥124,436 million, refl ecting the large impact of the drop in fl uorocarbon gas product sales. The segment’s operating income fell to ¥16,491 million, down 18.2% from the previous year. (cid:129) Others Total net sales of the Others segment amounted to ¥46,495 million, up 4.8% from the previous fi scal year. The segment’s operating income increased 44.2%, to ¥1,229 million. Daikin’s industrial machinery-related oil hydraulic equipment business maintained robust sales in the U.S. market, although slack demand in European, Japanese, and other Asian markets caused a year-on-year decrease in sales in those markets. A year-on-year increase was realized in sales of oil hydraulic equipment used in construction machinery and motor vehicles, refl ecting the strength of domestic and overseas demand for the products of our key customers in Japan. Sales in the defense business sector were up owing to a rise in orders from Japan’s Ministry of Defense for artillery shells and guided missile components. Sales of home-use oxygen therapy equipment were also strong. Electronic systems business sales exceeded the level in the previous year owing to growth in sales of database systems for design and development applications. Outlook for Fiscal 2014 For fi scal 2014, ending March 31, 2014, Daikin has instituted the Group new year’s policy “Maintain confi dence in our current development path and potential while addressing challenge after challenge.” In accordance with this policy, the Group is striving to fl exibly and quickly respond to changes in its operating environment as it seeks to maintain a balanced emphasis on both medium- to long-term corporate development and short-term profi tability going forward. Specifi cally, the Daikin Group will strive to increase sales and profi ts by addressing such Group-wide key challenges as accelerating the expansion of businesses in emerging markets through the development and promotion of products that meet local needs, maximizing business synergy with the newly acquired Goodman Group, building solutions businesses that meet the needs of customers around the world, expanding sales of air-conditioning equipment that uses next-generation refrigerants with low global warming potentials (GWPs), Total Assets Working Capital and Current Ratio Total Shareholders’ Equity and Shareholders’ Equity Ratio (¥ billion) 2,000 1,500 1,000 500 0 (¥ billion) 500 400 300 200 100 0 (%) 250 200 150 100 50 0 (¥ billion) 750 600 450 300 150 0 (%) 50 40 30 20 10 0 2009 2010 2011 2012 2013 2009 2010 2011 2012 2013 2009 2010 2011 2012 2013 Working capital Current ratio Shareholders’ equity Shareholders’ equity ratio ANNUAL REPORT 2013 31 e c n a G a l t A / s t h g i l h g H i l i a c n a n F i O E C e h t m o r f e g a s s e M A O O C e h t h t i w w e i v r e t n I s n o i t a r e p O f o w e i v e R e c n a n r e v o G e t a r o p r o C n o i t c e S l i a c n a n F i expanding environment-related innovation businesses that encompass respons- es to the increasingly widespread awareness of electric power conservation needs through the proposal of energy-saving products, promoting a decrease in variable costs, as well as reducing the levels of fi xed costs and inventories. Daikin’s performance outlook on a consolidated basis for fi scal 2014 is for a 36.3% increase in net sales, to ¥1,760.0 billion, a 41.0% increase in operating income, to ¥125.0 billion, and a 46.8% increase in net income, to ¥64.0 billion. Foreign currency exchange rates assumed for fi scal 2014 are ¥125 to one euro and ¥95 to one U.S. dollar. Assets, Liabilities, and Total Equity (cid:129) Assets At the end of fi scal 2013, current assets amounted to ¥803,326 million, up ¥174,279 million from the end of the previous fi scal year, owing to such factors as an increase resulting from the Goodman Group’s conversion into a consoli- dated subsidiary as well as to increases in cash and cash equivalents and trade receivables. Noncurrent assets were ¥400,993 million higher than at the end of the previous fi scal year, at ¥932,510 million, due to such factors as the recording of goodwill resulting from the acquisition of the Goodman Group and an increase in the customer relationship item resulting from the Goodman Group’s conversion into a consolidated subsidiary. Daikin made the Goodman Group a wholly owned subsidiary during the fi scal year under review. The assumed acquisition date is December 31, 2012, and the fi nancial statements of the newly consolidated subsidiary as of December 31, 2012 were used as a basis for the consolidation process. Therefore, only the Goodman Group’s balance sheets were subject to consolidation as of the end of the consolidated fi scal year under review. Consequently, total assets amounted to ¥1,735,836 million as of March 31, 2013, up ¥575,272 million from the end of the previous fi scal year. (cid:129) Liabilities and Total Equity Total liabilities rose to ¥1,099,839 million, up ¥455,196 million from the end of the previous fi scal year, owing to an increase in long-term debt associated with the procurement of funds for the acquisition of the Goodman Group and other factors. As a result, the ratio of interest-bearing debt grew to 40.7%, from 33.6% at the end of the previous fi scal year. Despite a decrease associated with the disbursal of cash dividends, total equity increased ¥120,076 million, to ¥635,997 million, owing to such factors as the generation of net income and changes in foreign currency translation adjustments, and the equity ratio stood at 35.6% at the end of the fi scal year. Capital Investment and Depreciation In accordance with the Daikin Group’s fundamental strategy of “concentrating management assets in business fi elds that offer higher profi tability,” the Company implemented capital investments during fi scal 2013 with a total value of ¥54,323 million, largely in the air-conditioning and chemicals business fi elds. In the air-conditioning fi eld, the Company invested ¥8,920 million, mainly for R&D related to room air conditioners and package air conditioners and for rationalization objectives, and Daikin Air-conditioning (Suzhou) Co., Ltd., implemented ¥7,663 million of capital investments, mainly for increasing its manufacturing capabilities. In the chemicals fi eld, the Company invested ¥5,671 million, mainly for increasing production capacity and for rationalization objectives, and Daikin Fluorochemicals (China) Co., Ltd., implemented ¥4,993 million of capital investments, mainly for increasing its production capabilities. Depreciation expense amounted to ¥39.4 billion, up ¥1.2 billion from the previoius fi scal year. Cash Flows Net cash provided by operating activities amounted to ¥103,161 million, up ¥58,194 million compared with the previous fi scal year, refl ecting such factors as a decrease in inventories. Net cash used in investing activities amounted to ¥218,386 million, up ¥155,431 million compared with the previous fi scal year, owing to such factors as payments for the acquisition of shares in Goodman Global Group, Inc. Net cash provided by fi nancing activities amounted to ¥143,520 million, a change of ¥144,633 million from ¥1,113 million of cash used in fi nancing activities in the previous fi scal year, owing to such factors as an increase in proceeds from long-term loans payable and proceeds from the issuance of bonds for the purpose of fi nancing the acquisition of the Goodman Group. As a result of these changes, cash and cash equivalents at March 31, 2013, amounted to ¥185,571 million, up ¥50,144 million from the previous fi scal year-end. ROE ROA Capital Investment and Depreciation and Amortization (%) 10 8 6 4 2 0 (%) 4 3 2 1 0 (¥ billion) 75 60 45 30 15 0 2009 2010 2011 2012 2013 2009 2010 2011 2012 2013 2009 2010 2011 2012 2013 32 DAIKIN INDUSTRIES, LTD. Capital investment Depreciation and amortization (excluding amortization of goodwill) Principal Risks Associated with the Daikin Group’s Operations (cid:129) Sharp changes in politico-economic conditions or supply-demand relationships in principal markets The Group provides goods and services throughout the world, and there is a possibility that Group performance could be impacted in the case of changes in politico-economic situations related to such markets as those of Japan, Europe, North America, China, and other countries in the Asian region. In particular, because the Group is proactively developing its business operations outside Japan through such measures as the establishment of new air-conditioning equipment manufacturing facilities and acquisition of air-conditioning equipment dealers in Europe as well as the establishment of manufacturing and marketing companies in China, there is a possibility that the Group’s performance could be impacted by business environment changes in one or more global regions, such as the deterioration of economic conditions, raw material price surges that elevate costs, or the intensifi cation of competition with other companies. Regarding the United States, on November 1, 2012, Daikin completed all procedures related to the acquisition of Goodman Global Group, Inc. (Head Offi ce: Houston, Texas, U.S.A. - hereinafter “Goodman”) for a purchase price of US$3.7 billion (including the refi nancing of Goodman’s existing indebtedness). By means of this acquisition, Daikin intends to reinforce Goodman’s sales network—the largest sales network in the U.S. residential and commercial air-conditioning equipment market—through the launch of environment-friendly products incorporating Daikin’s state-of-the-art environmental technologies, thereby aiming to bring about new trends in the U.S. air-conditioner market that will enable the Group to concurrently realize business expansion and environ- mental protection contributions. Furthermore, Daikin hopes to further improve its competitiveness by leveraging Goodman’s low-cost management know-how to develop business in emerging economies and volume-zone markets as well as reform the earnings structure of the Daikin Group’s operations, including activities in the advanced economies, and there is a possibility that the degree of progress toward realizing those objectives could impact the Daikin Group’s performance. (cid:129) Cold summer weather and other unusual weather patterns accompanied by changes in demand for air conditioners Because air-conditioning and refrigeration operations account for 86.8% of the Daikin Group’s consolidated net sales, the Group strives to accurately monitor weather information and demand trends in the world’s principal markets, and it employs fl exible manufacturing methods and marketing policies designed to minimize the impact of demand trends on its performance. Depending on the magnitude of changes regarding cold summer weather and other unusual weather patterns accompanied by changes in demand for air conditioners, however, there is a possibility that such changes could impact the Group’s performance. (cid:129) Large fl uctuations in currency exchange rates Overseas sales account for 62% of the Daikin Group’s consolidated net sales, and the acceleration of global business development going forward is expected to further elevate the level of the Group’s overseas sales ratio. Consolidated fi nancial statements are prepared by translating local-currency-denominated items for Group operations in each global region, including local currency fi gures for sales, expense, and assets. Accordingly, depending on currency exchange rates at the time of the currency translation, there may be an impact on yen translation values even when there has been no change in local-curren- cy-denominated fi gures. In addition, because the Group engages in foreign- currency-denominated transactions related to the procurement of raw materials and components as well as related to the sale of goods and services, there is a possibility that changes in currency exchange rates could have an impact on manufacturing costs and sales performance. To avoid such currency exchange rate-related risks, the