Daikin Industries Ltd. Annual Report 2014

Plain-text annual report

Annual Repor t 2014 Fiscal Year Ended March 31, 2014 A n n u a l R e p o r t 2 0 1 4 D A I K I N I N D U S T R I E S , L T D . On Daikin’s 90th Anniversary, Toward a New Phase of Development as a Global Company Based on Long Years of History and Experience Founded in 1924, Daikin has become a global company with its air-conditioning systems and fluorochem- istry businesses at the core. The year 2014 is the 90th anniversary of its founding, and today the Daikin Group does business in 145 countries with 74 production facilities. Preventing global warming and raising energy efficiency are key topics shared by developed countries and emerging ones. Air conditioners use electricity and gas, and emit CO2. The Daikin Group believes that energy control is an important part of its mission. Offering products and solutions that bring about both comfortable living and environmental friendliness to a high level, going forward, the Group will strive to raise corporate value even higher and further contribute to society. Based on its 90 years of history and experience, the Daikin Group will continue to earn the trust and meet the expectations of investors and the global community, and aim for a new phase of development. Contents Our Group Philosophy ............................ 1 Financial Highlights ................................. 2 At a Glance ............................................ 3 A Message from the CEO ....................... 4 Interview with the CEO ........................... 6 Review of Operations Air Conditioning— the Japanese Market ...................... 12 Air Conditioning— the Global Market ........................... 14 Chemicals ......................................... 16 DAIKIN INDUSTRIES, LTD. Oil Hydraulics .................................... 18 Defense ............................................ 19 Corporate Governance ......................... 20 Directors, Audit and Supervisory Board Members, and Executive Officers........ 22 CSR (Corporate Social Responsibility).... 23 Financial Section Eleven-Year Financial Highlights ........ 28 Financial Review ............................... 30 Consolidated Balance Sheet ............. 36 Consolidated Statement of Income ... 38 Consolidated Statement of Comprehensive Income .................. 39 Consolidated Statement of Changes in Equity ........................... 39 Consolidated Statement of Cash Flows ..................................... 40 Notes to Consolidated Financial Statements ....................... 41 Independent Auditors’ Report ........... 63 Corporate Data ................................. 64 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 perfor- mance. 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. 1 ANNUAL REPORT 2014 Financial Highlights Daikin Industries, Ltd. and Consolidated Subsidiaries Years Ended March 31 Operating Results (for the year): Net sales Gross profit Operating income Net income Cash Flows (for the year): Net cash provided by operating activities Net cash used in investing activities Free cash flow (Note) Net cash provided by (used in) financing activities Financial Position (at year-end): Total assets Total shareholders’ equity Per Share Data (yen): Net income (basic) Shareholders’ equity Cash dividends Cash flow per share Ratios (%): Gross profit 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 2013 2014 ¥1,290,903 388,046 88,627 43,585 ¥1,783,077 566,861 155,075 91,880 ¥103,161 (218,386) (115,225) 143,520 ¥179,713 (80,835) 98,878 (38,249) ¥1,735,836 618,118 ¥2,012,531 802,344 ¥ 149.73 2,123.10 36.00 (396) ¥ 315.21 2,749.76 50.00 339 30.06% 6.87 7.78 35.61 31.79% 8.70 12.94 39.87 Net Sales, Gross Profit, and Gross Profit Margin (¥ billion) 1,800 1,500 1,200 900 600 300 0 (%) 36 30 24 18 12 6 0 Operating Income and Operating Income Margin (¥ billion) 180 150 120 90 60 30 0 ROE (%) 15 12 9 6 3 0 (%) 12 10 8 6 4 2 0 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 Net Sales Gross Profit Gross Profit Margin Operating Income Operating Income Margin 2 DAIKIN INDUSTRIES, LTD.Financial Highlights/At a GlanceA Message from the CEOInterview with the CEOReview of OperationsCorporate GovernanceFinancial SectionAt a Glance Percentage of Net Sales Air-Conditioning 89.3% Chemicals 7.9% Defense 1.0% Air-Conditioning Net Sales and Operating Income (Loss) Major Products • Room air-conditioning systems • Heat-pump hot-water-supply and room-heating systems • Packaged air-conditioning systems • Multiple air-conditioning systems for office buildings • Air-conditioning systems for facilities and plants • Medium- and low-temperature air-conditioning systems • Absorption refrigerators • Humidity-adjusting external air-processing units • Air purifiers • Water chillers • Air-handling units • Marine-type container refrigeration • Fluorocarbons • Fluoroplastics • Fluoroelastomers • Fluoropaints • Fluoro coatings • Fluorinated oils • Oil- and water-repellent products • Mold release agents • Pharmaceuticals and intermediates • Semiconductor-etching products • Dry air suppliers • Oil hydraulic pumps • Oil hydraulic units • Oil hydraulic valves • Cooling equipment and systems • Hydrostatic transmissions • Centralized lubrication units and systems • Warheads for Japan’s Ministry of Defense • Warhead parts for guided missiles • Home-use oxygen therapy equipment (¥ billion) 1,600 1,200 800 400 0 138.5 1,592.9 (¥ billion) 160 120 80 40 0 2010 2011 2012 2013 2014 Chemicals (¥ billion) (¥ billion) 160 120 80 40 0 14.2 140.2 24 18 12 6 0 2010 2011 2012 2013 2014 Oil Hydraulics (¥ billion) (¥ billion) 30 20 10 0 1.4 29.0 30 20 10 0 -10 -40 2010 2011 2012 2013 2014 Defense (¥ billion) 20 15 10 5 0 0.5 17.3 (¥ billion) 0.8 0.6 0.4 0.2 0 2010 2011 2012 2013 2014 Oil Hydraulics 1.6% Description Since becoming the first in Japan to manufacture packaged 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 manufac- turer to create a full line of products from refrigerants to air conditioners. 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 com- pounds. Daikin’s unique hydraulic technologies offer out- standing energy-conserva- tion performance and are contributing to the devel- opment of industry by unleashing the potential of power control. Daikin’s superior machining and quality control technol- ogies are used in the pro- duction of defense-related products and other indus- tries where high levels of precision and performance are critical. 3 ANNUAL REPORT 2014A Message from the CEO Aiming for Sustainable Growth Continuing the momentum of record results in fiscal 2014, Daikin has welcomed fiscal 2015, which is the 90th anniversary of our founding. Going forward, the Daikin Group will expand business globally while reforming its business model and improving the environmental performance of its products and technologies. Fiscal 2014 (ended March 31, 2014) saw record levels of net sales, operating income, ordinary income, and net income. The year also welcomed fiscal 2015, which is our 90th anniversary. The Daikin Group continues to place all efforts for sustained growth by responding speedily and flexibly to a changing market environment. Specifically, under the FUSION 15 strategic management plan, aiming for a large expansion in net sales, we will increase our sales capabilities by reinforcing our sales network and developing new sales outlets in all markets, including in emerging countries. Also, Daikin will work to further develop its solutions business, including service, maintenance, installation, and control, and expand its environmental innovations business, which places next-generation refrigerants and heating systems as core business lines. Together with this growth strategy, the Group will carefully manage investments and fundamentally reduce fixed costs to further build a business structure with high profitability. Furthermore, we will raise quality assurance and compliance systems, and strengthen our human resources, which are the core of global Group management, to further put in place the business structure needed for sustainable growth. In 2012, the Daikin Group adopted the new refrigerant R32, which reduces the global warming factor by two-thirds over traditional refrigerants. Since then, aiming for R32 to be adopted global- ly, we have actively worked with environmental and air-conditioning-related parties in each country and region on setting a new global standard. Through this, we are meeting our role as a top maker of air-conditioning systems. Moreover, we think it is pressing to work quickly to switch sys- tems in emerging markets. Daikin is also introducing energy-efficient inverter system air condition- ers in mass market price ranges in emerging markets, and, through this and other efforts, we will both contribute to preventing global warming and expand business. I have always believed that the key to corporate growth is above all responding flexibly and with agility to changing times, and sparking innovation. Looking forward to our 100th anniversary, I aim for further development of the Daikin Group, striving to continue to win the support of the global markets and meet the expectations of our shareholders and other stakeholders. 4 DAIKIN INDUSTRIES, LTD.Financial Highlights/At a GlanceA Message from the CEOInterview with the CEOReview of OperationsCorporate GovernanceFinancial Section June 2014 Masanori Togawa President and CEO 5 ANNUAL REPORT 2014Interview with the CEO Overcoming Global Competition Fiscal 2014 was the middle year of the five-year FUSION 15 strategic management plan, and Daikin reached business results that surpassed quantitative targets for the first half of the FUSION 15 plan. At the same time, we made a running start to the three years in the second half of the plan, which is a great success. In fiscal 2015, the Daikin Group will turn its focus on meeting the second-half targets of FUSION 15 and on making Daikin a “Truly Global and Excellent Company.” To this end, we will overcome fierce competition and win. June 2014 Masanori Togawa President and CEO 6 DAIKIN INDUSTRIES, LTD.Financial Highlights/At a GlanceA Message from the CEOInterview with the CEOReview of OperationsCorporate GovernanceFinancial SectionQ1 Please explain the market environment in fiscal 2014 and Daikin’s business results, which were at record highs. Q2 Three years have passed since the start of the FUSION 15 strategic management plan, and fiscal 2014 marked the middle year. Please discuss the results of those three years Togawa: In fiscal 2014, the global economy recovered and progress on FUSION 15. from the depths, and we saw a bright market environment. Using this opportunity, under the FUSION 15 strategic Togawa: Fiscal 2012, the first year of the FUSION 15 plan, management plan, which covers fiscal 2012–2016, we started right after the March 2011 earthquake in Japan, worked to fundamentally strengthen profitability and and, as such, the business outlook was very unclear. further accelerate growth. Recovery in the global economy also slowed. However, In the air-conditioner business in Japan, Europe, the to overcome this period of paradigm shift and further United States, China, and other markets around the world, become a “Truly Global and Excellent Company,” the we put in place unique actions before competitors. Also, Group steadily implemented the core strategies of FUSION effects from the Goodman Group, which Daikin acquired 15 of a “new growth strategy,” “reorganizing the manage- in November 2012, moving into consolidation and the ment structure,” and “strengthening human resources.” impact of the weakened yen brought air-conditioning and Based on this, in the first three years of FUSION 15, refrigeration business sales 42% higher than the previous we expanded our business solidly. year, to ¥1,592.9 billion. Operating income increased 95% For example, in fiscal 2014, air-conditioner system busi- year on year, to ¥138.5 billion. ness sales in emerging markets reached ¥155.0 billion, about In the chemicals business, sales grew in auto-related three times the fiscal 2011 level. Also in Japan, we have applications, the semiconductor sector—which is raised business results in the energy efficiency solutions busi- recovering—and infrastructure applications in China. ness and introduced a series of high environmental-perfor- Sales reached ¥140.2 billion, up 13% over the previous mance air conditioners. Our strategy in the North American year. However, operating income decreased 14% year on air-conditioner market via the Goodman Group acquisition year, to ¥14.2 billion, as falling sales prices on increases has been another example of our successes. in market supply had a large impact. In other businesses, sales for oil hydraulics, defense, and electronic systems combined totaled ¥50.0 billion, and operating income came to ¥2.4 billion. Both sales and operating income increased over the previous year. Overall, consolidated sales totaled ¥1,783.1 billion (a 38.1% increase year on year), and operating income reached ¥155.1 billion (up 75.0% year on year). Net income increased to ¥91.9 billion (up 110.8% year on year) as losses on valuation of investment securities were far less than those booked in the previous period. Sales and all profit levels were at record highs. L Quantitative Targets for FY2016 L Group-wide Sales and Profit Targets (¥ billion) FY2011 actual results FY2014 initial plan FY2014 actual results FY2016 goals Net sales ¥1,160.3 ¥1,600.0 ¥1,783.1 ¥2,050.0 Operating income (Operating income margin) 75.5 (6.5%) 130.0 (8.1%) 155.1 (8.7%) 190.0 (9.3%) L Financial Targets ROA ROE FY2011 actual results FY2014 initial plan FY2014 actual results FY2016 goals 1.7% 4.0% 5.0% 4.9% 11.0% 12.9% 6.0% 13.0% L Investment Plan 3-year cumulative (¥ billion) FY2014–2016 ¥250.0 Note: Assumed exchange rates in FY2016: $1=¥95, 1=¥125 7 ANNUAL REPORT 2014 Fiscal 2014 marked four straight years of increasing Second, we worked to improve profitability by reinforc- sales and profits, and we managed to surpass by a large ing cost-competitiveness. Through building local produc- margin the targets for fiscal 2014 laid out in the FUSION tion and sales systems in markets globally, we are able 15 plan (consolidated sales of ¥1,600 billion and consoli- to respond flexibly to changes in demand and minimize dated operating income of ¥130 billion). In this period of foreign exchange fluctuation risks. Also, by adopting the unprecedented speed of change, we have made a running Goodman Group’s procurement practices globally, we start toward our quantitative targets for the final year of lowered procurement costs via a global centralized sys- FUSION 15: consolidated sales of ¥2,050 billion and tem. In our Suzhou plant in China, in addition to econo- consolidated operating income of ¥190 billion. mies of scale in room-type air-conditioner production, we Q3 Please tell us what Daikin built in these three years. bolstered cost-competitiveness by greatly increasing local materials procurement and making components in-house. Third, Daikin continued to build a strong sales network in each region that is unaffected by the external market environment. For instance, in China, we expanded the Togawa: In these three years, the Daikin Group imple- sales network for air conditioners in interior regions. mented policies toward further building a profitable busi- Through this, we strengthened retail sales by being even ness structure. First, we strived to increase the added closer to the customer. We managed to increase the num- value of our products. For example, in the Japanese ber of Daikin outlets to about 14,000 in fiscal 2014, from air-conditioner market, continuing on from our room-type about 6,000 in fiscal 2010. In North America, using the air-conditioner products, we launched the first commercial Goodman Group’s sales network of over 900 locations air conditioners to use the new R32 refrigerant. We have with about 60,000 dealers, we are working for a large- continued to introduce highly differentiated products into scale sales increase. In India, we segmented the diverse the market. needs of customers, and continued to develop optimal sales outlets in each region. 