Group undertakes short-term risk hedging by means of forward exchange contracts and similar instruments and undertakes medium- to long-term measures to continuously adjust procurement and manufacturing operations and optimize them with respect to changing currency exchange-rate trends, promote a balance of imports and exports related to each currency, and otherwise realize a business structure that is not greatly impacted by changes in currency exchange rates. However, it cannot be claimed that currency exchange rate-related risks can be completely avoided. The Group also recognizes signifi cant risks associated with the following items. • Major product quality claims • Major problems with manufacturing systems • Major changes in the market prices of negotiable securities and other assets • Natural disasters Free Cash Flow (¥ billion) 120 60 0 -60 -120 2009 2010 2011 2012 2013 ANNUAL REPORT 2013 33 e c n a G a l t A / s t h g i l h g H i l i a c n a n F i O E C e h t m o r f e g a s s e M A O O C e h t h t i w w e i v r e t n I s n o i t a r e p O f o w e i v e R e c n a n r e v o G e t a r o p r o C n o i t c e S l i a c n a n F i Consolidated Balance Sheet Daikin Industries, Ltd. and Consolidated Subsidiaries March 31, 2013 ASSETS Current assets: Cash and cash equivalents (Note 17) Short-term investments (Note 17) Trade receivables (Notes 8, 9 and 17): Notes Accounts Allowance for doubtful receivables Inventories (Notes 3 and 9) Deferred tax assets (Note 13) Prepaid expenses and other current assets Total current assets Property, plant and equipment (Note 9): Land Buildings and structures Machinery and equipment Furniture and fixtures Lease assets (Note 16) Construction in progress Total Accumulated depreciation Net property, plant and equipment Investments and other assets: Investment securities (Notes 6 and 17) Investments in and advances to unconsolidated subsidiaries and associated companies Goodwill (Notes 5 and 7) Customer relationships (Note 5) Other intangible assets (Note 5) Deferred tax assets (Note 13) Other assets (Note 10) Total investments and other assets Total See notes to consolidated financial statements. 34 DAIKIN INDUSTRIES, LTD. Millions of yen 2013 2012 ¥ 185,571 ¥ 135,427 221 36,348 172,729 (4,808) 243,600 9,381 36,149 629,047 30,739 182,550 362,450 116,034 6,635 18,313 716,721 (492,364) 224,357 84,219 15,205 166,276 4,271 9,939 9,276 17,974 307,160 43,464 219,859 (6,227) 285,169 21,782 53,708 803,326 33,121 216,148 414,716 131,921 6,279 18,111 820,296 (546,095) 274,201 102,588 14,831 348,411 109,723 52,754 3,570 26,432 658,309 ¥1,735,836 ¥1,160,564 LIABILITIES AND EQUITY Current liabilities: Short-term borrowings (Notes 9 and 17) Current portion of long-term debt (Notes 9 and 17) Current portion of long-term lease obligations (Note 16) Trade payables (Note 17): Notes Accounts Income taxes payable (Note 17) Deferred tax liabilities (Note 13) Provision for product warranties Accrued expenses Other current liabilities (Note 8) Total current liabilities Long-term liabilities: Long-term debt (Notes 9 and 17) Long-term lease obligations (Note 16) Liabilities for retirement benefits (Note 10) Deferred tax liabilities (Note 13) Long-term accounts payable Other long-term liabilities Total long-term liabilities Commitments and contingent liabilities (Notes 16 and 18) Equity (Notes 11, 12 and 22): Common stock—authorized, 500,000,000 shares; issued 293,113,973 shares in 2013 and 2012 Capital surplus Stock acquisition rights Retained earnings Treasury stock, at cost: 1,974,043 shares in 2013 and 2,028,808 shares in 2012 Accumulated other comprehensive income (loss): Unrealized gain (loss) on available-for-sale securities Deferred loss on derivatives under hedge accounting Foreign currency translation adjustments Subtotal Minority interests Total equity Total Millions of yen 2013 2012 ¥ 65,335 ¥ 90,449 4,126 1,464 7,377 119,987 14,694 5,518 40,235 67,089 56,802 57,290 2,042 6,392 103,716 9,836 2,974 23,674 52,748 47,218 382,627 396,339 633,033 238,108 1,912 3,960 54,362 1,387 22,558 2,002 2,016 4,327 443 1,408 717,212 248,304 85,032 83,017 1,335 438,671 (6,772) 18,431 (146) (115) 619,453 16,544 635,997 85,032 82,977 1,501 415,231 (6,961) (2) (74) (73,894) 503,810 12,111 515,921 ¥1,735,836 ¥1,160,564 ANNUAL REPORT 2013 35 e c n a G a l t A / s t h g i l h g H i l i a c n a n F i O E C e h t m o r f e g a s s e M A O O C e h t h t i w w e i v r e t n I s n o i t a r e p O f o w e i v e R e c n a n r e v o G e t a r o p r o C n o i t c e S l i a c n a n F i Consolidated Statement of Income Daikin Industries, Ltd. and Consolidated Subsidiaries Year Ended March 31, 2013 Net sales (Note 8) Cost of sales (Note 15) Gross profit Selling, general and administrative expenses (Notes 7, 8 and 15) Operating income Other income (expenses): Interest and dividend income Interest expense Exchange gains Loss on disposals of property, plant and equipment Gain on sales of investment securities (Note 6) Impairment losses on investment securities (Note 6) Equity in earnings of unconsolidated subsidiaries and associated companies Gain on reversal of stock acquisition rights Gain on insurance adjustment Gain on sales of shares of an associated company Loss on restructuring of a subsidiary Compensation for cancellation of contracts Loss on impairment of long-lived assets (Note 4) Other—net (Note 10) Other expenses—net Income before income taxes and minority interests Income taxes (Note 13): Current Prior years Deferred Total income taxes Net income before minority interests Minority interests in net income Net income Amounts per common share (Note 20): Basic net income Diluted net income Cash dividends applicable to the year See notes to consolidated financial statements. 36 DAIKIN INDUSTRIES, LTD. Millions of yen 2013 2012 ¥1,290,903 ¥1,218,701 902,857 388,046 299,419 88,627 4,690 (7,081) 6,849 (497) 117 (12,651) 1,063 310 166 986 (783) (319) (7,150) 81,477 32,677 (1,841) 3,500 34,336 47,141 (3,556) 846,799 371,902 290,709 81,193 4,875 (6,136) 22 (430) 1,437 (1,874) 2,918 69 (1,502) (356) 352 (625) 80,568 26,152 9,796 35,948 44,620 (3,448) ¥ 43,585 ¥ 41,172 Yen ¥149.73 149.71 36.00 ¥141.37 36.00 Consolidated Statement of Comprehensive Income Daikin Industries, Ltd. and Consolidated Subsidiaries Year Ended March 31, 2013 Net income before minority interests Other comprehensive income (loss) (Note 19): Unrealized gain (loss) on available-for-sale securities Deferred (loss) gain on derivatives under hedge accounting Foreign currency translation adjustments Share of other comprehensive income (loss) in affiliates accounted for using the equity method Total other comprehensive income (loss) Comprehensive income Total comprehensive income attributable to: The Company’s shareholders Minority interests See notes to consolidated financial statements. Consolidated Statement of Changes in Equity Daikin Industries, Ltd. and Consolidated Subsidiaries Year Ended March 31, 2013 Millions of yen 2013 ¥ 47,141 2012 ¥44,620 18,434 (72) 64,782 1,483 84,627 (4,642) 17 (12,968) (78) (17,671) ¥131,768 ¥26,949 ¥126,233 5,535 ¥23,561 3,388 Stock Common Acquisition Rights Stock ¥85,032 ¥82,977 ¥1,293 ¥385,761 ¥(5,473) Retained Earnings Treasury Stock Capital Surplus Millions of yen Accumulated Other Comprehensive Income (Loss) Unrealized Gain (Loss) on Available- for-Sale Securities ¥ 4,641 Deferred Loss on Derivatives under Hedge Accounting ¥ (91) Foreign Currency Translation Adjustments ¥(64,971) Total Minority Interests ¥489,169 ¥11,759 ¥500,928 Total Equity (1,205) 41,172 (10,490) (1,521) 33 (7) (1,205) 41,172 (10,490) (1,521) 26 (1,205) 41,172 (10,490) (1,521) 26 Outstanding Number of Common Shares Issued 291,662,445 (586,496) 9,067 149 291,085,165 85,032 82,977 208 1,501 415,231 (6,961) (4,643) (2) 17 (74) (8,923) (73,894) (13,341) 503,810 352 (12,989) 12,111 515,921 Balance, April 1, 2011 Effect of change of the fiscal year-end of certain consolidated subsidiaries (Note 2) Net income Cash dividends, ¥36 per share Repurchase of treasury stock Disposal of treasury stock Change in equity in affiliates accounted for by equity method—treasury stock Net change in the year Balance, March 31, 2012 Effect of change of the fiscal year-end of certain consolidated subsidiaries (Note 2) Net income Cash dividends, ¥36 per share Repurchase of treasury stock Disposal of treasury stock (310) 55,075 Net change in the year Balance, March 31, 2013 (9,666) 43,585 (10,479) 40 (166) 189 (9,666) 43,585 (10,479) (9,666) 43,585 (10,479) 229 91,974 229 96,407 ¥619,453 ¥16,544 ¥635,997 4,433 18,433 ¥18,431 (72) ¥(146) 73,779 ¥ (115) 291,139,930 ¥85,032 ¥83,017 ¥1,335 ¥438,671 ¥(6,772) See notes to consolidated financial statements. ANNUAL REPORT 2013 37 e c n a G a l t A / s t h g i l h g H i l i a c n a n F i O E C e h t m o r f e g a s s e M A O O C e h t h t i w w e i v r e t n I s n o i t a r e p O f o w e i v e R e c n a n r e v o G e t a r o p r o C n o i t c e S l i a c n a n F i Consolidated Statement of Cash Flows Daikin Industries, Ltd. and Consolidated Subsidiaries Year Ended March 31, 2013 Operating activities: Income before income taxes and minority interests ¥ 81,477 ¥ 80,568 Millions of yen 2013 2012 Adjustments for: Income taxes—paid Depreciation and amortization Gain on sales of investment securities Impairment losses on investment securities Loss on disposals of property, plant and equipment Equity in earnings of unconsolidated subsidiaries and associated companies Changes in assets and liabilities, net of effects of the purchase of subsidiaries: Trade notes and accounts receivable Inventories Other current assets Prepaid pension cost Trade notes and accounts payable Accrued expenses Other current liabilities Liabilities for retirement benefits Accounts payable for transaction to defined contribution pension plan Other—net Total adjustments Net cash provided by operating activities Investing activities: Payments for purchases of property, plant and equipment Proceeds from sales of property, plant and equipment Payments for acquisition of shares of newly consolidated subsidiaries, net of cash and cash equivalents acquired (Note 14) Payments for acquisition of investment securities Proceeds from sales of investment securities (Note 6) Proceeds from sales of shares of an associated company Other—net Net cash used in investing activities Financing activities: Net (decrease) increase in short-term borrowings Increase in long-term debt Repayments of long-term debt Cash dividends paid to the Company’s shareholders Cash dividends paid to minority interests Proceeds from issuance of shares to minority interests Other—net Net cash provided by (used in) financing activities Effect of exchange rate changes on cash and cash equivalents Net increase (decrease) in cash and cash equivalents Effect of change of the fiscal year-end of consolidated subsidiaries Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year See notes to consolidated financial statements. 38 DAIKIN INDUSTRIES, LTD. (29,688) 51,524 (117) 12,651 497 (1,063) (22,587) 10,299 (3,924) (306) 343 1,801 1,672 (204) (510) 1,296 21,684 103,161 (53,046) 1,146 (163,652) (4,877) 518 1,883 (358) (218,386) (42,868) 383,246 (183,354) (10,479) (1,232) 674 (2,467) 143,520 19,740 48,035 2,109 135,427 ¥185,571 (28,116) 50,526 (1,437) 1,874 430 (2,918) (15,680) (33,398) (5,878) 896 (5,566) 2,888 (819) (1,763) (699) 4,059 (35,601) 44,967 (42,459) 728 (20,875) (1,304) 1,892 (937) (62,955) 14,237 2,996 (2,321) (10,490) (1,915) (3,620) (1,113) (4,617) (23,718) (8,151) 167,296 135,427 Notes to Consolidated Financial Statements Daikin Industries, Ltd. and Consolidated Subsidiaries Year Ended March 31, 2013 1. Basis of Presenting Consolidated Financial Statements The accompanying consolidated financial statements of Daikin Industries, Ltd. (the “Company”) have been prepared in accordance with the provisions set forth in the Japanese Financial Instruments and Exchange Act and its related accounting regulations and in accordance with accounting principles generally accepted in Japan (the “Japanese GAAP”), which are different in certain respects as to the application and disclosure requirements of International Financial Reporting Standards. In preparing these consolidated financial statements, certain reclassifications and rearrangements have been made to the Company’s consolidated financial statements issued domestically in order to present them in a form which is more familiar to read- ers outside Japan. In addition, certain reclassifications have been made in the 2012 consolidated financial statements to conform to the classification used in 2013. 2. Summary of Significant Accounting Policies Principles of Consolidation and Accounting for Investments in Unconsolidated Subsidiaries and Associated Companies The accompanying consolidated financial statements include the accounts of the Company and its significant subsidiaries (collectively, the “Group”). Under the control or influence concept, those companies in which the Company, directly or indirectly, is able to exercise control are fully consolidated, and those companies over which the Group has the ability to exercise significant influence are accounted for by the equity method. The Group applies the equity method of accounting for investments in unconsolidated subsidiaries and associated companies except for certain insignificant companies. Investments in such insignificant companies are stated at cost except that appropriate write-downs are recorded for investments for which the value has been permanently impaired. If these subsidiaries and associated companies had been consolidated or accounted for using the equity method, respectively, the effect on the accompanying con- solidated financial statements would not have been material. For the year ended March 31, 2013, OYL Manufacturing Company Sdn. Bhd. and 49 other subsidiaries changed their fiscal year-end from December 31 to March 31. In addition, Daikin Fluorochemicals (China) Co., Ltd. and 33 other subsidiaries whose fiscal year-end is other than March 31, closed their books at March 31 for consolidation reporting purpose. The Company included the subsidiaries’ operating results for the 12-month period in the consolidated statement of income and included their operating results for the 3-month period in the consolidated statement of changes in equity directly charging into retained earnings as effect of change of the fiscal year-end of certain consolidated subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. All material unrealized profit includ- ed in assets resulting from transactions within the Group is eliminated. Unification of Accounting Policies Applied to Foreign Subsidiaries for the Consolidated Financial Statements In accordance with the Accounting Standards Board of Japan (“ASBJ”) Practical Issues Task Force No. 18, “Practical Solution on Unification of Accounting Policies Applied to Foreign Subsidiaries for the Consolidated Financial Statements,” the accounting poli- cies and procedures applied to a parent company and its subsidiaries for similar transactions and events under similar circum- stances should, in principle, be unified for the preparation of the consolidated financial statements. However, financial statements prepared by foreign subsidiaries in accordance with either International Financial Reporting Standards or the generally accepted accounting principles in the United States of America tentatively may be used for the consolidation process, except for the follow- ing items which should be adjusted in the consolidation process so that net income is accounted for in accordance with Japanese GAAP, unless they are not material: (a) amortization of goodwill; (b) scheduled amortization of actuarial gain or loss of pensions that has been directly recorded in equity; (c) expensing capitalized development costs of research and development; (d) cancella- tion of the fair value model accounting for property, plant, and equipment and investment properties and incorporation of the cost model accounting; and (e) exclusion of minority interests from net income, if contained in net income. Unification of Accounting Policies Applied to Foreign Associated Companies for the Equity Method In accordance with ASBJ Statement No. 16, “Accounting Standard for Equity Method of Accounting for Investments,” adjust- ments to be made to conform the associate’s accounting policies for similar transactions and events under similar circumstances to those of the parent company when the associate’s financial statements are used in applying the equity method unless it is impracticable to determine such adjustments. In addition, financial statements prepared by foreign associated companies in accordance with either International Financial Reporting Standards or the generally accepted accounting principles in the United States of America tentatively may be used in applying the equity method if the following items are adjusted so that net income is accounted for in accordance with Japanese GAAP, unless they are not material: (a) amortization of goodwill; (b) scheduled amorti- zation of actuarial gain or loss of pensions that has been directly recorded in the equity; (c) expensing capitalized development costs of research and development; (d) cancellation of the fair value model accounting for property, plant, and equipment and investment properties and incorporation of the cost model accounting; and (e) exclusion of minority interests from net income, if contained in net income. ANNUAL REPORT 2013 39 e c n a G a l t A / s t h g i l h g H i l i a c n a n F i O E C e h t m o r f e g a s s e M A O O C e h t h t i w w e i v r e t n I s n o i t a r e p O f o w e i v e R e c n a n r e v o G e t a r o p r o C n o i t c e S l i a c n a n F i Business Combinations As discussed in more detail in Note 5 to the consolidated financial statements, the Group acquired Goodman Global Group, Inc. and its subsidiaries on November 1, 2012, and A˙IRFEL ISITMA VE SO ˘GUTMA S˙ISTEMLER˙I SANAY˙I VE T˙ICARET A.ÇS. on July 8, 2011. The Group accounted for these transactions by the purchase method in accordance with ASBJ Statement No. 21, “Accounting Standard for Business Combinations.” Cash Equivalents Cash equivalents are short-term investments that are readily convertible into cash and that are exposed to insignificant risk of changes in value. Cash equivalents include time deposits, which mature within three months of the date of acquisition. Time deposits that mature in more than three months, but within a year of the date of acquisition, are recorded as short-term investments. Allowance for Doubtful Accounts The allowance for doubtful accounts is stated in amounts considered to be appropriate based on the past credit loss experience and an evaluation of potential losses in the receivables outstanding. Inventories Inventories of the Company and its consolidated domestic subsidiaries are principally stated at the lower of cost, determined by the average method, or net selling value. Inventories of consolidated foreign subsidiaries are principally stated at the lower of cost, determined by the average method, or market. Property, Plant and Equipment Property, plant and equipment are stated at cost. Depreciation of property, plant and equipment of the Company and its consoli- dated domestic subsidiaries is principally computed by the declining-balance method while the straight-line method is applied to buildings acquired after April 1, 1998. Depreciation of property, plant and equipment of the consolidated foreign subsidiaries is principally computed by the straight-line method at rates based on the estimated useful lives of the assets. The range of useful lives is from 15 to 50 years for buildings and structures, and from 5 to 15 years for machinery and equipment. The useful lives for lease assets are the terms of the respective leases. Asset Retirement Obligations In accordance with ASBJ Statement No. 18, “Accounting Standard for Asset Retirement Obligations” and ASBJ Guidance No. 21, “Guidance on Accounting Standard for Asset Retirement Obligations,” an asset retirement obligation is defined as a legal obliga- tion imposed either by law or contract that results from the acquisition, construction, development and normal operation of a tan- gible fixed asset and is associated with the retirement of such tangible fixed asset. The asset retirement obligation is recognized as the sum of the discounted cash flows required for the future asset retirement and is recorded in the period in which the obligation is incurred if a reasonable estimate can be made. If a reasonable estimate of the asset retirement obligation cannot be made in the period the asset retirement obligation is incurred, the liability should be recognized when a reasonable estimate of asset retirement obligation can be made. Upon initial recognition of a liability for an asset retirement obligation, an asset retirement cost is capital- ized by increasing the carrying amount of the related fixed the asset by the amount of the liability. The asset retirement cost is sub- sequently allocated to expense through depreciation over the remaining useful life of the asset. Over time, the liability is accreted to its present value each period. Any subsequent revisions to the timing or the amount of the original estimate of undiscounted cash flows are reflected as an adjustment to the carrying amount of the liability and the capitalized amount of the related asset retire- ment cost. Long-Lived Assets The Group reviews its long-lived assets for impairment whenever events or changes in circumstance indicate the carrying amount of an asset or asset group may not be recoverable. An impairment loss is recognized if the carrying amount of an asset or asset group exceeds the sum of the undiscounted future cash flows expected to result from the continued use and eventual disposition of the asset or asset group. The impairment loss would be measured as the amount by which the carrying amount of the asset exceeds its recoverable amount, which is the higher of the discounted cash flows from the continued use and eventual disposition of the asset or the net selling price at disposition. Leases In March 2007, the ASBJ issued ASBJ Statement No. 13, “Accounting Standard for Lease Transactions,” which revised the previous accounting standard for lease transactions. Under the previous accounting standard, finance leases that were deemed to transfer ownership of the leased property to the lessee were capitalized. However, other finance leases were permitted to be accounted for as operating lease transactions if certain “as if capitalized” information was disclosed in the note to the lessee’s financial statements. The revised accounting stan- dard requires that all finance lease transactions be capitalized by recognizing lease assets and lease obligations in the balance sheet. In addition, the accounting standard permits leases that existed at the transition date and do not transfer ownership of the leased property to the lessee to continue to be accounted for as operating lease transactions. 40 DAIKIN INDUSTRIES, LTD.  