8 DAIKIN INDUSTRIES, LTD.Financial Highlights/At a GlanceA Message from the CEOInterview with the CEOReview of OperationsCorporate GovernanceFinancial Section Fourth, Daikin focused on further strengthening its busi- In the final three years of FUSION 15, I want to further ness foundation to further speed up the global develop- quicken growth and enter the stage where we reap the ment of its business. Through alliances, cooperative fruits of our efforts. Through the speedy rollout of our core agreements, and M&A, Daikin has put in place a network strategy, we will further build a strong corporate foundation to increase business in the North American market via syn- and raise profitability. ergies gained from the Goodman Group, and to increase business in Turkey and Central Asia via the acquisition of Airfel. In production, we have expanded at a high pitch, particularly in emerging markets, such as Turkey, Brazil, and Mexico. Furthermore, to bolster R&D in air condition- Q4 A core strategy of FUSION 15 is four new growth themes. First, please explain what measures Daikin will take in the ers, with Japan as the mother R&D center, we have estab- final three years of FUSION 15 in the themes lished a network of seven R&D centers (Japan, the United “Fully enter emerging and high-volume markets” States, China, Belgium, Thailand, India, and Australia), and “Develop solutions business that meets where centers conduct development locally. At the centers customer needs.” in China and Belgium, we greatly increased the number of development engineers. Also, looking toward the next 10 Togawa: For the “Fully enter emerging and high-volume years, to raise productivity in product R&D, speed up pro- markets” theme, Daikin will introduce air-conditioner prod- cesses, and create innovative new products and business ucts that rival makers cannot match, and further expand lines by melding technologies from other fields, in autumn sales. In residential air conditioners, we will develop and 2015, Daikin will open the Technology Innovation Center. launch differentiated products speedily, such as inverter air In addition to strengthening our foundations for business conditioners, which specialize in cooling functions, and expansion, to build an even stronger management founda- high-volume-price-range multi-type air conditioners. In com- tion, we are working to minimize fixed costs across the mercial air conditioners, we will reinforce our product lineup Group as a percentage of net sales, and aim to lower the of high-value-added VRV products (multi-type air condition- fixed cost ratio to 26% by fiscal 2016. ers for buildings), improve cost-competitiveness, develop L FUSION 15: Approaches to Latter-Half 3-Year Plan While generating further results and implementing plans striving to achieve targets, looking ahead to the next development direction, the latter-half plan incorporates themes designed to yield results after 2015. Reinforcement of profitability and framework will be continuously undertaken to establish a robust corporate framework. 1) Accelerate core • Launch products for emerging and high-volume markets in advanced countries and regions (Japan, China, strategies leveraging environmental changes 2) Reform corporate framework to reinforce profitability 3) Further expand existing businesses and current regions of business Europe, etc.) • Establish distribution networks in regions where air-conditioning demand is growing (Russia, Middle East, Latin America, etc.) • Accelerate sales expansion of commercial-use air-conditioning equipment (VRV, Applied products) in Asia • Expand revenue in cyclical business (from installation to controls, service, and maintenance), including in Daikin’s core equipment strengths • Pursue energy-saving performance that leads the industry, better air quality environments (purification, humidifi- cation/dehumidification, ventilation), expand the number of products compatible with energy diversification, etc. • Improve earnings capacity and maximize FCF through Group-wide variable- and fixed-cost reductions • Streamline entire SCM process by learning from Goodman, etc. (inventory turnover: -9 days) • Europe: Expand sales outpacing economic recovery in key countries (France, Italy, etc.) and expand business in neighboring emerging countries • Revive Chemicals business to a highly profitable framework through sales expansion incorporating growing markets such as the automobile industry, development of new products, including hybrid materials, expansion of high-value-added products, etc. 9 ANNUAL REPORT 2014 service engineers and other staff, and enter new markets in global market changes flexibly. Energy sources are Asia and elsewhere. Furthermore, in the Middle East, Asia, becoming more diverse, and energy efficiency and air Oceania, Central and South America, and other regions, quality are increasing in consciousness among the world’s Daikin will take advantage of higher infrastructure spending population. Countries across the globe are strengthening and corporate investment, and take measures to expand environmental regulations. In step with this, growth oppor- applied solutions business sales. The Group plans to tunities in such new businesses as refrigerant gasses, heat expand air-conditioner sales in emerging markets to ¥300 pumps, fire heaters, air purifiers, and filters will appear, and billion by fiscal 2016, roughly twice the fiscal 2014 level. we will bolster efforts toward this growth using the full Moreover, Daikin will bring to the high-volume segment power of the Daikin Group. Specifically, as Daikin is the of developed markets the cost-competitive products only corporate group in the world with both air-condition- developed to meet the diverse needs and win over fierce ing and refrigerant gas technologies, we will lead the way competition in emerging markets. We will work to quickly and expand our lineup of products adopting the new bring this reverse innovation to reality, and be the first in refrigerant R32 and launch R32 products in more markets the air-conditioning industry to do so. and regions. We will also roll out the air-ventilation busi- For the “Develop solutions business that meets customer ness, which handles issues including PM2.5, or particulate needs” theme, we have a big aim to move away from a matter of 2.5 micrometers or less, globally. By fiscal 2016, “hard” or physical products-focused business model in the we will target environment-related innovation business air-conditioning business. Combining needs in different sales of over ¥300 billion. countries, regions, and applications, Daikin will offer energy Finally, in the “Develop synergies and expand business control solutions, including service, installation, and equip- through the Goodman Group acquisition” theme, primarily ment control. Through this, we will build a self-sustaining by combining procurement and administrative functions, business model where we capture replacement demand for improving logistics, and other rationalization efforts, we equipment. In the final three years of FUSION 15, Daikin were able to realize ¥3 billion in synergy effects, much larg- will polish its strengths in both the “hard” (energy-efficient er than the ¥1.5 billion targeted for fiscal 2014. In the final equipment) and “soft” (air-conditioner-related services) busi- three years of FUSION 15, in procurement alone, Daikin nesses. Via this, we will bring the solutions business, which plans for synergy savings of ¥15 billion–¥20 billion cumula- offers energy efficiency and comfort that cannot be tively. achieved with equipment alone, primarily to developed mar- Strengthening the North American business in earnest kets in short order. Moreover, particularly in the commercial also continues apace. In sales, we worked to further increase air-conditioner systems markets, we will focus on high- market share of unitary ducted air conditioners, which are margin service and parts businesses, and bring business the Goodman Group’s main products, and launched new expansion and higher profitability to reality. By fiscal 2016, premium air conditioners that feature energy-efficient inverter we target solutions business sales of over ¥300 billion. technology. Furthermore, taking advantage of Goodman’s sales network, we introduced Daikin’s ductless air condition- ers that feature superior energy efficiency. In production, local VRV unit production started in North America on schedule in February 2014. To strengthen the business foundation toward taking the No. 1 market position in the North American air- conditioner market in short order, in fiscal 2015, Daikin will make investments needed for a large increase in sales. Q5 Next, please explain what measures Daikin will take in the themes “Expand environment-related innovation business” and “Develop synergies and expand business through the Goodman Group acquisition.” Togawa: For the “Expand environment-related innovation business” theme, it is critical that Daikin can respond to 10 DAIKIN INDUSTRIES, LTD.Financial Highlights/At a GlanceA Message from the CEOInterview with the CEOReview of OperationsCorporate GovernanceFinancial Section Q6 Please explain your outlook for fiscal 2015 earnings for the Daikin Group. and reducing total costs. Aiming for sustainable growth, the Daikin Group will actively contribute to solving global warming, improve the soundness and transparency of Togawa: In fiscal 2015, we expect the global air-condi- management, speed up decision making, and strengthen tioner market to continue to grow, but the impact from the governance. Through these measures, we will maximize consumption tax rise in Japan and macroeconomic trends corporate value and bring our goal of being a “Truly Global in China and other emerging markets are causes of and Excellent Company” to reality. concern. Global competition will certainly continue to grow Fiscal 2015 marks the 90th anniversary of Daikin. In this fiercer, and, to overcome the competition and continue the milestone year, to progress to a new stage of growth and momentum Daikin has in earnings growth, sales and mar- development, we strengthened our corporate governance keting capabilities must be strengthened. First, Daikin will system. set independent sales strategies per region. In product The Daikin Group’s business areas and overall scale strategy, we are working to develop and introduce unique continue to grow rapidly globally. The Group does busi- and appealing products both speedily and timely. ness in 145 countries, with overseas sales making up over Moreover, by working to preserve and increase sales pric- 70% of total net sales, and non-Japanese accounting for es, and increase market share, Daikin will expand sales 80% of staff. In line with this quickening pace of global and income. expansion, we must build a governance system that On the other hand, periods with robust earnings are a makes even more-sophisticated Group management great chance to improve our profitability structure. Daikin possible. As part of this, we created the Chief Global will fully explore ways to cut fixed costs and reduce vari- Group Officer position. Via this new position, Daikin aims able costs as much as possible via global centralized pro- to build an organization management and governance curement and other measures. These efforts will raise the system as a truly multinational company. reinforcement of our business foundations into a higher Also, we increased the number of non-Japanese on the gear, and will be linked to higher growth. Board of Directors to two people, up from one, to reinforce In fiscal 2015, the Daikin Group targets consolidated net our governance system to meet our globalization needs. sales of ¥1,980.0 billion (up 11.0% year on year), consoli- For shareholder returns, going forward as a fundamental dated operating income of ¥170.0 billion (up 9.6% year on policy, Daikin will provide stable and continuing dividends, year), consolidated ordinary income of ¥166.0 billion (up and we are raising our target for the dividends on equity 7.7% year on year), and consolidated net income of ¥98.0 (DOE) ratio to 2.5%, from the previous 2.0% target. billion (up 6.7% year on year). With these targets, we will Together with this, keeping our consolidated dividend progress strongly toward FUSION 15’s final year targets. payout ratio well in mind, we will work to further increase Q7 Please describe your policies and struc- tures toward becoming a “Truly Global and Excellent Company,” and please explain your dividends. In fiscal 2014, Daikin paid ¥50 per share, an increase of ¥14 over the previous year. In fiscal 2015, we plan to offer ¥60 per share, an increase of ¥10 year on year, and also pay a commemorative ¥10 per share to mark our 90th philosophy on returns to shareholders. anniversary, bringing the total to ¥70 per share. Fiscal 2014 was the fourth consecutive year of Togawa: Going forward, Daikin will continue to reform its increasing sales and profits. We also reached record highs management foundation and strengthen its financial base, for sales and all profit levels and welcomed our 90th making strategic investments in its core air-conditioning anniversary year. We ask for the continued support and fluorochemistry segments and expanding business, and understanding of our shareholders. 11 ANNUAL REPORT 2014 Review of Operations Air Conditioning—the Japanese Market Expand sales of high-value-added products with superior energy efficiency and environmental performance Current Solidly Raised Profitability In fiscal 2014, industrial demand was robust in Japan’s In Japan’s residential air-conditioning market, unit ship- commercial air-conditioning equipment market owing to ments were at record high levels thanks to strong demand strong demand ahead of Japan’s consumption tax rise, ahead of the consumption tax rise, growth in new housing recovery in capital expenditure, and higher construction starts, hot weather, and replacement demand for energy- starts. In November 2013, Daikin launched FIVE STAR ZEAS, efficient products due to energy saving increasing in con- an air-conditioning system for stores and offices that is the sciousness. Centered on the Urusara 7 room air conditioner, first commercial air conditioner to use the new refrigerant Daikin increased unit sales, particularly of energy-efficient HFC32 (R32). This product was awarded the Director products. This caused an overall increase in residential General Prize of the Agency of Natural Resources and air-conditioning business sales over the previous year. Energy for excellent energy conservation equipment in the In fiscal 2014, the rapid depreciation of the yen led to large fiscal year ended March 2013. Centered on this product, increases in procurement costs. However, high-value-added Daikin worked to expand sales of high-value-added products with superior energy-efficiency features performed products that feature superior energy efficiency and strongly. Also, Daikin thoroughly enforced pricing policies, environmental friendliness, which drove commercial worked against weakening demand, lowered design costs, air-conditioning equipment sales higher over the previous and promoted total cost reductions via global procurement. fiscal year. 12 Combined, Daikin was able to raise profitability. DAIKIN INDUSTRIES, LTD.Financial Highlights/At a GlanceA Message from the CEOInterview with the CEOReview of OperationsCorporate GovernanceFinancial Section Develop solutions business that goes beyond device sales Future Expand Business of Daikin’s Unique Solutions The domestic air-conditioner market is maturing, and business base in business lines related to air conditioners, Daikin is working to fundamentally strengthen sales capa- and expand solutions in installation, instrumentation and bilities. Measures will include expanding the sales network control, and service. via developing new sales outlets, end-user marketing, and In the final three years of the FUSION 15 strategic man- efforts to have Daikin products specified in to new con- agement plan, Daikin is targeting sales of one million units struction. Daikin will also continue to enforce pricing for the VRV multi-split type air conditioner for buildings, policies, and work to increase sales and profits. which is spreading throughout Japan. Also, Daikin will For residential air conditioners, Daikin aims to increase expand business in maintenance and other solutions for its market share by expanding sales of high-value-added energy efficiency and comfortable spaces that cannot be products with the flagship Urusara 7 model at the core. achieved with air-conditioner units alone. Furthermore, For commercial air conditioners, Daikin will develop new through close-relationship sales efforts with clients, Daikin sales locations and expand sales of products with superior will aim to capture replacement demand and expand energy efficiency, centered on the FIVE STAR ZEAS and Eco- revenues. ZEAS80 models. Also, Daikin will work to further build its 13 ANNUAL REPORT 2014 Air Conditioning—the Global Market Developed room-type air conditioner for European market with high design features that meets local needs Goodman’s Houston plant launched local production of VRV units. Current Expanded Business Steadily in All Countries and Regions Profitability expanded steadily in all global air-conditioner In Asia and Oceania, macroeconomic conditions markets in fiscal 2014, growing markedly over the previous weakened due to political instability and slower growth. fiscal year. However, Daikin made steady progress in expanding its In Europe, demand remains weak in the main EU sales network and expanded sales firmly in the overall country markets, but Daikin worked to reorganize its region. In Australia and Singapore, key markets for Daikin, sales network and improve product competitiveness, sales capabilities were further strengthened. In India, and strengthened sales in new volume zones. In central Malaysia, Vietnam, and Indonesia, bolstering the sales Europe, Turkey, and other emerging markets, Daikin network yielded a large sales increase in room-type strengthened its sales network for room-type and VRV and commercial air conditioners. (multi-split type units for buildings) air conditioners. In North America, using the strong sales network of the In China, due to tightened monetary policy, market con- Goodman Group, purchased in fiscal 2013, sales in resi- ditions remained severe. However, by strengthening retail dential and commercial air conditioners grew. In applied sales, which are relatively resistant to macroeconomic solutions as well, expanding the service business raised conditions, conducting full model changes for all models, profitability. Sales for the region overall expanded strongly, and cost reductions, Daikin improved profitability. In the due in part to the Goodman Group moving into consolida- applied solutions business (large-scale air conditioners) tion and the cultivation of synergies between Goodman as well, business grew and sales increased strongly. and Daikin. 14 DAIKIN INDUSTRIES, LTD.Financial Highlights/At a GlanceA Message from the CEOInterview with the CEOReview of OperationsCorporate GovernanceFinancial Section Further expand commercial air-conditioner business in Indonesia, where the market is growing rapidly Continue developing retail sales outlets in all regions in China Future Grow Globally and Strengthen Business Base In the final three years of the FUSION 15 strategic man- quicken local R&D for new products. Through this, Daikin agement plan, Daikin will move fully into the high volume will work for stable growth. zone in emerging markets, develop the solutions business, In Asia and Oceania, the Group will accelerate business and expand the environmental innovations business. As expansion by developing new sales outlets, launching new the Group puts these new growth strategies into place, products that meet the diverse needs in each country, and Daikin will also work to reinforce sales capabilities in each cultivating demand for high-value-added products, such country and region. as VRV. Also, along with carefully selecting and executing In Europe, market conditions are expected to remain the needed investment for business growth, Daikin will harsh. Through developing more sales outlets and work to lower total cost and strengthen profitability. strengthening sales based on offering solutions packages In North America, aiming for a large sales increase in the that include services, however, Daikin will work to reach United States, where the economy is recovering, Daikin the No.1 market position and reorganize its sales network will bolster sales of residential unitary air conditioners and so that it can react quickly when the market recovers. The expand the solutions business in the applied solutions Group will bring total costs down by restructuring its fixed business line. The Group will also enter the premium seg- costs and strengthen its business base. ment of the residential unitary air-conditioner market as a In China, Daikin will continue to build its own retail sales new business line, and fully enter the mid-size building network, focusing on developing outlets across the coun- market, for which VRV products are the focus. Through try, including suburbs of large cities, the interior regions these efforts, Daikin will work to attain the No.1 market as well as the central western region. The Group will also position in short order. 15 ANNUAL REPORT 2014 Chemicals Water and oil repellent agents for clothing applications Current Increased Sales in the United States, China, and Other Asian Markets In fiscal 2014, chemicals business sales in Japan did not well, demand was robust in the auto sector in China and perform well; however, sales expanded in the United other overseas markets. Overall sales in this business line States, China, and other Asian markets. Combined with grew year on year. tailwind effects from the weakened yen, overall segment In the chemical products business, sales of OPTOOL, sales grew over the previous fiscal year. Operating income an anti-smudge surface coating agent for touch screens, decreased, however, as the supply-demand balance failed to grow, but water and oil repellent agents for cloth- worsened due to supply increases, causing price drops ing applications in China and other Asian markets per- that had a large adverse effect on Daikin. formed well. Overall, business line sales increased over the In fluorochemical resins, demand in China related to rail- previous year. way and telecommunications infrastructure investments In fluorocarbon gas, competition grew fiercer in China, recovered, and demand in the United States for auto and but sales grew in other Asian markets. Business line sales aerospace applications was strong. In fluoroelastomers as were maintained from levels of the previous year. 16 DAIKIN INDUSTRIES, LTD.Financial Highlights/At a GlanceA Message from the CEOInterview with the CEOReview of OperationsCorporate GovernanceFinancial Section Speed up application development in leading-edge fields Fluoropaint “Zeffle” with high weather resistance properties for painting ferry decks Future Cultivate New Demand Centered on New Application Development In the final three years of the FUSION 15 strategic man- across the globe. Doing so, Daikin will further establish a agement plan, Daikin will quicken development of new high- profitability business structure. applications in the global growth fields of the auto and In fiscal 2015, taking advantage of the recovery trend information device sectors. The Group will also speed up in demand, the Group will work to expand sales in auto, R&D of new energy field applications, such as new refrig- semiconductor, and infrastructure field applications. Daikin erants, Li-ion battery applications, and paint for wind tur- will also make efforts to improve competitiveness in its bines. With these measures, Daikin will work to expand solutions business, working closely with customers, with demand for its products. Furthermore, the Group will culti- an aim to strengthen overall sales capabilities. vate the environmental products market, using composite As sales prices continue to fall, Daikin will focus efforts technologies to combine fluorochemistry products with on securing profitability. In addition to cost reductions, in other materials, by applying, coating, or mixing. Daikin will high-value-added products, the Group will introduce fea- also use surface materials, including fluoropaints and fluo- tures not found in competing products, such as ease of roresin films in these environmental product development processing. In volume-zone products, the Group will efforts. Combined, Daikin will work to increase competi- launch low-cost, differentiated products that meet tiveness by localizing raw materials development and customers’ functional needs. procurement and by producing locally as well in markets 17 ANNUAL REPORT 2014 Oil Hydraulics Energy-efficient oil hydraulic drive unit “EcoRich” Oil hydraulics provide drive power to construction equipment and vehicles. Current Grew Business in the United States and China Future Continue to Develop Global Markets In the oil hydraulics business, Daikin offers equipment Aiming for growth globally, in China, the Group will re - to convert small power into larger power, and control inforce sales capabilities, cost-competitiveness, and its strength, speed, and direction smoothly in a variety of product lineup, mainly in molding- and general-industrial machinery and vehicles. machinery applications. In the United States, Daikin will Sales in this business segment increased in fiscal 2014 expand business, focusing on maintenance, repair, and over the previous year. Oil hydraulics equipment for indus- operations (“MRO”) solutions, with the recovery in the U.S. trial machinery performed strongly in Japan, and also in manufacturing sector as a tailwind. In Europe, Central and the United States as Daikin expanded its U.S. sales net- South America, and other Asian markets, Daikin will enter work. In construction equipment and vehicles, sales and new markets and work to improve profitability via develop- production have been combined in a single unit globally, ing the MRO solutions business. raising sales in Japan, the United States, and China. In Japan, Daikin will take measures to increase market share and profitability not only via unit sales, but also the solutions business. Due to recovery in capital expenditure at factories and increasing energy-saving needs due to power production issues, the Group will offer high-value- added services in technology consulting for customers, after-sales services, unit design, and other areas in the solutions business. 18 DAIKIN INDUSTRIES, LTD.Financial Highlights/At a GlanceA Message from the CEOInterview with the CEOReview of OperationsCorporate GovernanceFinancial Section Defense Expand sales of home-use oxygen therapy equipment in Japan and China Current Continued Shift to Civil Sector Future Expand Home-Use Oxygen Therapy Equipment in China In fiscal 2014, Japan’s Ministry of Defense continued to Going forward, Daikin expects Japan’s defense budget cut its budget, and orders for guided missile components to continue to be under pressure. As such, the Group is and artillery shells in the defense business decreased. working to restructure its business and improve efficiency Sales, thus, fell over the previous fiscal year. and profitability. Also, based on the Japanese govern- Daikin continued its steady shift to civil-sector products ment’s National Defense Program Guidelines, announced and in the home-use oxygen therapy equipment business. in December 2013, Daikin will work to capture new Daikin’s five-liter unit features the same small size and light demand from the Ministry of Defense in line with changing weight as a three-liter unit, and, thus, is highly praised. needs. Sales of this unit are robust. In civil-sector products, the Group will strengthen its product lineup by improving energy efficiency, ease of maintenance, and other product features in the oxygen therapy equipment business. Doing so, Daikin will make efforts to further expand sales of these products. Also, the Group will roll out these products, which will be launched in China in fiscal 2015, in other global markets. 19 ANNUAL REPORT 2014 Corporate Governance Fundamental Corporate Governance Concept The Daikin Group’s corporate governance systems are designed to help accelerate decision making and operational execution work in anticipation of and response to changes in management tasks and the management environment while concurrently promoting consistently high levels of manage- ment transparency and soundness, thereby seeking to increase the Group’s corporate value. Going forward, the Group will be striving to ensure the increasing sophistication of speedy management, the strengthening of consolidated management, and still-higher levels of soundness and trans- parency. In addition, to realize an increase in corporate value, the Group will continually consider and reevaluate its con- cepts regarding the most-appropriate forms of corporate gov- ernance as it pursues a diverse range of Group-level initiatives aimed at ensuring best practices throughout the Group. Management and Operational Execution Systems Rather than adopt a U.S.