The Company and its consolidated domestic subsidiaries applied the revised accounting standard effective April 1, 2008. In addition, the Company and its consolidated domestic subsidiaries continue to account for leases that existed at the transition date and do not transfer ownership of the leased property to the lessee as operating lease transactions. All other leases are accounted for as operating leases. Investment Securities All marketable securities held by the Group are classified as available-for-sale securities and are reported at fair value, with unrealized gains and losses, net of appli cable taxes, reported in a separate component of equity. The cost of securities sold is principally determined based on the moving-average method. Non-marketable available-for-sale securities are stated at cost principally determined by the moving- average method. For other-than-temporary declines in fair value, available-for-sale securities are reduced to net realizable value by charging such losses to income. Goodwill and Intangible Assets Goodwill and intangible assets arise principally from business combinations. Goodwill represents the excess of the purchase price over the fair value of the identifiable net assets acquired. Goodwill is amortized over a period of 3 to 20 years. Intangible assets include primarily customer relationships. Customer relationships are amortized using the straight-line method over the estimated useful lives (mainly 30 years). Provision for Product Warranties The Group repairs or exchanges certain products without charge under specific circumstances. The provision for product warran- ties is stated in amounts considered to be appropriate based on the past experience and an evaluation of potential losses on the product warranties. Employees’ Retirement Benefits The Company and its consolidated domestic subsidiaries have non-contributory funded pension plans covering substantially all of their employees. Certain consolidated foreign subsidiaries have pension plans. The liabilities for retirement benefits are computed based on projected benefit obligations and plan assets at the balance sheet date. Stock Options In accordance with ASBJ Statement No. 8, “Accounting Standard for Stock Options,” the Company measures the cost of employ- ee stock options based on the fair value at the date of grant and recognize compensation expense over the vesting period as con- sideration for receiving goods or services. The Company accounts for stock options granted to nonemployees based on the fair value of either the stock option or the goods or services received. In the consolidated balance sheets, the stock option is present- ed as a stock acquisition right as a separate component of equity until exercised. Foreign Currency Transactions All short-term and long-term monetary receivables and payables denominated in foreign currencies are translated into Japanese yen at the exchange rates at the balance sheet date. The foreign exchange gains and losses from translation are recognized in the consolidated statement of income to the extent that they are not hedged by forward exchange contracts. Foreign Currency Financial Statements The balance sheet accounts of the consolidated foreign subsidiaries are translated into Japanese yen at the current exchange rate as of the balance sheet date except for equity, which is translated at the historical rates. Revenue and expense accounts of the consolidated foreign subsidiaries are translated into Japanese yen at the average exchange rate. Differences arising from such translations are shown as “foreign currency translation adjustments” under accumulated other comprehensive income in a sepa- rate component of equity. Income Taxes The provision for current income taxes is computed based on the income before income taxes and minority interests included in the consolidated statement of income. The asset and liability approach is used to recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Deferred taxes are measured by applying currently enacted tax laws to the temporary differences. Derivative Financial Instruments The Group uses foreign exchange forward contracts, currency swaps and currency options to hedge foreign exchange risk associated with certain assets and liabilities denominated in foreign currencies. The Group uses mainly interest rate swaps and interest rate options to manage its exposures to fluctuations in interest rates. The Group uses commodity future contracts to hedge the risk of fluctuation of commodity price for materials. The Group does not enter into derivatives for trading or speculative purposes. Derivative financial instruments are classified and accounted for as follows: (1) derivatives are principally recognized as either assets or liabilities and measured at fair value, and gains or losses on derivative transactions are recognized in the consolidated statement of income and (2) for derivatives used for hedging purposes, if such derivatives qualify for hedge accounting because of high correlation and effectiveness between the hedging instruments and the hedged items, gains or losses are deferred until maturity of the hedged transactions. ANNUAL REPORT 2013 41 e c n a G a l t A / s t h g i l h g H i l i a c n a n F i O E C e h t m o r f e g a s s e M A O O C e h t h t i w w e i v r e t n I s n o i t a r e p O f o w e i v e R e c n a n r e v o G e t a r o p r o C n o i t c e S l i a c n a n F i The interest rate swaps that qualify for hedge accounting and meet specific matching criteria are not remeasured at market value but the differential paid or received under the swap agreements is recognized and included in interest expense or income. Amounts per Common Share Basic net income per common share is computed by dividing net income available to common shareholders by the weighted- average number of common shares outstanding for the period, retroactively adjusted for stock splits. Diluted net income per share of common stock assumes full exercise of the outstanding stock options which have dilutive effect at the beginning of the year (or at the time of issuance). Cash dividends per share presented in the accompanying consolidated statement of income are dividends appli cable to the respective years including dividends to be paid after the end of the year. New Accounting Pronouncements Accounting Standard for Retirement Benefits On May 17, 2012, the ASBJ issued ASBJ Statement No. 26, “Accounting Standard for Retirement Benefits,” and ASBJ Guidance No. 25, “Guidance on Accounting Standard for Retirement Benefits,” which replaced the Accounting Standard for Retirement Benefits that had been issued by the Business Accounting Council in 1998 with an effective date of April 1, 2000, and the other related practical guidance, and followed by partial amendments from time to time through 2009. Major changes are as follows: (a) Treatment in the balance sheet Under the current requirements, actuarial gains and losses and past service costs that are yet to be recognized in profit or loss are not recognized in the balance sheet, and the difference between retirement benefit obligations and plan assets (hereinafter, “deficit or surplus”), adjusted by such unrecognized amounts, is recognized as a liability or asset. Under the revised accounting standard, actuarial gains and losses and past service costs that are yet to be recognized in profit or loss shall be recognized within equity (accumulated other comprehensive income), after adjusting for tax effects, and any result- ing deficit or surplus shall be recognized as a liability (liability for retirement benefits) or asset (asset for retirement benefits). (b) Treatment in the statement of income and the statement of comprehensive income The revised accounting standard does not change how to recognize actuarial gains and losses and past service costs in profit or loss. Those amounts would be recognized in profit or loss over a certain period no longer than the expected average remaining working lives of the employees. However, actuarial gains and losses and past service costs that arose in the current period and have not yet been recognized in profit or loss shall be included in other comprehensive income and actuarial gains and losses and past service costs that were recognized in other comprehensive income in prior periods and then recognized in profit or loss in the current period shall be treated as reclassification adjustments. (c) Amendments relating to the method of attributing expected benefit to periods and relating to the discount rate and expected future salary increases The revised accounting standard also made certain amendments relating to the method of attributing expected benefit to periods and relating to the discount rate and expected future salary increases. The accounting standard and the guidance for (a) and (b) above are effective for the end of annual periods beginning on or after April 1, 2013, and for (c) above are effective for the beginning of annual periods beginning on or after April 1, 2014, or for the beginning of annual periods beginning on or after April 1, 2015, subject to certain disclosure in March 2015, both with earlier application being permitted from the beginning of annual periods beginning on or after April 1, 2013. However, no retrospective application of this accounting standard to consolidated financial statements in prior periods is required. The Company expects to apply the revised accounting standard for (a) and (b) above from the end of the annual period begin- ning on April 1, 2013, and for (c) above from the beginning of the annual period beginning on April 1, 2014, and is in the process of measuring the effects of applying the revised accounting standard in future applicable periods. 3. Inventories Inventories at March 31, 2013 and 2012 consisted of the following: Finished products and merchandise Semifinished products and work in process Raw materials and supplies Total Millions of yen 2013 2012 ¥191,195 ¥153,913 41,381 52,593 42,153 47,534 ¥285,169 ¥243,600 42 DAIKIN INDUSTRIES, LTD. 4. Long-Lived Assets The Group reviewed its long-lived assets for impairment for the year ended March 31, 2012. As a result, the Group recognized an impairment loss as other expense for certain machinery and equipment and other, which were deemed to be idle assets with no future plan for utilization and for which the carrying amount exceeded the fair value at March 31, 2012, as follows: Asset Category Machinery and equipment, etc. Machinery and equipment, etc. Total Location Settsu City, Osaka Prefecture Kamisu City, Ibaraki Prefecture Millions of yen ¥261 95 ¥356 The carrying amounts of the relevant assets were written down to the recoverable amount. The recoverable amounts of these assets were measured by the net selling price at disposition. No impairment loss was recognized for the year ended March 31, 2013. 5. Business Combination Acquisition of an entity during the year ended March 31, 2013 1. Outline of the business combination: (1) Name and business contents of the acquiree Name: Business contents: Goodman Global Group, Inc. Development, manufacture and sale of residential and commercial air-condition- ing equipment (2) Main reason for the business combination: The Company has assessed that Goodman Global Group, Inc. has an extensive sales network and a significant presence in the residential unitary HVAC (heating, ventilating and air-conditioning) segment in North America. Through the busi- ness combination, the Group’s sales are expected to grow substantially with an outstanding and complementary product portfolio covering not only ducted and ductless air-conditioning systems but also furnace and heat-pump systems in the world’s largest HVAC market, and to consolidate its position as a leading company in the global air-conditioning market. November 1, 2012 Merger with a special purpose company for acquisition which was set up in the United States by Daikin Holdings (Houston), Inc., the Company’s newly estab- lished subsidiary in the United States. (3) Date of the business combination: (4) Legal form of the business combination: (5) Name of the acquiree after business combination: (6) Ratio of voting rights acquired: (7) Basis for determination of the acquirer: Goodman Global Group, Inc. Ratio of voting rights held just before the business combination: —% Ratio of additional voting rights acquired on the date of business combination: Ratio of voting rights held after the business combination: Goodman Global Group, Inc. merged with the special purpose company for acquisition which was set up in the United States by Daikin Holdings (Houston), Inc., a subsidiary of the Company, and Daikin Holdings (Houston), Inc. held 100% of the voting rights of Goodman Global Group, Inc. 100% 100% 2. Period of operating result of the acquiree included in the consolidated financial statements: The operating result of the acquiree was not included in the consolidated statement of income for the year ended March 31, 2013, because the Company deemed the acquisition date as December 31, 2012, and used the financial statements of the subsidiary as of December 31, 2012, in the preparation of the consolidated financial statements. 3. Amount and breakdown of the acquisition costs: Payment for acquisition of shares: USD2,200 million Expenses related directly to the acquisition, including mainly advisory expenses: ¥2,824 million 4. Amount of goodwill recognized, reason for recognition, and method and period for amortization of goodwill: (1) Amount of goodwill recognized: USD2,260 million (2) Reason for recognition: Future business activities are expected to generate excess profitability. (3) Method and period for amortization of goodwill: Straight-line method over 20 years ANNUAL REPORT 2013 43 e c n a G a l t A / s t h g i l h g H i l i a c n a n F i O E C e h t m o r f e g a s s e M A O O C e h t h t i w w e i v r e t n I s n o i t a r e p O f o w e i v e R e c n a n r e v o G e t a r o p r o C n o i t c e S l i a c n a n F i 5. Amount and breakdown of the assets acquired and the liabilities assumed at the acquisition date: Year Ended March 31, 2013 Current assets Fixed assets Total assets Current liabilities Long-term liabilities Total liabilities Millions of USD $ 795 4,190 $4,985 $2,005 744 $2,749 In the purchase price allocation, those allocated to intangible assets other than goodwill mainly include customer relationships of USD1,218 million and rights of trademarks of USD425 million, and the amortization periods for these assets are determined individually based on their useful lives. 6. Unaudited summaries of estimated impact on consolidated financial statement of income: Estimated impact on the consolidated financial statement of income for the fiscal year ended March 31, 2013, which provide the effects of the acquisition as if it had been completed on April 1, 2012, are as follows: Net sales Operating income Income before income taxes and minority interests Net income Amount per common share Millions of Yen ¥159,599 21,219 12,355 7,607 Yen ¥26.13 These summaries of estimated impact were based on the hypothesis that this business combination had been completed on April 1, 2012, the beginning of the fiscal year ended March 31, 2013. Amortization of goodwill and other intangible assets arising from this acquisition for the period from April 1, 2012 to March 31, 2013, is not reflected in the estimated impact. These summaries have not been audited by an independent auditor. Acquisition of an entity during the year ended March 31, 2012 1. Outline of the business combination: (1) Name and business contents of the acquiree Name: Business contents: (2) Main reason for the business combination: To strengthen product offering and sales network in the Turkish market A˙IRFEL ISITMA VE SO ˘GUTMA S˙ISTEMLER˙I SANAY˙I VE T˙ICARET A.ÇS. Manufacture and distribution of air-conditioning equipment (3) Date of the business combination: (4) Legal form of the business combination: (5) Name of the acquiree after business combination: and expand the business in the Middle East, Africa and CIS July 8, 2011 The issued shares were acquired for cash (6) Ratio of voting rights acquired: (7) Basis for determination of the acquirer: A˙IRFEL ISITMA VE SO ˘GUTMA S˙ISTEMLER˙I SANAY˙I VE T˙ICARET A.ÇS. (Corporate name was changed to DAIKIN ISITMA VE SO ˘GUTMA S˙ISTEMLER˙I SANAY˙I VE T˙ICARET A.ÇS.) Ratio of voting rights held just before the business combination: —% Ratio of additional voting rights acquired on the date of business combination: Ratio of voting rights held after the business combination: Daikin Europe N.V., a consolidated subsidiary of the Company, acquired the shares by cash and held 100% of voting rights of the acquiree. 100% 100% 2. Period of operating result of the acquiree included in the consolidated financial statements: From July 1, 2011 to December 31, 2011 3. Amount and breakdown of the acquisition costs: Year Ended March 31, 2012 Payment for acquisition of shares Acquisition costs Millions of EUR 178 178 44 DAIKIN INDUSTRIES, LTD. 4. Amount of goodwill recognized, reason for recognition, and method and period for amortization of goodwill (1) Amount of goodwill recognized: (2) Reason for recognition: (3) Method and period for amortization of goodwill: Straight-line method over 10 years TRY178 million Future business activities are expected to generate excess profitability. 5. Amount and breakdown of the assets acquired and the liabilities assumed at the acquisition date: Year Ended March 31, 2012 Current assets Fixed assets Total assets Current liabilities Long-term liabilities Total liabilities Millions of TRY 201 190 391 119 30 149 6. Even if this business combination had been completed as of April 2011, the beginning of the fiscal year ended March 31, 2012, the Company believes the effect of consolidating this company on the financial statements would be minor. Therefore, the unau- dited pro forma financial statements are omitted. 6. Investment Securities The acquisition costs and aggregate fair values of marketable available-for-sale securities included in investment securities at March 31, 2013 and 2012, were as follows: Securities classified as available-for-sale: Equity securities Debt securities Total Securities classified as available-for-sale: Equity securities Debt securities Other Total Millions of yen 2013 Unrealized Gains Unrealized Losses Fair Value ¥29,193 4 ¥29,197 ¥(2,415) ¥(2,415) ¥93,611 129 ¥93,740 Cost ¥66,833 125 ¥66,958 Millions of yen 2012 Cost Unrealized Gains Unrealized Losses Fair Value ¥74,570 150 396 ¥75,116 ¥12,396 4 45 ¥12,445 ¥(12,353) (4) ¥(12,357) ¥74,613 154 437 ¥75,204 The information of available-for-sale securities which were sold during the years ended March 31, 2013 and 2012, is as follows: March 31, 2013 Available-for-sale: Equity securities March 31, 2012 Available-for-sale: Equity securities Millions of yen Proceeds Realized Gains Realized Loss ¥518 ¥117 Millions of yen Proceeds Realized Gains Realized Loss ¥1,892 ¥1,437 The impairment losses on marketable available-for-sale securities for the years ended March 31, 2013 and 2012 were ¥12,651 million and ¥1,874 million, respectively. ANNUAL REPORT 2013 45 e c n a G a l t A / s t h g i l h g H i l i a c n a n F i O E C e h t m o r f e g a s s e M A O O C e h t h t i w w e i v r e t n I s n o i t a r e p O f o w e i v e R e c n a n r e v o G e t a r o p r o C n o i t c e S l i a c n a n F i 7. Goodwill Amortization of goodwill is ¥12,077 million and ¥12,147 million for the years ended March 31, 2013 and 2012, respectively, which is included in selling, general and administrative expenses. 8. Related Party Transactions Material transactions and balances with related individuals for the years ended March 31, 2013 and 2012, were as follows: (1) 2013 (a) The Company Name Description of Post Chiyono Terada Outside Director/ Chief Executive Officer (CEO) and President of Art Corporation (b) The Company’s consolidated subsidiaries Name Description of Post Chiyono Terada Outside Director/CEO and President of Art Corporation Ownership of the Company (%) 0.00 Ownership of the Company (%) 0.00 Millions of yen Transactions Resulting Account Balances Description of Transaction Commission for moving business and delivery business 2013 ¥488 Account Other current liabilities 2013 ¥39 Millions of yen Transactions Resulting Account Balances Description of Transaction Commission for moving business and delivery business 2013 ¥70 Account Other current liabilities 2013 ¥ 4 Sales of products and other 77 Accounts receivable 16 The terms and conditions applicable to the above-mentioned transactions have been determined on the basis of arm’s length and by reference to the normal market price. (2) 2012 (a) The Company Name Description of Post Chiyono Terada Outside Director/CEO and President of Art Corporation (b) The Company’s consolidated subsidiaries Name Description of Post Chiyono Terada Outside Director/CEO and President of Art Corporation Ownership of the Company (%) 0.00 Ownership of the Company (%) 0.00 Millions of yen Transactions Resulting Account Balances Description of Transaction Commission for moving business and delivery business 2012 ¥470 Account Other current liabilities 2012 ¥42 Millions of yen Transactions Resulting Account Balances Description of Transaction Commission for moving business and delivery business 2012 ¥72 Account Other current liabilities 2012 ¥ 4 Sales of products and other 71 Accounts receivable 13 The terms and conditions applicable to the above-mentioned transactions have been determined on the basis of arm’s length and by reference to the normal market price. 46 DAIKIN INDUSTRIES, LTD. 9. Short-Term Borrowings and Long-Term Debt Short-term borrowings of the Group at March 31, 2013 and 2012, consisted of the following: Bank overdrafts and notes to banks Commercial paper Total Millions of yen 2013 ¥63,408 1,927 ¥65,335 2012 ¥67,395 23,054 ¥90,449 Unused short-term bank credit lines were ¥150,000 million at March 31, 2013. Weighted-average interest rates of bank overdrafts and notes to banks at March 31, 2013 and 2012 were 1.37% and 0.89%, respectively. Weighted-average interest rates of commercial paper at March 31, 2013 and 2012 were 0.25% and 0.13%, respectively. Long-term debt at March 31, 2013 and 2012 consisted of the following: 1.00% unsecured bonds, due 2014 1.42% unsecured bonds, due 2016 0.46% unsecured bonds, due 2017 1.86% unsecured bonds, due 2019 0.72% unsecured bonds, due 2019 1.20% unsecured bonds, due 2022 Unsecured loans from government-sponsored banks, with interest 1.75%, due through 2019 Collateralized loans from banks and others, payable in foreign currencies, with interest 4.75% (2013) and 7.63% (2012), due through 2016 Unsecured loans from banks and others, payable in foreign currencies, with interest ranging from 0.71% to 5.90% (2013) and from 0.71% to 5.99% (2012), due through 2022 Unsecured loans from banks and others with interest ranging from 0.30% to 3.59% (2013) and from 0.39% to 3.63% (2012), due through 2026 Total Less current portion Long-term debt, less current portion Annual maturities of long-term debt outstanding at March 31, 2013, were as follows: Year Ending March 31 2014 2015 2016 2017 2018 2019 and thereafter Total Millions of yen 2013 ¥ 30,000 30,000 10,000 40,000 10,000 30,000 20,000 2012 ¥ 30,000 30,000 40,000 20,000 28 26 152,088 13,318 315,043 637,159 (4,126) ¥633,033 162,054 295,398 (57,290) ¥238,108 Millions of yen ¥ 4,126 94,697 35,170 70,233 65,106 367,827 ¥637,159 At March 31, 2013, property, plant and equipment; trade accounts receivables; inventories; and other with a book value of ¥39,212 million, ¥15,952 million, ¥8,241 million and ¥4,220 million, respectively, were pledged as collateral for short-term borrow- ings and long-term debt. Certain loan agreements provide that the lender may require the Group to submit proposals for paying dividends, issuing addi- tional long-term debt and certain other matters, for prior approval. As is customary in Japan, security must be given if requested by a lending bank. Banks have the right to offset cash deposited with them against any debt or obligation that becomes due, or, in case of default and certain other specified events, against all other debt payable to them. To date, none of the lenders has ever exercised these rights with respect to debt of the Group. ANNUAL REPORT 2013 47 e c n a G a l t A / s t h g i l h g H i l i a c n a n F i O E C e h t m o r f e g a s s e M A O O C e h t h t i w w e i v r e t n I s n o i t a r e p O f o w e i v e R e c n a n r e v o G e t a r o p r o C n o i t c e S l i a c n a n F i 10. Severance Indemnities and Pension Plans Under the Group’s severance indemnities and pension plans, employees terminating their employment are, in most circum stances, entitled to severance and pension payments based on their average pay during