-style “committees system” that completely separates decision making from operational exe- cution, the Group has adopted an “integrated management” system that calls for directors to bear responsibility for man- agement responsibilities 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 decision making and operational exe- cution. In addition, the Group has introduced an Executive Officer System to accelerate the speed of execution based on autonomous judgments and decisions in units handling each region, division, and function. 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 2014, the Board of Directors included 12 members, including one female and two non-Japanese directors. The Board of Directors is making speedy strategic decisions and perform- ing sound supervision for the entire Group. Daikin’s Board of Directors included two external directors as of June 2014. Daikin seeks to recruit external directors who have abundant experience and deep insight and can, therefore, offer a sophisticated perspective on a broad range of issues as they participate in decision making and supervise management. Accordingly, experience as a top manager in a listed enterprise is a principal nomination criterion for external director recruitment. To ensure that the external directors can effectively contrib- ute to Daikin’s corporate governance system, the external directors are assigned assistants in the Management Planning Office who strive to provide the external directors with early notice of Board of Directors meetings. In addition, in the case that an external director is not able to attend a Board of Directors meeting, the assistants provide the external director with related materials and subsequently provide the external 20 director with an explanation of the proceedings of the meeting and provide other assistance. To further raise corporate governance and Group manage- ment as a multinational company, Daikin has put a Chief Global Group Officer position in place. Under this position, the Group strives to further improve cohesiveness across global operations. Shareholders’ Meeting Appointment, dismissal Audit Board of Directors Accounting Auditor Audit & Supervisory Board Appointment, supervision Audit & Supervisory Board Members Group Auditors Meeting 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 Executive Officers (The rest is abbreviated) Activities by External Directors Name Principal Activities Chiyono Terada Kosuke Ikebuchi Attended 15 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 propos- als 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 employees. Attended 14 out of 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 view- points concerning manufacturing, such as production innovation, cost reduction, and enhancement of reliability and productivity. Systems for Supporting Speedy Management The top deliberative unit in the Group’s management system is the Group Steering Meeting. This unit determines the direction of important management policies and strategies in a rapid and timely manner, thereby accelerating the resolution of issues. In addition, the Group Management Meeting aims to thor- oughly share information on important management policies and the basic strategies of the Group and support and expedite Group 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. DAIKIN INDUSTRIES, LTD.Financial Highlights/At a GlanceA Message from the CEOInterview with the CEOReview of OperationsCorporate GovernanceFinancial Section 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 manage- ment issues from an independent standpoint. Audit System Daikin employs an Audit and Supervisory Board and seeks to nominate two or more outside members to its Audit and Supervisory Board. The principal nomination criteria for exter- nal Audit and Supervisory Board members are the same as those for external directors and include independence from the Company in terms of not having a relationship of interest with the Company. As of June 2014, Daikin’s four Audit and Supervisory Board members included two external Audit and Supervisory Board members. The external Audit and Supervisory Board members 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 Audit and Supervisory Board receives reports on important issues relat- ed to management and performance when necessary and also investigates relevant units, confirms approval of docu- ments, and regularly exchanges opinions with representative directors, executive officers, and the independent auditors. To strengthen Groupwide auditing and auditing functions for all Group companies, including overseas subsidiaries, principal Group companies appoint Group auditors. The Audit and Supervisory Board members and Group auditors regularly hold Group Auditors’ meetings and otherwise work to increase the smoothness of information flows. Activities by External Audit and Supervisory Board Members Name Principal Activities Yoshiyuki Kaneda Ryu Yano Attending all 16 meetings of the Board of Directors and all 15 meet- ings for the Audit and Supervisory Board this fiscal year. From his broad and advanced perspective, Yoshiyuki Kaneda offered timely pro- posals as needed, especially in technology development, based on his abundant experience and deep insight as a corporate manager. Appointed on June 27, 2013, Ryu Yano attended 12 of the 13 meet- ings of the Board of Directors held since his appointment and all 10 meetings for the Audit and Supervisory Board. From his broad and advanced perspective, he offered timely proposals as needed, particu- larly with respect to overseas business, based on his abundant experi- ence overseas and deep insight as a corporate manager. Corporate Officer Remuneration, Etc. To ensure the transparent management of its corporate officer personnel and remuneration processes, Daikin has estab- lished the Compensation Advisory Committee. This commit- tee engages in discussions and deliberations regarding issues including corporate officer nomination criteria, corporate offi- cer candidates, and remuneration. The Committee consists of four members, including two external directors and two in-house directors, with the committee chair being chosen from the external directors. The remuneration of directors and corporate auditors is determined so as to fall within the aggre- gate remuneration ceiling for directors and corporate auditors as set by a resolution at 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 audi- tors’ remuneration is determined by a resolution of the Audit and Supervisory Board. Daikin’s corporate officer remuneration system is designed to accord with the Group’s management policy and responds to shareholders’ expectations by increasing corporate officers’ motivation to promote a sustained increase in Group perfor- mance 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 external 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 Audit and Supervisory Board Members Position Number of Individuals Total Compensation (Millions of yen) Directors Audit and Supervisory Board Members Total 12 6 18 979 89 1,069 Total Compensation for External Directors and External Corporate Auditors Position Number of Individuals Total Compensation (Millions of yen) Total Compensation for External Directors and External Audit and Supervisory Board Members 5 59 21 ANNUAL REPORT 2014Directors, Audit and Supervisory Board Members, and Executive Officers (As of June 27, 2014) Position(s) Responsibilities & Principal Jobs Name Chairman of the Board and Chief Global Group Officer Noriyuki Inoue President and CEO, Member of the Board 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 Member of the Board and Senior Executive Officer Member of the Board and Senior Executive Officer Member of the Board (non-resident) Member of the Board (non-resident) Audit and Supervisory Board Member (external) Audit and Supervisory Board Member (external) Audit and Supervisory Board Member Audit and Supervisory Board Member Guntaro 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 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 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 Takashi Matsuzaki Responsible for Air-Conditioning Research and Development (including Applied Solution Business and Refrigeration Business) and Global Procurement, General Manager of Shiga Plant, and Member of Technology and Innovation Center Preparation Office Koichi Takahashi Responsible for Accounting, Finance, Budget Operations and IT Development, General Manager of the Finance and Accounting Division, Chairman of Information Disclosure Committee, Chairman of Development Committee for Operational Adequacy Promotion System Frans Hoorelbeke Chairman of Daikin Europe N.V. David Swift Yoshiyuki Kaneda Former Officer of Sony Corporation Ryu Yano Chairman of the Board of Sumitomo Forestry Co., Ltd. Shigeru Murakami Kenji Fukunaga 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 Systems Business and General Manager of Tokyo Office Senior Executive Officer Kosei Uematsu Responsible for Global Air-Conditioning Business (excluding Japan) and Refrigeration Business 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, Department Manager of Corporate Communication Department and Department Manager of Corporate IR Group, and Chairman of CSR Committee, Chairman of Corporate Ethics and Risk Management Committee Senior Executive Officer Shinya Okada Responsible for Global Environment Affairs Senior Executive Officer Yoshikazu Tayama General Manager of Budget and Administration Group, Finance and Accounting Division Senior Executive Officer Yoshiyuki Uemura Director of Goodman Global Group, Inc., EVP for Cooperation and Strengthening Technological Capabilities, and President of Daikin Holdings (Houston), Inc. Senior Executive Officer Masayuki Moriyama Responsible for Applied Solutions Business in China, ASEAN and Oceania Regions, Director and Vice President of Daikin (China) Investment Co., Ltd., COO of McQuay China, Chairman (non-resident) of Daikin Refrigeration (Suzhou) Co., Ltd. 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 Hiroo Sakai Responsible for Chemicals Research/Technology Product Commercialization Promotion/Environment/Safety and General Manager of Chemicals Division Executive Officer Yoshihiro Mineno Executive Officer Hitoshi Jinno Executive Officer Kota Miyazumi General Manager of Global Operations Division, Director (non-resident) of Goodman Global Group, Inc., Director of Daikin Holdings (Houston), Inc. Responsible for PL/Quality, Air-Conditioning/Refrigeration/Applied, Manufacturing Excellence in the Emerging Countries, and Deputy General Manager of Air-Conditioning Manufacturing Division Responsible for Corporate Planning, General Manager of Marketing Research Division, Director of Planning Group in Marketing Research Division Executive Officer Executive Officer Tsutomu Morimoto Responsible for Executive Secretarial Department, Goodman Group Business Yuji Yoneda Deputy General Manager of Air-Conditioning Manufacturing Division (Responsible for R&D), Executive Leader of R&D Quality in Air-Conditioning Manufacturing Division Executive Officer Masaki Saji General Manager of Human Resources Division 22 DAIKIN INDUSTRIES, LTD.Financial Highlights/At a GlanceA Message from the CEOInterview with the CEOReview of OperationsCorporate GovernanceFinancial SectionCSR (Corporate Social Responsibility) The Daikin Group considers CSR to be fully living up to its Group Philosophy,*1 and works to do so each and every day. Also, the Group considers corporate ethics and legal compliance to be fundamental to CSR, and has put in place a global system to this end. Specific programs are enacted based on the ISO26000 interna- tional standard for CSR. This section of the Annual Report 2014 highlights the Group’s efforts in the seven pillars of ISO26000 (corporate governance,*2 compli- ance, human rights, labor practices, environment, quality and customer satisfaction, and contribution to society). *1 Please see page 1. *2 Please see page 20. Compliance and Risk Management L Compliance Daikin has established the Corporate Ethics and Risk Man age- ment Committee, with the senior executive in charge of compli- ance and corporate ethics as chair, as an organ for promoting corporate ethics throughout the Group. 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 confirm that compliance with respect to the regulations and manuals is rigorous. The results of checks are reported at monthly CRL meetings, and related information is shared at those meet- ings. 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. L 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 product liability, product quality, safety, manufacturing, marketing, and disasters) from a global per- spective and institute Groupwide systems for alleviating risks. Each year, after each division conducts its own risk assess- ment to identify major risks, Daikin drafts and implements individual divisional counter measures as well as Companywide countermeasures. Strengthening Overseas Operations: In step with rapid overseas expansion, the Daikin Group places great emphasis on compliance and risk management overseas. In accordance with conditions in each region and at each Group company, Daikin establishes compliance committees, drafts and distributes corporate ethics handbooks, conducts risk assessments, and supports employees in self-assessments. Also, risk management staff from headquarters regularly visit overseas Group companies to confirm progress of efforts in each region and share information. Daikin also works to incor- porate best practices from overseas Group companies to the parent company to raise sophistication across the Group. Reorganizing Earthquake Risk Measures: Daikin has set earthquake risk measures as themes of the utmost impor- tance, and has established teams to implement policy for each issue to tackle. Based on disaster damage scenarios (extremely strong earthquakes, extremely high tsunamis, etc.) from Japan’s Central Disaster Prevention Council, Daikin has reinforced production facilities for earthquake resistance, implemented tsunami plans for chemicals facilities, and for- mulated and held evacuation drills at locations susceptible to tsunamis. Daikin is also further building its business continuity planning (BCP) system, assessing many risks, and formulating and enacting action policies in this process. Group companies are also taking similar measures regarding natural disaster risks. Strengthening Policies on Client Entertainment and Gift Giving: The Daikin Group has set a compliance policy regard- ing client entertainment and gift giving of “Client entertainment and gift giving in moderation and according to social norms, following all national and regional regulations.” The Group has also set policies on “Maintaining fair and transparent relation- ships with government officials,” “Complying with the Political Funds Control Act and Public Offices Election Act,” and “Entertainment and gift giving in moderation to business part- ners.” The Group implements in-house training to ensure thor- ough compliance with these rules. In fiscal 2015, the Group plans to draft behavioral guidelines for entertainment and gift giving for public officials both domestically and overseas, and circulate these guidelines across the Group globally. 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 2.5% or higher and is seeking to set stable levels of dividends based on a comprehensive consid- eration of such factors as the Company’s consolidated performance, financial position, and funding requirements. 23 ANNUAL REPORT 2014Respect for the Exercise of Voting Rights: To enable share- holders to exercise voting rights after due consideration of resolution items, Daikin provides shareholders with invitations to general shareholders’ meetings and ancillary materials a week in advance of the statutory deadline. 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 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 pro- actively 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 shareholders and investors. Human Rights In October 2008, the Daikin Group joined the UN’s Global Compact, which is a strategic policy initiative representing universal principles on human rights, treatment of labor, and environmental protection. Through this, the Group works to educate staff on and promote human rights, and strives to build an organization rich in diversity, creativity, and respect for all people. To bring these ideals into being, Daikin conducts human rights training for different employee ranks, centered on senior executives. Daikin also supports employees in self-assessments on whether they have violated human rights, and conducts human rights seminars at Daikin divisions as needed. Respect for Human Rights: The Daikin Group Compliance Guidelines call for “Respecting human rights and diversity in the workplace and complying with all labor regulations.” Under a Respect for Human Rights policy, via which the 24 Group strives for a fair, cheerful, and lively workplace, the Group prohibits child labor and forced labor. • Group Compliance Guidelines (formulated 2008) http://www.daikin.com/csr/company/idea.html Human Rights Education: As part of efforts to promote human rights understanding, the Daikin Group conducts human rights education for different levels of staff, including senior executives, newly appointed managers, and newcomers to the Group. Also, Daikin’s employee newsletter contains arti- cles on human rights, and production facilities have held human rights catchphrase contests. Through this, Daikin is working to improve human rights consciousness amongst employees. Labor Practices The Daikin Group considers people to be the source of com- petitive strength. The Group works toward an organization that accepts, respects, and seeks harmony from all members regardless of sex, nationality, or ethnicity, and brings out each person’s abilities to the maximum. Evaluation and Working Conditions: Daikin seeks to build a workplace with equality of opportunity and fairness of outcome where people with the desire to grow are rewarded for taking opportunities and producing results. Promoting Diversity: Daikin is an organization that employs diverse people who respect different value systems regardless of age, gender, nationality, race, temporary or permanent employment status, and traditional or mid-career joining sta- tus. Daikin employees use this diversity and improve organiza- tion strength, and endeavor toward large goals. Daikin believes that this kind of organization serves as a primary source of the Group’s dynamic strength. In accordance with this concept, the Group Compliance Guidelines state “We shall respect the diversity in values and approach to work of all employees, accept differences, seek harmony, and gather strengths so that each and every employee can pursue his or her dreams boldly with passion and tenacity.” The Daikin Group also actively employs people with disabili- ties. In Japan, Daikin has established Daikin Sunrise Setsu, Inc., and as of the end of March 2014, people with disabilities account for 2.07% of domestic employees, which is above the legal requirement. In China, Daikin Air-conditioning (Shanghai) Co., Ltd. also actively employs people with disabili- ties; currently, 66 such persons are at the company. In fiscal 2014, Daikin invited family members of employees with disabili- ties to factory tours and social events, and made a sign- language brochure to facilitate communication between disabled persons and those without disabilities. Also, Daikin Industries (Thailand) Ltd. employs 23 people with disabilities, and Daikin Compressor Industries, Ltd. employs such 25 persons. DAIKIN INDUSTRIES, LTD.Financial Highlights/At a GlanceA Message from the CEOInterview with the CEOReview of OperationsCorporate GovernanceFinancial SectionWork-Life Balance: Daikin emphasizes measures for optimal work-life balances for employees. Daikin has introduced diverse work policies that offer flexible work modes and time schedules suitable for diverse employees. Also, as a company that has signed on to the Act on Advancement of Measures to Support Raising Next-Generation Children, Daikin has set action plans to build a workplace where employees with chil- dren can concurrently handle work and child-raising tasks with confidence and peace of mind. In particular, Daikin has strengthened its childcare leave and childcare support sys- tem, and encourages male employees to use these systems as well. In fiscal 2014, to support a smooth transition back to the workplace after childcare leave, Daikin established the “Hokatsu*1 Concierge.” From April 2014, the fourth action plan under the Act on Advancement of Measures to Support Raising Next-Generation Children is in execution. The Group is working to expand childcare support by introducing even more flexible work systems for early returners from childcare leave. Daikin is also expanding support by further bolstering the childcare support cafeteria plan system,*2 increasing the menu choices in this plan and increasing subsidies for early returners. *1 Hokatsu: “finding a daycare” *2 Childcare support cafeteria plan system: subsidy system for childcare services used when employees with children work overtime, go on business trips, or when the children are sick Labor Relations: The Daikin Group believes good labor rela- tions to be fundamental in management. As such, the Group considers the management-labor partnership and manage- ment-labor mutual trust to be highly important. At Daikin, all employees except for manager-class and contract employees are union members. Daikin and the union hold dynamic discussions, and when business plans are formulated, Daikin holds meetings to explain the new plans to the union. In fiscal 2014, such meetings were held 20 times. Occupational Safety and Health: In accordance with the Group Compliance Guidelines, which state “We shall take all possible precautions for safe operations so that we all can work in safety,” Daikin endeavors to ensure all employees and employees of subcontractors have 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” workplace at each of its facilities. Daikin also focuses on raising awareness of workplace safety via training involving simulated dangers associated with accidents. Daikin has built devices and systems where participants can see, touch, and feel what it is like to be caught in machines in which accidents are prevalent in machine manufacturing. Participants can also experience how scary heat and pressure resulting from chemical reactions is in chemicals manufacturing. Combined with principles-based knowledge education, Daikin holds effective training programs. Overseas as well, Daikin aims for zero work accidents through safety training and safety patrols. Daikin Industries Czech Republic s.r.o. holds the Green Cross Competition to compete for zero work- place injuries, and Daikin Compressor Industries, Ltd. in Thailand has constructed a training center inside the factory for safety training. Human Resource Development: Daikin considers enacting its management philosophy of “The pride and enthusiasm of each employee is the driving force of our Group,” and people- centered management to be essential for the Group to grow. The Group’s corporate philosophy states that “The combined growth of all Group employees, regardless of nationality or specific Group unit they are with, is the basis for the Group’s advancement.” Based on the concept that “people grow by means of work experience,” Daikin believes that on-the-job training (OJT)*1 is fundamental in human resource develop- ment to discovering the characteristics of each employee and assigning jobs that will bring motivation. To supplement the OJT, Daikin is bolstering various off-the-job-training (Off-JT)*2 programs, including the Daikin Managers’ School for develop- ing managers for the front lines of the Group’s global business. Overseas office training for younger employees is another example. From fiscal 2014, to improve management capabili- ties of manager-class employees, Daikin launched the Man- agement Dojo (for 450 people over two years). Training at this Dojo in fiscal 2014 focused on department general managers. *1 OJT: at-the-workplace learning of skills, knowledge, technologies, and attitudes needed for the job *2 Off-JT: off-site learning of skills, knowledge, technologies, and attitudes needed for the job Environmental Protection The largest societal problem that Daikin must contribute to solving is climate change resulting from greenhouse gas emis- sion. Daikin will use its strength in technology to contribute to this solution. Providing Energy-Saving Products: Through its products, Daikin is working to reduce CO2 emissions via 1) promoting the widespread use of energy-saving inverter products, 2) promoting the widespread use of heat pump solutions, which emit less CO2 than previous combustion-type heating devices, 3) growing its energy-saving solutions business, and 4) devel- oping next-generation refrigerants. For inverters, Daikin’s fac- tory in Suzhou, China launched production in April 2012 with annual capacity of 1.5 million units, and is manufacturing inverter air conditioners which are sold globally. In the Chinese market, residential-use inverter air conditioners have increased from 7% of the market in 2009 to about 60% (Daikin’s estimate). Via increased use of inverter products, 25 ANNUAL REPORT 2014 Daikin is aiming to reduce its emerging countries’ annual CO2 emissions by 30 million tons by fiscal 2016. As of fiscal 2014, the Group estimates that emissions have been reduced by 23 million tons. Going forward, Daikin will promote inverter prod- ucts in North America along with new emerging markets. For heat pump heating solutions, Daikin is undertaking a large-scale verification project for effectiveness in energy saving for heating and water heating in the U.K. This project, taken at the behest of the New Energy and Industrial Technology Development Organization, is scheduled for com- pletion in March 2017. Using this project, Daikin is working with national and local governments, and energy providers, to promote heat pump product usage. Daikin is also working with governments and industry participants across the globe in promoting the next-generation refrigerant R32, which great- ly contributes to ozone layer protection and preventing global warming. Developing and Marketing Low Global-Warming Factor Refrigerant: Freon, which traditionally has been the refriger- ant in air conditioners, has a greenhouse effect of several hundred times to 2,000 times the effect of CO2. As an air- conditioner manufacturer, the Daikin Group considers working toward developing and commercializing low global-warming factor refrigerants to be its duty. Daikin determined the next-generation refrigerant R32 to be optimal, and launched the refrigerant first in Japan in fiscal 2013. R32 features a global-warming factor of about one-third of the traditional refrigerant. R32 also has superior energy efficiency, with less refrigerant needed per air- conditioner unit, and is easily recy- clable and reusable. In November 2013, Daikin Europe N.V. launched sales of residential-use air conditioners that use R32. Sales in Australia were launched in January 2014, and, going forward, Daikin will launch in more markets to further expand market presence. To promote adoption of R32 in emerging markets, where air-conditioner demand is growing strongly, Daikin is providing the basic patents needed to manufacture and sell air condi- tioners that use R32 free of charge to emerging countries. Daikin also participates in support programs for emerging markets run by Japan’s Ministry of Economy, Trade, and Industry and the Japan International Cooperation Agency. Furthermore, the Group receives research groups from emerging countries and offers technology support for local manufacturers and dealers. Minimizing Environmental Impact of Production: With a view to reducing greenhouse gas emissions from production to one-fourth the fiscal 2006 level by 2020, in the FUSION 15 strategic management plan, Daikin aims to reduce emissions to one-third (67% below) of the fiscal 2006 level by fiscal 2016. As of fiscal 2014, a 69% reduction has been achieved. 