their employment, length of service and certain other factors. For the year ended March 31, 2013, one domestic consolidated subsidiary implemented a defined contribution pension plan and then terminated a part of its defined benefit pension plan. In addition, the subsidiary withdrew from the employees’ pension fund. The effect of this implementation and this withdrawal were to decrease income before taxes and minority interests by ¥346 million and were included in other-net of other expenses of the consolidated statement of income for the year ended March 31, 2013. The liabilities for employees’ retirement benefits at March 31, 2013 and 2012, consisted of the following: Projected benefit obligation Fair value of plan assets Unrecognized prior service cost Unrecognized actuarial gain Net assets Prepaid pension cost (included in other assets of investments and other assets) Liabilities for retirement benefits Millions of yen 2013 ¥84,071 (80,088) 225 (10,816) (6,608) (10,568) ¥3,960 2012 ¥69,387 (66,632) 10 (10,976) (8,211) (10,227) ¥ 2,016 The components of net periodic benefit costs for the years ended March 31, 2013 and 2012, are as follows: Service cost Interest cost Expected return on plan assets Amortization of prior service cost Recognized actuarial loss Net periodic benefit costs Contribution to defined contribution pension plan and other Total Assumptions used for the years ended March 31, 2013 and 2012, are set forth as follows: Millions of yen 2013 ¥4,015 1,856 (2,210) (46) 557 4,172 2,922 ¥7,094 2012 ¥3,543 1,912 (2,186) (24) 1,400 4,645 2,766 ¥7,411 Discount rate Expected rate of return on plan assets Amortization period of prior service cost Recognition period of actuarial gain/loss 11. Equity 2013 Mainly 1.2% Mainly 2.5% Mainly 10 years Mainly 10 years 2012 Mainly 2.0% Mainly 2.5% Mainly 10 years Mainly 10 years Japanese companies are subject to the Companies Act of Japan (the “Companies Act”). The significant provisions in the Companies Act that affect financial and accounting matters are summarized below: (a) Dividends Under the Companies Act, companies can pay dividends at any time during the fiscal year in addition to the year-end dividend upon resolution at the Shareholders’ meeting. For companies that meet certain criteria, the Board of Directors may declare dividends (except for dividends in kind) at any time during the fiscal year if the company has prescribed so in its articles of incorporation. However, the Company cannot do so because it does not meet all the above criteria. The Companies Act permits companies to distribute dividends-in-kind (non-cash assets) to shareholders subject to a certain limitation and additional requirements. Semiannual interim dividends may also be paid once a year upon resolution by the Board of Directors if the articles of incor- poration of the Company so stipulate. The Companies Act provides certain limitations on the amounts available for dividends or the purchase of treasury stock. The limitation is defined as the amount available for distribution to the shareholders, but the amount of net assets after dividends must be maintained at no less than ¥3 million. (b) Increases/Decreases and Transfer of Common Stock, Reserve and Surplus The Companies Act requires that an amount equal to 10% of dividends must be appropriated as a legal reserve (a component of retained earnings) or as additional paid-in capital (a component of capital surplus), depending on the equity account that was charged upon the payment of such dividends, until the aggregate amount of legal reserve and additional paid-in capital equals 25% of the common stock. Under the Companies Act, the total amount of additional paid-in capital and legal reserve may be reversed without limitation. The Companies Act also provides that common stock, legal reserve, additional paid-in capital, other capital surplus and retained earnings can be transferred among the accounts under certain conditions upon resolution of the shareholders. 48 DAIKIN INDUSTRIES, LTD. (c) Treasury Stock and Treasury Stock Acquisition Rights The Companies Act also provides for companies to purchase treasury stock and dispose of such treasury stock by resolution of the Board of Directors. The amount of treasury stock purchased cannot exceed the amount available for distribution to the shareholders which is determined by specific formula. Under the Companies Act, stock acquisition rights are presented as a separate component of equity. The Companies Act also provides that companies can purchase both treasury stock acquisition rights and treasury stock. Such treasury stock acquisition rights are presented as a separate component of equity or deducted directly from stock acquisition rights. 12. Stock Options The stock options outstanding for the year ended March 31, 2013, were as follows: Number of Options Granted 298,000 shares Date of Grant Exercise Price Exercise Period 2006.7.18 ¥3,790 Stock Option 2006 Stock Option 2007 Stock Option 2008 Stock Option 2009 Stock Option 2010 Stock Option 2011 Stock Option 2012 Stock Option Persons Granted 9 directors 44 employees 9 directors 42 employees 8 directors 44 employees 8 directors 42 employees 8 directors 41 employees 10 directors 39 employees 10 directors 41 employees The stock option activity was as follows: 292,000 shares 2007.7.17 ¥4,640 308,000 shares 2008.7.14 ¥5,924 294,000 shares 2009.7.13 ¥3,250 290,000 shares 2010.7.14 ¥3,050 296,000 shares 2011.7.14 ¥2,970 300,000 shares 2012.7.13 ¥2,186 From July 19, 2008 to July 18, 2012 From July 18, 2009 to July 17, 2013 From July 15, 2010 to July 14, 2014 From July 14, 2011 to July 13, 2015 From July 15, 2012 to July 14, 2016 From July 15, 2013 to July 14, 2017 From July 14, 2014 to July 13, 2018 2005 Stock Option 2006 Stock Option 2007 Stock Option 2008 Stock Option 2009 Stock Option 2010 Stock Option 2011 Stock Option 2012 Stock Option Shares 308,000 88,800 262,000 254,700 (9,000) (79,800) (20,000) 242,000 (20,000) 234,700 Year Ended March 31, 2012 Vested April 1, 2011—Outstanding Granted Exercised Canceled March 31, 2012—Outstanding Year Ended March 31, 2013 Vested April 1, 2012—Outstanding Granted Exercised Canceled March 31, 2013—Outstanding Exercise price Average stock price at exercise Fair value price at grant date The assumptions used to measure fair value of 2012 Stock Option Black-Scholes option pricing model Estimate method: Volatility of stock price: 47.5% Estimated remaining outstanding period: 4 years Estimated dividend: Risk-free interest rate: (40,000) 202,000 ¥4,640 ¥36 per share 0.1% ¥2,852 ¥2,792 (234,700) 234,700 242,000 ¥1,035 ¥3,790 ¥ 736 (42,000) 266,000 266,000 (46,000) 220,000 ¥5,924 ¥ 803 294,000 290,000 296,000 294,000 290,000 296,000 294,000 290,000 296,000 300,000 (16,000) (66,000) 212,000 ¥3,250 ¥3,756 ¥ 899 (39,000) 251,000 ¥3,050 ¥3,756 ¥1,113 296,000 ¥2,970 300,000 ¥2,186 ¥ 935 ¥ 676 ANNUAL REPORT 2013 49 e c n a G a l t A / s t h g i l h g H i l i a c n a n F i O E C e h t m o r f e g a s s e M A O O C e h t h t i w w e i v r e t n I s n o i t a r e p O f o w e i v e R e c n a n r e v o G e t a r o p r o C n o i t c e S l i a c n a n F i 13. Income Taxes The Company and its domestic subsidiaries are subject to Japanese national and local income taxes that, in the aggregate, result- ed in a normal effective statutory tax rate of approximately 37.9% for the years ended March 31, 2013 and 40.6% for the year ended March 31, 2012. The tax effects of significant temporary differences and tax loss carryforwards that resulted in deferred tax assets and liabilities, at March 31, 2013 and 2012, were as follows: Deferred tax assets: Tax loss carryforwards Provision for product warranties Inventories Investment securities Accrued bonus Software and other intangible assets Foreign income tax credit Allowance for doubtful receivables Liabilities for retirement benefits Other Less valuation allowance Total deferred tax assets Deferred tax liabilities: Intangible assets Undistributed earnings of consolidated subsidiaries Unrealized gain on available-for-sale securities Prepaid pension cost Deferred gains on sales of property Other Total deferred tax liabilities Net deferred tax (liabilities) assets Millions of yen 2013 2012 ¥ 15,325 11,583 9,474 7,434 3,430 3,243 1,436 1,352 878 17,112 (21,927) ¥ 49,340 ¥ 47,895 14,197 8,346 3,697 1,961 7,772 ¥ 83,868 ¥(34,528) ¥18,511 5,576 5,202 2,924 3,146 3,045 1,048 737 1,140 7,793 (16,094) ¥33,028 ¥ 895 9,965 86 4,288 1,906 4,532 ¥21,672 ¥11,356 A reconciliation between the normal effective statutory tax rates and the actual effective tax rates reflected in the accompanying consolidated statement of income for the years ended March 31, 2013 and 2012, is as follows: Normal effective statutory income tax rate Difference in foreign subsidiaries’ tax rate Tax and tax effect on dividends from foreign subsidiaries Amortization of goodwill Consolidation adjustment for gain on sales of shares of a subsidiary Valuation allowance Income taxes—prior years Unrecognized tax effect on unrealized profit Unrecognized tax effect on foreign income tax credit Foreign taxes on royalties and other Amendment of deferred tax assets by change in the income tax rates Other—net Actual effective income tax rate 2013 37.9% (13.5) 7.0 5.2 5.0 3.2 (2.1) (1.8) 1.3 (0.1) 42.1% 2012 40.6% (16.4) 4.3 5.4 7.3 0.2 1.3 1.0 0.9 44.6% On December 2, 2011, new tax reform laws were enacted in Japan, which changed the normal effective statutory tax rate from approximately 40.6% to 37.9% effective for the fiscal years beginning on or after April 1, 2012 through March 31, 2015, and to 35.6% afterward. During the current year, the Company received a refund notice from the Japanese tax authority informing that they reached an agreement with the Chinese tax authority regarding the taxation of the Company’s intercompany transactions. The refund amount to ¥1,841 million is presented as income taxes-prior years in the consolidated statement of income for the year ended March 31, 2013. 50 DAIKIN INDUSTRIES, LTD.  At March 31, 2013, the Company and certain consolidated subsidiaries had tax loss carryforwards aggregating approximately ¥35,679 million, which are available to be offset against taxable income of the Company and such subsidiaries in future years. These tax loss carryforwards, if not utilized, will expire as follows: Year Ending March 31 2014 2015 2016 2017 2018 2019 and thereafter Total Millions of yen ¥ 137 113 68 861 2,903 31,597 ¥35,679 14. Supplemental Cash Flow Information The Group acquired Goodman Global Group, Inc. and its consolidated subsidiaries during the year ended March 31, 2013. A reconciliation between cash paid for the shares of Goodman Global Group, Inc. and payment for the acquisition of these newly consolidated subsidiaries, net of cash and cash equivalents acquired, was as follows: Current assets Fixed assets Goodwill Current liabilities Long-term liabilities Foreign currency translation adjustments Cash paid for the shares Cash and cash equivalents of consolidated subsidiary Payment for acquisition of shares of newly consolidated subsidiary, net of cash and cash equivalents acquired Millions of yen 2013 ¥ 68,866 166,943 195,711 (173,607) (64,386) (17,879) 175,648 (11,996) ¥163,652 The Group acquired A˙IRFEL ISITMA VE SO ˘GUTMA S˙ISTEMLER˙I SANAY˙I VE T˙ICARET A.ÇS. during the year ended March 31, 2012. A reconciliation between cash paid for the shares of A˙IRFEL ISITMA VE SO ˘GUTMA S˙ISTEMLER˙I SANAY˙I VE T˙ICARET A.