26 Daikin is also making efforts to reduce water usage. In fiscal 2014, water (unit basis) usage at domestic Group companies was 5% lower than fiscal 2011 levels and 9% lower at over- seas Group companies. For reducing chemical compounds, in fiscal 2014, emissions of chemicals subject to PRTR regulations were 19% lower than fiscal 2011 levels. In fiscal 2006, Daikin established the “Super Green Heart Factory” in-house standards to certify factories with advanced environmental friendliness. As of fiscal 2014, 18 Daikin plants in Japan, China, Thailand, the United States, and other coun- tries have been certified as Super Green Heart Factories. Quality and Customer Satisfaction The Daikin Group seeks customer satisfaction by offering high- quality products anticipating society’s needs in each region. Ensuring Product Quality and Safety: As a manufacturer, Daikin considers its social mission to be providing products and services that not only satisfy customers, but that are safe, high quality, and friendly to the environment. Daikin has obtained ISO 9001 certification of its quality management systems in both its air-conditioning and chemicals businesses and is sustaining efforts at the R&D and manufacturing stages to further elevate product quality levels. Daikin discloses infor- mation with the goal of ensuring the safety of customers when they use Daikin products. In addition, Daikin collects informa- tion on products after sales and seeks to employ this informa- tion for further product quality improvements. In fiscal 2014, Daikin set thoroughly ensuring product quality as an issue of top importance and is making great efforts in policies for speeding up corrections to quality problems, reducing quality risks, and preventing problems from recurring. Pursuing Customer Satisfaction: To further raise customer satisfaction levels, it is critical to quickly and accurately grasp needs in each market overseas, and incorporate this into product R&D. In this, Daikin is moving from a unipolar R&D system in Japan to one where regional offices also conduct R&D themselves according to local strengths. Marketing research functions globally are also being strengthened. Furthermore, Daikin continuously runs customer satisfaction surveys domestically and abroad at all Group companies, and the results of these surveys are highly useful in further raising product and service quality. Customer Support: In Japan, for the air-conditioning business, the Daikin Contact Center accepts inquiries from all customers, 24 hours a day, 365 days a year. In fiscal 2014, to prevent customers getting different responses to questions or service requests from different Contact Center staff, Daikin systematized the practical know-how and rules of thumb of Contact Center staff, and made this system browseable by all DAIKIN INDUSTRIES, LTD.Financial Highlights/At a GlanceA Message from the CEOInterview with the CEOReview of OperationsCorporate GovernanceFinancial Section staff. Overseas as well, Daikin has put a strong after-sales service system in place, and under a policy of “fast, accurate, and kind,” meets customers’ diverse requests according to conditions in each country and region. Daikin has Contact centers in major countries, and via this support system strives to increase customer satisfaction. Social Contributions Aiming to be a company with deep roots in the many commu- nities throughout the world where it does business, Daikin organizes numerous kinds of activities that enable employees to lead the way in contributing to local societies. These activi- ties center on the themes of “environmental protection,” “art and culture,” “promoting sports,” and “support for education.” Environmental Protection: Daikin promotes reforestation programs throughout the world to contribute to protecting biodiversity and reducing atmospheric CO2 levels. The Group undertakes a variety of efforts to restore the natural environ- ment to vitality and maintain balance in the ecosystem, part- nering with governments, local communities, and NGOs. Examples include a reforestation program in Indonesia and environmental protection and renovation programs on Japan’s Shiretoko Peninsula. In Indonesia, in partnership with international NGO Conservation International, Daikin launched the Reforestation Project in June 2008 in Gunung Gede Pangrango National Park to restore deforested areas and help the ecosystem recover. From fiscal 2015, Daikin will expand these efforts to Brazil, Cambodia, India, China, and Liberia, and contribute globally to sustainable reforestation and community develop- ment. In Japan, since July 2011, Daikin has worked with the Shiretoko Nature Foundation, Shari Town, and Shiretoko Rausu-Town in supporting efforts in preserving and restoring the natural environment of the Shiretoko Peninsula, a UNESCO World Heritage Site. For the five years until March 2016, via financial support and employees volunteering, Daikin is working to restore the forests and waterways of Shiretoko, and supporting programs for people and bears to coexist. In May and September of fiscal 2014, 25 people volunteered in maintaining and expanding barriers to protect saplings from deer and cutting underbrush to help saplings grow. Art and Culture: To promote art and culture, Daikin has established the Daikin Foundation for Contemporary Arts, which supports exhibitions, lectures, academic research, pub- lishing programs, and other activities of the National Museum of Art, Osaka. In April 2013, the foundation became a public interest incorporated foundation, and is actively pursuing its areas of activity. Through this, Daikin aims to further invigorate the arts and culture in Osaka, Daikin’s birthplace. Daikin also supports the Kansai Philharmonic Orchestra, which is based in Osaka. From 2004, Daikin’s Chairman has served as Chairman of the Orchestra. Overseas also, Daikin sponsors music events and other events and is fostering local culture. Promoting Sports: Daikin sponsors the Daikin Orchid Ladies Golf Tournament, an LPGA of Japan Tour event held in Okinawa each spring. Daikin’s aim is for the event to be a bridge between Okinawa and mainland Japan through golf. Support for Education: Daikin provides support for the education of young people in each region where it has a facili- ty. In fiscal 2014, Daikin signed on to the “Program to Raise Creative Children that Like Science” run by Sakai City’s Board of Education. Daikin employees served as teachers in science experiment classes for about 990 students at 11 elementary schools. R&D and Intellectual Property Respect for Intellectual Property Rights: Daikin considers intellectual property (IP) to be a critical corporate asset, and striving to protect it and use it effectively is made clear in Daikin’s Group Compliance Guidelines. The guidelines also make clear that other firms’ IP is to be respected and not infringed upon. With this in mind, Daikin has incorporated specific compliance points in its Compliance Policies. The policies call for R&D managers to realize that they are respon- sible for patents, and for R&D staff to realize that “IP activities are the essence of R&D efforts,” and proactively obtain patents, use them, and prevent infringement. Daikin has a patent and compliance review system in place as part of the design review process for new product and technology development. Also, when cooperating with other companies in R&D, Daikin works to separate technologies and know-how into those that must be kept secret and those that need not be. Those determined to be secret are shown in black-box form. To actively support R&D staff, IP efforts at Daikin are undertaken mainly by the legal and compliance teams, and the IP Center. IP officers are also placed in R&D teams in all business lines. These IP managers work together to handle day-to-day IP work (including patent applications, application follow-ups, analyzing infringement risk of other companies’ patents, and dealing with infringements on Daikin patents). The officers also hold IP training for Daikin employees in different functions and at different seniority levels, promote new inventions, and promote strategic use of IP. To this end, together with R&D staff, the IP officers are strengthening func- tions to build an effective patent network as well as functions in Daikin’s global patent research. 27 ANNUAL REPORT 2014 Eleven-Year Financial Highlights Daikin Industries, Ltd. and Consolidated Subsidiaries Years Ended March 31 Operating Results (for the year): Net sales Gross profit 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 flow (Note 3) Net cash provided by (used in) financing 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 profit margin Operating income margin EBITDA margin Return on shareholders’ equity (ROE) Shareholders’ equity ratio 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Millions of yen ¥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 ¥911,749 312,688 231,934 27,204 80,754 115,315 45,420 ¥ 83,725 (305,251) (221,526) 245,975 ¥1,161,364 456,074 397,542 ¥ 172.66 1,511.47 28.00 34.30% 8.86 12.65 12.31 34.23 ¥1,291,081 ¥1,202,420 ¥1,023,964 ¥1,160,331 ¥1,218,701 ¥1,290,903 ¥1,783,077 ¥103,329 ¥ 62,238 ¥129,227 441,549 313,451 32,075 128,098 179,469 74,822 (76,428) 26,902 3,367 356,928 545,641 ¥ 262.24 1,867.79 38.00 9.92 13.90 15.87 45.09 363,660 302,266 30,535 61,394 118,325 21,755 (99,302) (37,065) 48,382 417,919 471,686 ¥ 74.51 1,615.98 38.00 5.11 9.84 4.28 42.21 319,301 275,263 28,220 44,038 96,462 19,391 (39,848) 89,379 (34,942) 399,313 496,179 ¥ 66.44 1,701.29 32.00 4.30 9.42 4.01 43.54 361,665 286,210 30,771 75,455 127,168 19,873 ¥78,411 (23,306) 55,105 (37,623) 371,902 290,709 32,987 81,193 131,719 41,172 ¥44,967 (62,955) (17,988) (1,113) 388,046 299,419 33,569 88,627 140,151 43,585 ¥103,161 (218,386) (115,225) 143,520 566,861 411,786 40,177 155,075 233,976 91,880 ¥179,713 (80,835) 98,878 (38,249) 372,481 487,876 389,891 502,309 705,871 618,118 693,943 802,344 ¥ 68.14 1,672.74 36.00 ¥ 141.37 1,725.64 36.00 ¥ 149.73 2,123.10 36.00 ¥ 315.21 2,749.76 50.00 6.50 10.96 4.04 43.08 6.66 10.81 8.30 43.28 6.87 10.86 7.78 35.61 8.70 13.12 12.94 39.87 34.20% 30.24% 31.19% 31.17% 30.52% 30.06% 31.79% ¥1,210,094 ¥1,117,418 ¥1,139,656 ¥1,132,507 ¥1,160,564 ¥1,735,836 ¥2,012,531 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) 160 120 80 40 0 (¥ billion) 100 80 60 40 20 0 04 05 06 07 08 09 10 11 12 13 14 04 05 06 07 08 09 10 11 12 13 14 04 05 06 07 08 09 10 11 12 13 14 (¥ billion) 1,800 1,500 1,200 900 600 300 0 28 Daikin inDustries, LtD.Financial Highlights/At a GlanceA Message from the CEOInterview with the CEOReview of OperationsCorporate GovernanceFinancial Section 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Millions of yen Operating Results (for the year): Net sales Gross profit 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 flow (Note 3) Net cash provided by (used in) financing activities Total assets Financial Position (at year-end): Total interest-bearing liabilities Total shareholders’ equity Per Share Data (yen): Net income (basic) Shareholders’ equity Cash dividends Ratios (%): Gross profit margin Operating income margin EBITDA margin Return on shareholders’ equity (ROE) Shareholders’ equity ratio Notes: ¥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 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 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) 172,995 340,523 ¥ 152.11 1,293.41 22.00 8.39 12.09 13.11 47.53 ¥911,749 312,688 231,934 27,204 80,754 115,315 45,420 ¥ 83,725 (305,251) (221,526) 245,975 456,074 397,542 ¥ 172.66 1,511.47 28.00 8.86 12.65 12.31 34.23 33.98% 35.14% 34.04% 34.30% 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. ¥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 ¥1,783,077 566,861 411,786 40,177 155,075 233,976 91,880 ¥179,713 (80,835) 98,878 (38,249) ¥716,440 ¥1,161,364 ¥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 ¥2,012,531 693,943 802,344 ¥ 262.24 1,867.79 38.00 ¥ 74.51 1,615.98 38.00 ¥ 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 ¥ 315.21 2,749.76 50.00 34.20% 9.92 13.90 15.87 45.09 30.24% 5.11 9.84 4.28 42.21 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 31.79% 8.70 13.12 12.94 39.87 Research and Development Expenses Shareholders’ Equity Total Assets (¥ billion) 50 40 30 20 10 0 (¥ billion) 1,000 800 600 400 200 0 (¥ billion) 2,500 2,000 1,500 1,000 500 0 04 05 06 07 08 09 10 11 12 13 14 04 05 06 07 08 09 10 11 12 13 14 04 05 06 07 08 09 10 11 12 13 14 29 ANNUAL REPORT 2014 Financial Review Overview of Net Sales Looking at economic conditions throughout the world during fiscal 2014, the U.S. economy recovered steadily supported by strong consumer spending and a recovering housing market. The European economy remained weak due to fiscal austerity measures, high unemployment, and weak economies in southern Europe. Growth in emerging economies slowed down steadily. In Japan, due to effects from the government and Bank of Japan policies, corporate profits and capital expenditures are recovering, and the economy is improving steadily. Consumer spending, in particular, was strong on the back of high demand before the consumption tax rise. Overall in fiscal 2014, the Group was able to boost its consolidated net sales and profits thanks to the growth of air-conditioner refrigeration equip- ment business sales in Japan, China, elsewhere in Asia, and other regions. The weakened yen also was a positive factor. Furthermore, the Goodman Group of the United States, acquired in November 2012, was brought into consolidation from the first quarter of the year, which brought Goodman’s sales and profits into accretion. Overall, consolidated net sales set a new record at ¥1,783.1 billion, up 38.1% from the level in the previous fiscal year. Cost of goods sold as a percentage of net sales improved 1.7 percentage points, to 68.2%. Gross profit amounted to ¥566.9 billion, up ¥178.8 billion, and the gross margin for the fiscal year was 31.8%. Consolidated operating income increased 75.0% year on year, to ¥155.1 billion. Currency Exchange Rates The yen depreciated substantially against the U.S. dollar and euro compared to the previous year’s levels, and the average currency exchange rate during the fiscal year was ¥100 to one U.S. dollar and ¥134 to one euro. As a result of these movements in foreign currency exchange rates, Daikin consolidated net sales were estimated to be ¥161.0 billion higher and operating income ¥16.0 billion higher than they would have been without movements in exchange rates. Yen-U.S. dollar rate Yen-euro rate Fiscal 2013 ¥ 83 ¥107 Fiscal 2014 ¥100 ¥134 SG&A Expenses and Operating Income As a result of a rise in personnel expenses and product warranty allowances associated with business expansion in the air-conditioner refrigeration equipment business, SG&A expenses increased to ¥411.8 billion (37.5% higher year on year). The ratio of SG&A expenses to net sales was 23.1%, almost the same level as in the previous fiscal year. Operating income grew 75.0%, to ¥155.1 billion, and the operating income margin rose 1.8 percentage points, to 8.7%. R&D Expenses R&D expenses included in cost of goods sold and SG&A expenses amounted to ¥40.2 billion and corresponded to 2.3% of net sales. • Air-Conditioning and Refrigeration Equipment R&D expenses for air-conditioning and refrigeration equipment operations totaled ¥35.0 billion. Daikin launched the Urusara 7 residential-use air conditioner in November 2012. This product received the Prime Minister’s Award in the Fifth Japan Craftsmanship Awards held by the Ministry of Economy, Trade and Industry, the first home appliance product to win this award. In industrial heating and cooling systems, Daikin launched FIVE STAR ZEAS, an air-conditioning system for stores and offices that is the first commercial air conditioner to use the new refrigerant HFC32 (R32). In residential-use air purifiers, Daikin launched Clear Force Z, a premium air purifier capable of controlling room humidity and purifying the air in a single unit. Domestic and Overseas Sales Operating Income and Operating Income Margin (¥ billion) 1,800 1,500 1,200 900 600 300 0 (¥ billion) 180 150 120 90 60 30 0 Net Income (¥ billion) 100 80 60 40 20 0 (%) 12 10 8 6 4 2 0 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 Domestic Overseas sales Operating income Operating income margin 30 Daikin inDustries, LtD.Financial Highlights/At a GlanceA Message from the CEOInterview with the CEOReview of OperationsCorporate GovernanceFinancial Section In North America, Daikin launched sales of a high-efficiency compact Other Income (Expenses) and Net Income air-cooled scroll chiller (30-70 ton) in November 2013. In China, the Group introduced a DC brushless inverter fan coil unit capable Reflecting record-high sales and operating income, and a much smaller of cutting energy use by 30%-60% over standard fan coil units sold by Daikin. write-down of investment securities than what was recorded in the previous In Europe, Daikin developed an ultra-large 3,000-ton turbo cooling system year, net income amounted to ¥91.9 billion, 110.8% higher than in the that features a two-stage compressor and that can cool large spaces in the previous fiscal year. Middle East and other areas. To answer calls for greater environmental friendliness in products, the Group also introduced an air-cooled DC inverter Dividend Policy and Dividends Applicable multi-scroll chiller that can greatly reduce part load power usage. to the Fiscal Year • Chemicals Daikin strives to continue to make strategic investments and expand its busi- R&D expenses for Chemicals operations totaled ¥4.3 billion. ness, and improve operations, including reducing overall costs and strengthen- Daikin’s chemicals business conducts R&D for new products and new ing its financial position. Through these efforts, Daikin seeks to be a truly global applications based on rich experience in fluorine products and fluorochemical excellent company, raise corporate value, and improve shareholder returns. technology. In fluoropolymer resins and fluororubbers, using fluorochemicals’ The Group seeks to provide a stable and continuous return to shareholders. good properties in heat resistance, low drug reactivity, and dielectric proper- Previously, Daikin set a policy of maintaining at least a 2.0% consolidated ratio ties, Daikin is developing new differentiated products for automotive, semicon- of dividends on equity (DOE). Going forward, the Group will raise this target to ductor, and wire and cable (IT field) applications. Also, in recent years, demand 2.5% in a stepwise fashion. Always keeping dividend payouts in mind, the for the fluorocoating OPTOOL for preventing fingerprint contamination for touch Group will work to further strengthen shareholder returns. screens on IT devices has grown strongly. Sales, R&D, and production divisions Internal reserves will be applied to strategic investments aimed at expanding are working closely to develop and manufacture products ideal for the market business operations and increasing competitiveness by such means as further in a speedy manner and actively meet this great change in demand. strengthening management systems, accelerating the development of global businesses, and accelerating the development of environmentally conscious • Other operations products. R&D expenses for oil hydraulics, defense systems, and other operations totaled For the year ended March 31, 2014, Daikin distributed a total annual cash ¥913 million. dividend of ¥50 per share (interim dividend of ¥23 per share and a year-end In oil hydraulics, Daikin is commercializing a large-capacity series of dividend of ¥27 per share), a ¥14 increase from the previous fiscal year. The products and developing new applications. The Group is doing so using its high DOE ratio was 2.1%. energy-efficiency and high-functionality hybrid oil hydraulic system technology that combines oil hydraulic technology and inverter technology. In defense Performance by Business Segment systems, Daikin conducts R&D for components for guided missiles and artillery shells for Japan’s Ministry of Defense. • Air-Conditioning Total sales of the air-conditioning and refrigeration equipment segment increased to ¥1,592.9 billion, up 42.2% from the previous fiscal year. Operating income increased 95.3%, to ¥138.5 billion. Selling, General and Administrative Expenses Revenues by Segment Segment Profit (Loss) (¥ billion) 480 360 240 120 0 (¥ billion) 1,800 1,500 1,200 900 600 300 0 (¥ billion) 160 120 80 40 0 -40 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 Air conditioning Chemicals Other Air conditioning Chemicals Other 31 ANNUAL REPORT 2014 Unit Sales of Air-Conditioning Systems in the Japanese Air-Conditioning Industry (Fiscal 2014) (1,000 units) Residential use Commercial use First half 5,788 438 Year on year 104% 100% Second half 3,634 397 Year on year 124% 116% Full year 9,422 835 Year on year 111% 107% Japan launch of highly cost-competitive air conditioners for stores in emerging Industry demand was robust in Japan’s commercial air-conditioning equipment markets, and increased sales of multi-unit air conditioners for buildings in market, owing to strong demand ahead of the consumption tax rise and higher Turkey. The residential heat pump water and room heating system business construction starts. In November 2013, Daikin launched FIVE STAR ZEAS, an expanded year on year. Demand fell in the major market of France, but store air-conditioning system for stores and offices that is the first commercial air development in central Europe, Italy, and Spain drove overall results conditioner to use the new refrigerant HFC32 (R32). This product was awarded higher. the Director General Prize of the Agency of Natural Resources and Energy for excellent energy conservation equipment in the fiscal year ended March 2013. • China Centered on this product, Daikin worked to expand sales of high-value-added In China, due to tightened monetary policy, new large-scale real estate and products that feature superior energy efficiency and environmental friendliness, building projects decreased, although consumer demand remained robust. which drove commercial air- conditioning equipment sales higher over the Daikin has long focused on retail sales in China, and thus effects of macro- previous fiscal year. economic conditions are lessened. Therefore, the Group was able to achieve In Japan’s residential air-conditioning market, industry demand was at year-on-year growth in sales of both residential and commercial air-condition- record high levels thanks to favorable weather, strong demand ahead of the ing systems. In 2013, full model changes were undertaken for all products to consumption tax rise, and growth in new housing starts. Centered on the quicken product differentiation, particularly in the commercial air-conditioning Urusara 7 room air conditioner, Daikin increased unit sales, particularly of systems market. Also, the product lineup aimed at regional cities was strength- energy-efficient products. This caused an overall increase in residential ened, and the sales network was expanded across the country. Within this, via air-conditioning business sales. Overseas • Europe Region the rollout of the Group’s PROSHOP network of exclusive retail sales outlets, Daikin is promoting sales tailored to local needs and winning new customers. Together with a product strategy that added multi-type air conditioners to room units, market share in the residential air-conditioning market expanded. In Europe, the EU area economy showed signs of recovery, and demand was Sales of air purifiers also grew as that market continues to expand on the relatively strong in emerging markets. Overall sales in the region grew over the back of increased consciousness of environmental and air quality. In large- previous year. Sales of residential air-conditioning systems grew year on year, scale (applied) air-conditioning systems, growth in new construction and thanks to strengthened marketing of low-cost room air conditioners and government projects slowed, but sales of chillers and air-handling units to increased sales in Turkey. private-sector customers increased. Maintenance and service business sales In commercial air-conditioning systems, Daikin’s sales expanded over the in these systems also increased, driving sales higher in this business line. previous year, due to construction demand bottoming in EU countries, the Composition of Sales Others 2.8% Chemicals 7.9% 32 Research and Development Expenses Air-Conditioning 89.3% (¥ billion) 48 36 24 12 0 2010 2011 2012 2013 2014 Daikin inDustries, LtD.Financial Highlights/At a GlanceA Message from the CEOInterview with the CEOReview of OperationsCorporate GovernanceFinancial Section • Asia/Oceania Region over the previous year. Demand in Japan from the semiconductor and auto The residential housing market in Thailand was weak due to slowing growth sectors started to recover; however, sales slipped year on year. Sales of and instability in the government; thus, sales were flat year on year. However, fluororubber products were up year on year, owing to strong demand mainly results in Australia, Malaysia, and Singapore were robust. Moreover, in India, from the auto sector in China and other overseas markets. As a result, total Vietnam, Indonesia, and other emerging markets, thanks to expansion of the sales of fluoropolymers were above the level of the previous year. sales network, sales of residential and commercial air-conditioning systems In the chemical products sector, demand for water and oil repellents fell both experienced double-digit growth. Thus, overall, sales in this region grew in Japan, but demand from apparel applications in China recovered. Thus, markedly over the previous year. • Americas Region sales in this business line expanded over the previous year. R&D work for new applications in anti-smudge surface coating agents for touch screens progressed, but existing demand dropped. Therefore, sales in this business Non-residential building starts are on a recovery trend in North America, but declined year on year. In other chemical products, demand for etching competition remains fierce in large-scale (applied) air-conditioning systems. solutions for semiconductors did not improve; thus, sales were flat year on However, sales increased year on year in the region stemming from expanded year. Driven by overseas sales of water and oil repellents, overall chemical unit volume thanks to a strengthened store network, expanded after-sales products sales increased year on year. service business, and strong exports to Central and South America. Sales of fluorocarbon gas products were flat compared to the level in the In the residential air-conditioning systems market, shipments were strong previous fiscal year as demand did not significantly change globally. in step with the recovery in residential housing starts. In the commercial air-conditioning systems market, sales grew year on year, thanks to recovery • Others in the construction sector. Orders were particularly strong for school and other Total sales in the others segment amounted to ¥50.0 billion, up 7.6% from the government-related projects. Overall, regional sales were up strongly over previous fiscal year. The segment’s operating income increased 96.4%, to the previous year due to such factors as Goodman becoming a consolidated ¥2.4 billion. subsidiary. • Chemicals Daikin’s oil hydraulic equipment business for industrial machinery main- tained robust sales in Japan and the United States; thus, sales in this business line grew year on year. Sales of oil hydraulic equipment used in construction In the chemicals segment, despite positive effects from a weaker yen, the machinery and motor vehicles were also strong, reflecting healthy demand supply-demand balance worsened due to increased supply, which pushed from key customers in Japan and also from overseas. prices down. The Daikin Group’s total sales in the segment increased 12.7% Sales in the defense business sector declined over the previous year, owing from the previous year, to ¥140.2 billion, but operating income fell to ¥14.2 to a fall in orders from Japan’s Ministry of Defense for artillery shells and billion, down 14.0% from the previous year. guided missile components. Sales of home-use oxygen therapy equipment Sales of fluoropolymer resins grew year on year, thanks to recovery in were strong. infrastructure spending in China, centered on railways and telecommunica- Electronic systems business sales exceeded the level in the previous year tions, and also thanks to strong demand from the auto sector. In the U.S. on sales growth in database systems for design and development applications, market, sales for LAN cable applications were stagnant, but demand from the together with moderate recovery in IT investments. auto and aerospace sectors was relatively robust. Thus, revenues increased Total Assets Working Capital and Current Ratio Total Shareholders’ Equity and Shareholders’ Equity Ratio (¥ billion) 2,400 1,800 1,200 600 0 (¥ billion) 500 400 300 200 100 0 (%) 250 200 150 100 50 0 (¥ billion) 1,000 800 600 400 200 0 (%) 50 40 30 20 10 0 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 Working capital Current ratio Shareholders’ equity Shareholders’ equity ratio 33 ANNUAL REPORT 2014 Outlook for Fiscal 2015 Assets, Liabilities, and Total Equity In the global macroeconomy, it appears that the pace of recovery in the United • Assets States is quickening centered on private demand, and European economies At the end of fiscal 2014, current assets amounted to ¥967.9 billion, up appear to have bottomed out. Growth in emerging markets, China and India in ¥164.5 billion from the end of the previous fiscal year, owing to factors particular, is expected to continue slowing. including an increase in cash and cash equivalents and trade receivables. In Japan, the economy is expected to temporarily slow down in reaction to Noncurrent assets were ¥112.2 billion higher than at the end of the previous the high demand immediately before the consumption tax rise in April 2014. fiscal year, at ¥1,044.7 billion, due to purchases and valuation changes of However, supported by government economic policy and recovery in exports, investment securities as well as other factors. Total assets amounted to the economy is expected to continue expanding, albeit at a slower pace. Using ¥2,012.5 billion, up ¥276.7 billion from the end of the previous fiscal year. the plan formulated last year for the final three years of the FUSION 15 strategic management plan as a pillar, for fiscal 2015, ending March 31, • Liabilities and Total Equity 2015, Daikin has instituted the Group policy “Combine the Group’s strengths Total liabilities rose to ¥1,188.2 billion, up ¥88.3 billion from the end of the and follow through.” In accordance with this policy, the Group is striving to previous fiscal year, partially owing to an increase in trade payables. The flexibly and quickly respond to changes in its operating environment as it seeks interest-bearing debt to total assets ratio improved to 34.5%, from 40.7% at to maintain a balanced emphasis on both medium- to long-term corporate the end of the previous fiscal year. development and short-term profitability going forward. Despite a decrease due to cash dividend payments, net assets increased Specifically, the Daikin Group will strive to increase sales by fundamentally ¥188.4 billion, to ¥824.3 billion, due to factors including net income for the strengthening sales capabilities by developing new markets and expanding its year and foreign currency translation adjustments booked in equity. sales network in China and other regions. The Group will also work to build a solutions business by strengthening service and maintenance offerings. Daikin, Capital Investment and Depreciation furthermore, will make efforts to grow its environmental innovations business, including developing next-generation refrigerants and building a heating In accordance with the Daikin Group’s fundamental strategy of concentrating equipment business. With these measures, Daikin will vigorously push forward management assets in business fields that offer high profitability, the Group its growth strategy. At the same time, the Group will carefully select invest- made total capital investments of ¥59.4 billion in fiscal 2014, largely in the ments and strive to increase efficiency in administrative departments to air-conditioning and chemicals business fields. In the air-conditioning field, fundamentally lower fixed costs. Through this, Daikin