ÇS. and payment for the acquisition of this newly consolidated subsidiary, net of cash and cash equivalents acquired, was as follows: Current assets Fixed assets Goodwill Current liabilities Long-term liabilities Cash paid for the shares Cash and cash equivalents of consolidated subsidiary Payment for acquisition of shares of newly consolidated subsidiary, net of cash and cash equivalents acquired Millions of yen 2012 ¥ 9,991 9,422 8,826 (5,915) (1,500) 20,824 (124) ¥20,700 15. Research and Development Costs Research and development costs included in cost of sales and selling, general and administrative expenses were ¥33,569 million and ¥32,987 million for the years ended March 31, 2013 and 2012, respectively. ANNUAL REPORT 2013 51 e c n a G a l t A / s t h g i l h g H i l i a c n a n F i O E C e h t m o r f e g a s s e M A O O C e h t h t i w w e i v r e t n I s n o i t a r e p O f o w e i v e R e c n a n r e v o G e t a r o p r o C n o i t c e S l i a c n a n F i 16. Leases The Group leases certain computer equipment and other assets. Obligations under finance leases and future minimum payments under noncancelable operating leases as of March 31, 2013, were as follows: Due within one year Due after one year Total Millions of yen Finance Leases Operating Leases ¥1,464 1,912 ¥3,376 ¥11,138 19,542 ¥30,680 Pro Forma Information for the Years Ended March 31, 2013 and 2012 As discussed in Note 2, the Company and its consolidated domestic subsidiaries account for leases which existed at the transition date of ASBJ Statement No. 13 and do not transfer ownership of the leased property to the lessee as operating lease transac- tions. Pro forma information of such leases existing at the transition date, such as acquisition cost, accumulated depreciation, obli- gations under finance leases and depreciation expense on an “as if capitalized” basis for the years ended March 31, 2013 and 2012, were as follows: Acquisition cost Accumulated depreciation Net leased property Obligations under finance leases: Due within one year Due after one year Total Millions of yen Furniture and Fixtures ¥147 120 ¥ 27 2013 Others ¥111 86 ¥ 25 Total ¥258 206 ¥ 52 Furniture and Fixtures ¥669 580 ¥ 89 2012 Others ¥249 198 ¥ 51 Total ¥918 778 ¥140 Millions of yen 2013 ¥27 25 ¥52 2012 ¥ 88 52 ¥140 The amounts of acquisition cost and obligations under finance leases include the imputed interest expense portion. Lease payments and depreciation expense under finance leases: Lease payments Depreciation expense Millions of yen 2013 ¥87 87 2012 ¥260 260 Depreciation expense, which is not reflected in the accompanying consolidated statement of income, was computed using the straight-line method. 17. Financial Instruments and Related Disclosures Group Policy for Financial Instruments The Group uses financial instruments, mainly bank loans and bonds, based on its capital financing plan. Short-term bank loans and commercial paper are used to fund the Group’s ongoing operations, and cash surpluses are invested in low-risk financial assets. Derivatives are used not for speculative purposes, but to manage exposure to financial risks as described below. Nature and Extent of Risks Arising from Financial Instruments, and Risk Management for Financial Instruments Receivables, such as trade notes and trade accounts are exposed to customer credit risk. The Group manages its credit risk from receivables on the basis of the internal policies, which include monitoring of payment term and balances of major customers to identify the default risk of the customers. Payment terms of payables, such as trade notes and trade accounts, are less than one year. Although receivables and payables in foreign currencies are exposed to the market risk of fluctuation in foreign currency exchange rates, the net position of receivables and payables in each foreign currency is hedged by using mainly forward foreign currency contracts and currency swaps. In addition, receivables and payables in foreign currencies which are expected from forecasted transactions are hedged by using forward foreign currency contracts and currency swaps. Investment securities, mainly equity instruments of customers and suppliers of the Group, are exposed to the risk of market price fluctuations. Investment securities are periodically managed by monitoring market values and financial position of issuers. 52 DAIKIN INDUSTRIES, LTD.  Short-term bank loans and commercial paper are mainly used to fund the Group’s ongoing operations. Long-term bank loans and bonds are used mainly for capital expenditures. Although the payables such as trade notes and trade accounts, bank loans and bonds, are exposed to liquidity risk, the Group manages its liquidity risk along with adequate financial planning by the corpo- rate treasury department and has short-term bank credit lines. A part of long-term bank loans, which are exposed to market risks from change in interest rates, is hedged by using mainly interest rate swaps. Derivatives mainly include forward foreign currency contracts, interest rate swaps, and commodity future contracts, which are used to manage exposure to market risks from changes in foreign currency exchange rates of receivables and payables, from changes in interest rates of bank loans, and from changes in market value fluctuation of the raw materials. Derivative transactions entered into by the Group have been made in accordance with internal policies which regulate the authorization and credit limit amount. Because the counterparties to these derivatives are limited to financial institutions with high creditworthiness, the Group does not anticipate any losses arising from credit risk. Fair Values of Financial Instruments The carrying amount, fair value and unrealized loss of significant financial instruments were as follows. Fair values of financial instru- ments are based on quoted price in active markets. If a quoted price is not available, another rational valuation technique is used instead. Instruments whose fair value cannot be readily determined are not included in the following: Cash and cash equivalents Trade notes and accounts receivable Investment securities Total Trade notes and accounts payable Short-term borrowings Income taxes payable Long-term debt Total Derivatives Cash and cash equivalents Short-term investments Trade notes and accounts receivable Investment securities Total Trade notes and accounts payable Short-term borrowings Income taxes payable Long-term debt Total Derivatives Millions of yen March 31, 2013 Fair Value ¥185,571 263,323 93,740 ¥542,634 ¥127,364 65,335 14,694 647,497 ¥854,890 ¥ 893 Millions of yen March 31, 2012 Fair Value ¥135,427 221 209,077 75,204 ¥419,929 ¥110,108 90,449 9,836 305,991 ¥516,384 ¥ 51 Carrying Amount ¥185,571 263,323 93,740 ¥542,634 ¥127,364 65,335 14,694 637,159 ¥844,552 ¥ 893 Carrying Amount ¥135,427 221 209,077 75,204 ¥419,929 ¥110,108 90,449 9,836 295,398 ¥505,791 ¥ 51 Unrealized Loss ¥10,338 ¥10,338 Unrealized Loss ¥10,593 ¥10,593 Assets Cash and cash equivalents and short-term investments The carrying values of cash and cash equivalents and short-term investments approximate fair value because of their short maturities. Trade notes and accounts receivable The carrying values of trade notes and accounts receivable approximate fair value because of their short maturities. Investment securities The fair values of equity securities are measured at the quoted market price of the stock exchange for the equity instruments, the fair value of debt securities are measured at the amount to be received through maturity discounted at the Group’s assumed corporate discount rate, and the fair values of investment trusts are measured at the constant value. The information related to the fair value of the investment securities by classification is included in Note 6. ANNUAL REPORT 2013 53 e c n a G a l t A / s t h g i l h g H i l i a c n a n F i O E C e h t m o r f e g a s s e M A O O C e h t h t i w w e i v r e t n I s n o i t a r e p O f o w e i v e R e c n a n r e v o G e t a r o p r o C n o i t c e S l i a c n a n F i Liabilities Trade notes and accounts payable, short-term borrowings, and income taxes payable The carrying values of trade notes and accounts payable, short-term borrowings, and income taxes payable approximate fair value because of their short maturities. Long-term debt The fair values of bonds are determined at the quoted market price of the over-the-counter market for the corporate bonds, and the fair values of long-term loans are determined by discounting the cash flows related to the loans at the Group’s assumed corporate borrowing rate. The fair values of long-term loans with floating interest, which are hedged by the interest rate swaps which qualify for hedge accounting and meet specific matching criteria, are determined by discounting the cash flows related to the loans and the interest rate swaps at the Group’s assumed corporate borrowing rate. Derivatives The fair value of derivatives is measured at quoted price obtained from the financial institution. The contracts or notional amounts of derivatives that are shown in the below table do not represent the amounts exchanged by the parties and do not measure the Group’s exposure to credit or market risk. Derivative transactions to which hedge accounting is not applied Millions of yen March 31, 2013 Contract Amount Due after One Year Fair Value Unrealized Gain (Loss) ¥ 29 (169) 970 42 (12) (9) 78 29 53 (4) (127) 27 (8) 70 ¥ 29 (169) 970 42 (12) (9) 78 29 53 (4) (127) 27 (8) 70 Contract Amount ¥ 920 42,962 17,233 3,887 1,556 866 5,457 1,215 188 2,183 1,667 8,826 1,692 164 303 752 ¥ 1,278 ¥ (47) ¥ (47) Forward exchange contracts: Selling: GBP EUR USD AUD NZD ZAR CZK HKD PLN SGD MYR TRY BRL Buying: EUR CNY USD Commodity future contracts: Metal Buying 54 DAIKIN INDUSTRIES, LTD. Forward exchange contracts: Selling: GBP EUR USD AUD NZD ZAR CZK HKD PLN SGD MYR TRY MXN INR Buying: EUR USD Currency swaps: Receive JPY/Pay HKD Commodity future contracts: Metal Buying Millions of yen March 31, 2012 Contract Amount Due after One Year Fair Value Unrealized Gain (Loss) ¥ (2) 250 (129) 66 (4) 1 (13) (7) (8) 20 (26) (2) (21) 32 84 ¥ (2) 250 (129) 66 (4) 1 (13) (7) (8) 20 (26) (2) (21) 32 84 ¥ 18 ¥ 18 Contract Amount ¥ 583 24,023 12,058 4,647 269 778 3,547 953 301 1,997 1,641 6,274 180 468 6,551 1,232 ¥ 83 ¥ 1,706 ¥(134) ¥(134) Derivative transactions to which hedge accounting is applied Forward exchange contracts: Selling: GBP EUR USD AUD ZAR CZK PLN TRY Buying: CNY USD Millions of yen March 31, 2013 Contract Amount Due after One Year Hedged Item Receivables Receivables Receivables Receivables Receivables Receivables Receivables Receivables Payables Payables Contract Amount ¥ 5,953 25,013 630 630 588 8,469 893 4,650 32 12,550 Interest rate swaps: Fixed rate payment, floating rate receipt Fixed rate payment, floating rate receipt* Long-term debt Long-term debt ¥ 80,000 215,000 ¥ 80,000 215,000 Fair Value ¥ 21 (426) (16) (50) (7) 247 (2) (105) (7) 440 ¥(126) ANNUAL REPORT 2013 55 e c n a G a l t A / s t h g i l h g H i l i a c n a n F i O E C e h t m o r f e g a s s e M A O O C e h t h t i w w e i v r e t n I s n o i t a r e p O f o w e i v e R e c n a n r e v o G e t a r o p r o C n o i t c e S l i a c n a n F i Forward exchange contracts: Selling: GBP EUR USD AUD ZAR CZK PLN TRY Buying: USD Interest rate swaps: Fixed rate payment, floating rate receipt Fixed rate payment, floating rate receipt* Millions of yen March 31, 2012 Contract Amount Due after One Year Hedged Item Receivables Receivables Receivables Receivables Receivables Receivables Receivables Receivables Payables Contract Amount ¥ 5,171 20,873 1,306 673 631 8,013 910 1,599 2,464 Long-term debt Long-term debt ¥ 30,000 122,000 ¥97,000 Fair Value ¥ (75) 174 13 (27) (9) (241) (28) (56) 218 ¥ (43) * The above interest rate swaps that qualify for hedge accounting and meet specific matching criteria are not remeasured at market value, but the differential paid or received under the swap agreements is recognized and included in interest expense or income. In addition, the fair value of such interest rate swaps is included in long-term debt. Financial instruments whose fair value cannot be reliably determined Nonlisted equity securities Investments in limited partnerships and other investments Total Maturity analysis for financial assets and securities with contractual maturities Cash and cash equivalents Trade notes and accounts receivable Investment securities: Available-for-sale securities with contractual maturities (Corporate Bond) Total Cash and cash equivalents Short-term investments Trade notes and accounts receivable Investment securities: Available-for-sale securities with contractual maturities (Corporate Bond) Total Please see Note 9 for annual maturities of long-term debt. Due in One Year or Less ¥185,571 263,290 25 ¥448,886 Due in One Year or Less ¥135,427 221 209,073 25 ¥344,746 Millions of yen Carrying Amount 2013 ¥8,180 668 ¥8,848 2012 ¥8,235 780 ¥9,015 Millions of yen March 31, 2013 Due after One Year through Five Years Due after Five Years through Ten Years Due after Ten Years ¥ 33 100 ¥133 Millions of yen March 31, 2012 Due after One Year through Five Years Due after Five Years through Ten Years Due after Ten Years ¥ 4 100 ¥104 ¥25 ¥25 56 DAIKIN INDUSTRIES, LTD. 18. Commitments and Contingent Liabilities At March 31, 2013, the Group had the following commitment: Capital expenditures At March 31, 2013, the Group had the following contingent liabilities: Trade notes endorsed Millions of yen ¥14,451 Millions of yen ¥3,536 19. Comprehensive Income (Loss) The components of other comprehensive income (loss) for the year ended March 31, 2013 and 2012, were as follows: Unrealized gain (loss) on available-for-sale securities: Gains (losses) arising during the year Reclassification adjustments to profit or loss Amount before income tax effect Income tax effect Total Deferred (loss) gain on derivative under hedge accounting: (Losses) gains arising during the year Reclassification adjustments to profit or loss Amount before income tax effect Income tax effect Total Foreign currency translation adjustments: Adjustments arising during the year Share of other comprehensive income in affiliates accounted for using the equity method: Adjustments arising during the year Total other comprehensive income (loss) Millions of yen 2013 2012 ¥14,173 12,534 26,707 (8,273) ¥18,434 ¥ (191) 90 (101) 29 ¥ (72) ¥ (8,380) 437 (7,943) 3,301 ¥ (4,642) ¥ 376 (298) 78 (61) ¥ 17 ¥64,782 ¥(12,968) ¥ 1,483 ¥ (78) ¥84,627 ¥(17,671) 20. Net Income Per Share Reconciliation of the differences between basic and diluted net income per share (“EPS”) for the years ended March 31, 2013 and 2012, was as follows: Year Ended March 31, 2013 Basic EPS: Net income available to common shareholders Effect of dilutive securities Stock options Diluted EPS: Net income for computation Year Ended March 31, 2012 Basic EPS: Net income available to common shareholders Millions of yen Thousands of shares Net Income Weighted Average Shares Yen EPS ¥43,585 291,089 ¥149.73 39 ¥43,585 291,128 ¥149.71 Millions of yen Thousands of shares Net Income Weighted Average Shares Yen EPS ¥41,172 291,242 ¥141.37 Diluted net income per share for the year ended March 31, 2012, is not disclosed because there were no dilutive shares. ANNUAL REPORT 2013 57 e c n a G a l t A / s t h g i l h g H i l i a c n a n F i O E C e h t m o r f e g a s s e M A O O C e h t h t i w w e i v r e t n I s n o i t a r e p O f o w e i v e R e c n a n r e v o G e t a r o p r o C n o i t c e S l i a c n a n F i 21. Segment Information Under ASBJ Statement No. 17, “Accounting Standard for Segment Information Disclosures” and ASBJ Guidance No. 20, “Guidance on Accounting Standard for Segment Information Disclosures,” an entity is required to report financial and descriptive information about its reportable segments. Reportable segments are operating segments or aggregations of operating segments that meet specified criteria. Operating segments are components of an entity about which separate financial information is avail- able and such information is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Generally, segment information is required to be reported on the same basis as is used internally for eval- uating operating segment performance and deciding how to allocate resources to operating segments. 1. Description of Reportable Segments The Group’s reportable segments are those for which separate financial information is available and regular evaluation by the Company’s Board of Directors is being performed in order to decide how resources are allocated among the Group. Therefore, the Group’s reportable segments consist of the “Air Conditioning” segment and the “Chemicals” segment. The “Air Conditioning” segment manufactures, distributes and installs air conditioning and refrigeration equipment. The “Chemicals” segment manufactures and distributes chemicals. 2. Methods of Measurement for the Amounts of Sales, Profit, Assets and Other Items for Each Reportable Segment The accounting policies of each reportable segment are generally consistent with those disclosed in Note 2, “Summary of Significant Accounting Policies”. 3. Information about Sales, Profit, Assets and Other Items Reportable Segment Millions of yen March 31, 2013 Air Conditioning Chemicals Total Other Total Reconciliations Consolidated ¥1,119,972 855 1,120,827 70,905 1,445,186 ¥124,436 5,804 130,240 16,491 150,099 ¥1,244,408 ¥46,495 225 46,720 1,229 29,719 6,659 1,251,067 87,396 1,595,285 ¥ 27,614 12,051 ¥ 9,696 26 ¥ 37,310 ¥ 2,099 12,077 ¥1,290,903 6,884 1,297,787 88,625 1,625,004 ¥ 39,409 12,077 ¥ (6,884) (6,884) 2 110,832 ¥1,290,903 1,290,903 88,627 1,735,836 ¥ 39,409 12,077 8,436 5,605 14,041 14,041 14,041 36,944 15,549 52,493 1,830 54,323 54,323 Sales: Sales to external customers Intersegment sales Total Segment profit Segment assets Other: Depreciation Amortization of goodwill Investment balance in unconsolidated subsidiaries and associated companies accounted for using the equity method Investment in property, plant and equipment and intangible assets 58 DAIKIN INDUSTRIES, LTD. Reportable Segment Millions of yen March 31, 2012 Air Conditioning Chemicals Total Other Total Reconciliations Consolidated ¥1,041,387 1,193 1,042,580 60,175 903,203 ¥132,931 10,071 143,002 20,172 130,213 ¥1,174,318 ¥44,383 232 44,615 852 28,788 11,264 1,185,582 80,347 1,033,416 ¥ 26,152 12,098 ¥ 9,832 49 ¥ 35,984 ¥ 2,263 12,147 ¥1,218,701 11,496 1,230,197 81,199 1,062,204 ¥ 38,247 12,147 ¥(11,496) (11,496) (6) 98,360 ¥1,218,701 1,218,701 81,193 1,160,564 ¥ 38,247 12,147 7,202 6,287 13,489 763 14,252 14,252 37,485 9,151 46,636 1,713 48,349 48,349 Sales: Sales to external customers Intersegment sales Total Segment profit Segment assets Other: Depreciation Amortization of goodwill Investment balance in unconsolidated subsidiaries and associated companies accounted for using the equity method Investment in property, plant and equipment and intangible assets Notes: 1. The “Other” segment is the aggregation of other operating segments which are not included in the reportable segments and consists of “Oil Hydraulics” segment, “Defense” segment, and “Electronics” segment. 2. “Reconciliations” include unallocated items and intersegment eliminations. The unallocated corporate assets included in “Reconciliations” amount to ¥118,702 mil- lion and ¥105,756 million at March 31, 2013 and 2012, respectively, which consisted mainly of the Company’s cash, time deposits, short-term investments and investment securities. 3. The aggregated amount of segment profit equals to operating income in the consolidated statements of income. 4. Intersegment sales are recorded at values that approximate market prices. 4. Supplemental Information (1) Information about Geographical Areas a. Sales Japan China Europe Millions of yen March 31, 2013 Asia and Oceania Americas Other ¥494,284 ¥234,774 ¥195,053 ¥186,219 ¥137,479 ¥43,094 Consolidated ¥1,290,903 Japan China Europe Millions of yen March 31, 2012 Asia and Oceania Americas Other Consolidated ¥474,572 ¥215,655 ¥205,656 ¥163,502 ¥127,268 ¥32,048 ¥1,218,701 Note: Sales are classified in countries or regions based on location of customers. b. Property, Plant and Equipment Millions of yen March 31, 2013 Japan ¥91,759 China ¥69,951 USA ¥42,717 Europe ¥31,460 Millions of yen March 31, 2012 Japan ¥93,585 China USA ¥45,108 ¥24,573 Europe ¥28,630 Asia and Oceania ¥32,615 Asia and Oceania ¥27,450 Other ¥5,699 Consolidated ¥274,201 Other ¥5,011 Consolidated ¥224,357 ANNUAL REPORT 2013 59 e c n a G a l t A / s t h g i l h g H i l i a c n a n F i O E C e h t m o r f e g a s s e M A O O C e h t h t i w w e i v r e t n I s n o i t a r e p O f o w e i v e R e c n a n r e v o G e t a r o p r o C n o i t c e S l i a c n a n F i (2) Significant Impairment Loss on Noncurrent Assets Millions of yen March 31, 2012 Air Conditioning Chemicals Other ¥356 Eliminations and Corporate Consolidated ¥356 Impairment losses on noncurrent assets (3) Information about Goodwill a. Balance of Goodwill by Reportable Segment Goodwill for each reportable segment at March 31, 2013 and 2012, was as follows: Goodwill Goodwill Millions of yen 2013 Chemicals Other Eliminations and Corporate Millions of yen 2012 Chemicals Other Eliminations and Corporate Air Conditioning ¥348,411 Air Conditioning ¥166,276 Consolidated ¥348,411 Consolidated ¥166,276 22. Subsequent Events Resolutions approved by the Company’s Board of Directors at the meeting held on May 8, 2013, are subject to approval at the general shareholders’ meeting planned to be held on June 27, 2013. Appropriations of Retained Earnings Payment of a year-end cash dividend of ¥18 per share to holders of record at March 31, 2013, totaling ¥5,241 million was approved. 60 DAIKIN INDUSTRIES, LTD. Independent Auditors’ Report ANNUAL REPORT 2013 61 e c n a G a l t A / s t h g i l h g H i l i a c n a n F i O E C e h t m o r f e g a s s e M A O O C e h t h t i w w e i v r e t n I s n o i t a r e p O f o w e i v e R e c n a n r e v o G e t a r o p r o C n o i t c e S l i a c n a n F i Corporate Data (As of March 31, 2013) Head Office Umeda Center Bldg., 2-4-12, Nakazaki-Nishi, Kita-ku, Osaka 530-8323, Japan Phone: 81-6-6373-4312 URL: http://www.daikin.com/ Tokyo Office JR Shinagawa East Bldg., 2-18-1, Konan, Minato-ku, Tokyo 108-0075, Japan Fiscal Year-End Date March 31 on an annual basis Phone: 81-3-6716-0111 Date of Founding Date of Establishment Paid-in Capital October 25, 1924 February 11, 1934 ¥85,032 million Number of Shares of Common 293,113 thousand Stock Issued Number of Shareholders 41,662 Major Shareholders (cid:129) The Master Trust Bank of Japan, Ltd. (Trust account) (cid:129) Japan Trustee Services Bank, Ltd. (Trust account) (cid:129) Japan Trustee Services Bank, Ltd. (Retirement Benefit Trust Account for Nippon Steel & Sumitomo Metal Industries, Ltd.) (cid:129) Sumitomo Mitsui Banking Corporation (cid:129) SSBT OD05 OMNIBUS ACCOUNT-TREATY CLIENTS (cid:129) Japan Trustee Services Bank, Ltd. (Retirement Benefit Trust Account for The Norinchukin Bank) (cid:129) The Bank of Tokyo-Mitsubishi UFJ, Ltd. (cid:129) Japan Trustee Services Bank, Ltd. (Trust account 9) (cid:129) Japan Trustee Services Bank, Ltd. (Trust account 4) (cid:129) Mellon Bank, N.A. as Agent for Its Client Mellon Omnibus U.S. Pension Number of Subsidiaries and Subsidiaries: 207 Affiliates: 10 Affiliated Companies Number of Employees 51,398 (Consolidated) Stock Exchange Listing Tokyo Advertising Method The Company uses the electronic advertising method, posting advertisements on its website (http://www.daikin.co.jp/e-koukoku/). However, when electronic advertising is not possible due to technical problems or other circumstances, the Company will post advertisements in the Nikkei Shimbun. Shareholder Register Mitsubishi UFJ Trust and Banking Corporation Administrator 3-6-3, Fushimicho, Chuo-ku, Osaka 541-8502, Japan Ordinary General Meeting of June Shareholders Auditor Deloitte Touche Tohmatsu LLC 62 DAIKIN INDUSTRIES, LTD. ANNUAL REPORT 2013 63 This report is printed on paper certified by the Forest Stewardship Council (FSC)—an inter- national labeling scheme that provides a credible guarantee that the raw materials used in the product come from an environmentally well-managed forest—and with vegetable ink for waterless printing (non-VOC ink) that does not contain volatile organic compounds. Printed in Japan http://www.daikin.co.jp CC-A2A(13-09-003)IB 

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