will make initiatives to Daikin invested ¥10.3 billion, mainly for R&D related to room air conditioners further build a profitable business structure and aim to increase sales and and package air conditioners and for rationalization objectives. At Goodman profits. Global Group, Inc., investments of ¥4.8 billion were made primarily to increase Daikin’s performance outlook on a consolidated basis for fiscal 2015 is capacity. In the chemicals field, the Group invested ¥7.7 billion, mainly for for an 11.0% increase in net sales, to ¥1,980.0 billion, a 9.6% increase in increasing production capacity and for rationalization objectives, and Daikin operating income, to ¥170.0 billion, and a 6.7% increase in net income, to Fluorochemicals (China) Co., Ltd., implemented ¥6.6 billion in capital invest- ¥98.0 billion. Foreign currency exchange rates assumed for fiscal 2015 are ments, mainly for increasing its production capabilities. The main sources of ¥132/euro and ¥98/U.S. dollar. funds for these investments were bank borrowings and retained earnings. The depreciation expense amounted to ¥55.1 billion, up ¥15.7 billion from the previous fiscal year. Capital Investments and Depreciation and Amortization (¥ billion) 75 60 45 30 15 0 ROA (%) 5 4 3 2 1 0 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 Capital investment Depreciation and amortization (excluding amortization of goodwill) ROE (%) 15 12 9 6 3 0 34 Daikin inDustries, LtD.Financial Highlights/At a GlanceA Message from the CEOInterview with the CEOReview of OperationsCorporate GovernanceFinancial Section Cash Flows By means of this acquisition, Daikin intends to reinforce Goodman’s sales network—the largest sales network in the U.S. residential and commercial Net cash provided by operating activities amounted to ¥179.7 billion, up ¥76.6 air-conditioning equipment market—through the launch of environment-friendly billion compared with the previous fiscal year, due to factors including the products incorporating Daikin’s state-of-the-art environmental technologies. Doing increase in income before income taxes and minority interests. Net cash used this, Daikin aims to bring about new trends in the U.S. air-conditioner market that in investing activities amounted to ¥80.8 billion, ¥137.6 billion less than that will enable the Group to realize business expansion and contribute to environmen- used in the previous fiscal year. In fiscal 2013, Daikin acquired Goodman, tal protection. Furthermore, Daikin hopes to further improve its competitiveness by which accounted for the cash outlay in that year. Net cash used in financing leveraging Goodman’s low-cost management know-how to develop business in activities amounted to ¥38.2 billion. Cash flow in this category fell ¥181.8 emerging economies and volume-zone markets. Daikin also hopes to use this billion from the cash provided in the previous year, as funds were borrowed know-how to reform the Group’s earnings structure, including at operations in and bonds issued to finance the Goodman acquisition. As a result of these advanced economies. There is a possibility that the degree of progress toward changes, cash and cash equivalents as of March 31, 2014 amounted to realizing those objectives could impact the Daikin Group’s performance. ¥257.3 billion, up ¥71.7 billion from the previous fiscal year-end. Principal Risks Associated with the Daikin Group’s Operations • Cold summer weather and other unusual weather patterns accompanied by changes in demand for air conditioners Air-conditioning and refrigeration operations accounted for 89.3% of the Daikin Group’s consolidated net sales in fiscal 2014. Therefore, the Group strives to • Sharp changes in politico-economic conditions accurately monitor weather information and weather-related demand trends in or supply-demand relationships in principal markets the world’s principal markets. It also employs flexible manufacturing methods The Group provides goods and services throughout the world, and there is a and marketing policies designed to minimize the impact of those demand possibility that Group performance could be impacted if politico-economic trends on its performance. However, depending on the magnitude of demand changes occur in such markets as Japan, Europe, North America, China, and changes resulting from cold summer weather or other unusual weather other countries in the Asian region. patterns, there is a possibility that the Group’s performance could be impacted. In particular, the Group is proactively developing business operations outside Japan through measures including constructing new air-conditioning • Large fluctuations in currency exchange rates equipment manufacturing facilities and acquiring air-conditioning equipment Overseas sales accounted for 71.2% of the Daikin Group’s consolidated net dealers in Europe as well as establishing manufacturing and marketing sales in fiscal 2014. The acceleration of global business development going companies in China. There is, thus, a possibility that the Group’s performance forward is expected to further elevate this overseas sales ratio. Consolidated could be impacted by business environment changes in one or more global financial statements are prepared by translating local currency-denominated regions. These changes could include the deterioration of economic conditions, items for Group operations in each global region, including sales, expenses, raw material price surges, and/or the intensification of competition with other and assets. Accordingly, depending on currency exchange rates at the time of companies. In the United States, on November 1, 2012, Daikin completed all the currency translation, there may be an impact on yen translation values procedures for the acquisition of Goodman Global Group, Inc. (Head Office: even when there has been no change in local currency-denominated figures. Houston, Texas—hereinafter, “Goodman”) for a purchase price of US$3.7 In addition, because the Group engages in foreign currency-denominated billion (including the refinancing of Goodman’s existing debt). transactions in raw materials and component procurement and in the sale of Free Cash Flow (¥ billion) 120 60 0 -60 -120 2010 2011 2012 2013 2014 goods and services, there is a possibility that changes in currency exchange rates could impact manufacturing costs and sales performance. To avoid such currency exchange rate-related risks, the Group undertakes short-term risk hedging via forward exchange contracts and similar instruments. Daikin also undertakes medium- to long-term measures to continuously adjust procure- ment and manufacturing operations and optimize them for changing currency exchange-rate trends, and to balance imports and exports in each currency. Through this, the Group works to realize a business structure that is not greatly impacted by changes in currency exchange rates. However, currency exchange rate-related risks cannot be completely avoided. The Group also recognizes significant risks associated with the following items. • Major product quality claims • Major problems in manufacturing • Major changes in the market prices of securities and other assets • Impairment of long-lived assets • Natural disasters 35 ANNUAL REPORT 2014 Consolidated Balance Sheet Daikin Industries, Ltd. and Consolidated Subsidiaries March 31, 2014 ASSETS Current assets: Cash and cash equivalents (Notes 7 and 15) Trade receivables (Notes 6, 7 and 15): Notes Accounts Allowance for doubtful receivables Inventories (Notes 3 and 7) Deferred tax assets (Note 11) Prepaid expenses and other current assets Total current assets Property, plant and equipment (Note 7): Land Buildings and structures Machinery and equipment Furniture and fixtures Lease assets (Note 14) Construction in progress Total Accumulated depreciation Net property, plant and equipment Investments and other assets: Investment securities (Notes 4 and 15) Investments in and advances to unconsolidated subsidiaries and associated companies Goodwill (Note 5) Customer relationships Other intangible assets Deferred tax assets (Note 11) Assets for retirement benefits (Note 8) Other assets Total investments and other assets Total See notes to consolidated financial statements. 36 Millions of yen 2014 2013 ¥ 257,295 ¥ 185,571 59,984 259,465 (6,598) 316,656 29,598 51,471 967,871 33,624 235,076 450,213 148,450 6,139 21,899 895,401 (595,684) 299,717 154,360 17,175 361,667 123,700 60,389 6,236 10,070 11,346 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 10,569 15,863 744,943 658,309 ¥2,012,531 ¥1,735,836 Daikin inDustries, LtD.Financial Highlights/At a GlanceA Message from the CEOInterview with the CEOReview of OperationsCorporate GovernanceFinancial Section LIABILITIES AND EQUITY Current liabilities: Short-term borrowings (Notes 7 and 15) Current portion of long-term debt (Notes 7 and 15) Current portion of long-term lease obligations (Note 14) Trade payables (Note 15): Notes Accounts Income taxes payable (Note 15) Deferred tax liabilities (Note 11) Provision for product warranties Accrued expenses Other current liabilities (Note 6) Total current liabilities Long-term liabilities: Long-term debt (Notes 7 and 15) Long-term lease obligations (Note 14) Liabilities for retirement benefits (Note 8) Deferred tax liabilities (Note 11) Other long-term liabilities Total long-term liabilities Commitments and contingent liabilities (Notes 14 and 16) Equity (Notes 9, 10 and 20): Common stock—authorized, 500,000,000 shares; issued 293,113,973 shares in 2014 and 2013 Capital surplus Stock acquisition rights Retained earnings Treasury stock, at cost: 1,326,704 shares in 2014 and 1,974,043 shares in 2013 Accumulated other comprehensive income (loss): Unrealized gain on available-for-sale securities Deferred gain (loss) on derivatives under hedge accounting Foreign currency translation adjustments Remeasurements of defined benefit plans Subtotal Minority interests Total equity Total Millions of yen 2014 2013 ¥ 43,325 ¥ 65,335 95,886 1,731 9,380 152,704 17,429 13,356 46,113 84,618 69,095 4,126 1,464 7,377 119,987 14,694 5,518 40,235 67,089 56,802 533,637 382,627 550,475 633,033 2,526 9,975 73,300 18,269 1,912 3,960 54,362 23,945 654,545 717,212 85,032 83,550 842 514,584 (4,549) 40,066 606 87,938 (4,883) 803,186 21,163 824,349 85,032 83,017 1,335 438,671 (6,772) 18,431 (146) (115) 619,453 16,544 635,997 ¥2,012,531 ¥1,735,836 37 ANNUAL REPORT 2014 Consolidated Statement of Income Daikin Industries, Ltd. and Consolidated Subsidiaries Year Ended March 31, 2014 Net sales (Note 6) Cost of sales (Note 13) Gross profit Selling, general and administrative expenses (Notes 5, 6 and 13) Operating income Other income (expenses): Interest and dividend income Interest expense Exchange gains Gain on sales of land Loss on disposals of property, plant and equipment and other intangible assets Gain on sales of investment securities (Note 4) Impairment losses on investment securities (Notes 4 and 15) 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 Other—net (Note 8) Other expenses—net Income before income taxes and minority interests Income taxes (Note 11): Current Prior years Deferred Total income taxes Net income before minority interests Minority interests in net income Net income Amounts per common share (Note 18): Basic net income Diluted net income Cash dividends applicable to the year See notes to consolidated financial statements. Millions of yen 2014 ¥1,783,077 1,216,216 566,861 411,786 155,075 2013 ¥1,290,903 902,857 388,046 299,419 88,627 6,478 (9,454) 483 159 (335) 54 (1,531) 1,652 209 (137) (2,422) 152,653 50,390 5,014 55,404 97,249 (5,369) 4,690 (7,081) 6,849 38 (497) 117 (12,651) 1,063 310 166 986 (783) (357) (7,150) 81,477 32,677 (1,841) 3,500 34,336 47,141 (3,556) ¥ 91,880 ¥ 43,585 Yen ¥315.21 314.83 50.00 ¥149.73 149.71 36.00 38 Daikin inDustries, LtD.Financial Highlights/At a GlanceA Message from the CEOInterview with the CEOReview of OperationsCorporate GovernanceFinancial Section Consolidated Statement of Comprehensive Income Daikin Industries, Ltd. and Consolidated Subsidiaries Year Ended March 31, 2014 Net income before minority interests Other comprehensive income (Note 17): Unrealized gains on available-for-sale securities Deferred gains (losses) on derivatives under hedge accounting Foreign currency translation adjustments Share of other comprehensive income in affiliates accounted for using the equity method Total other comprehensive income 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, 2014 Millions of yen 2014 ¥ 97,249 2013 ¥ 47,141 21,632 1,218 59,499 2,823 85,172 18,434 (72) 64,782 1,483 84,627 ¥182,421 ¥131,768 ¥175,572 6,849 ¥126,233 5,535 Outstanding Number of Common Shares Issued 291,085,165 Stock Acqui- sition Common Stock Rights ¥85,032 ¥82,977 ¥1,501 ¥415,231 ¥(6,961) Retained Earnings Treasury Stock Capital Surplus Millions of yen Accumulated Other Comprehensive Income (Loss) Unrealized Gain (Loss) on Available- for-Sale Securities ¥ (2) Deferred Gain (Loss) on Derivatives under Hedge Accounting ¥ (74) Foreign Currency Translation Adjustments ¥(73,894) Remeasure- ment of Defined Benefit Plans (9,666) 43,585 (10,479) (310) 55,075 40 189 291,139,930 85,032 83,017 (166) 1,335 438,671 (6,772) 18,433 18,431 (72) (146) 73,779 (115) (4,021) 91,880 (11,946) (663) 648,002 533 (4) 2,227 291,787,269 (493) ¥85,032 ¥83,550 ¥ 842 ¥514,584 ¥(4,549) 21,635 ¥40,066 752 ¥606 88,053 ¥(87,938) ¥(4,883) ¥(4,883) Balance, April 1, 2012 Effect of change of the fiscal year-end of certain consolidated subsidiaries Net income Cash dividends, ¥36 per share Repurchase of treasury stock Disposal of treasury stock Net change in the year Balance, March 31, 2013 Effect of change of the fiscal year-end of certain consolidated subsidiaries (Note 2) Net income Cash dividends, ¥50 per share Repurchase of treasury stock Disposal of treasury stock Net change in the year Balance, March 31, 2014 See notes to consolidated financial statements. Total Minority Interests ¥503,810 ¥12,111 ¥515,921 Total Equity (9,666) 43,585 (9,666) 43,585 (10,479) (10,479) 229 91,974 619,453 229 96,407 4,433 16,544 635,997 (4,021) 91,880 (4,021) 91,880 (11,946) (11,946) (4) (4) 2,760 2,760 105,064 4,619 109,683 ¥803,186 ¥21,163 ¥824,349 39 ANNUAL REPORT 2014 Consolidated Statement of Cash Flows Daikin Industries, Ltd. and Consolidated Subsidiaries Year Ended March 31, 2014 Operating activities: Income before income taxes and minority interests ¥152,653 ¥ 81,477 Millions of yen 2014 2013 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 and other intangible assets 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 Assets for retirement benefits Trade notes and accounts payable Accrued expenses Other current liabilities Liabilities for retirement benefits 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 12) Payments for acquisition of investment securities Proceeds from sales of investment securities (Note 4) Proceeds from sales of shares of an associated company Payment for transfer of business Other—net Net cash used in investing activities Financing activities: Net decrease 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 (used in) provided by financing activities Effect of exchange rate changes on cash and cash equivalents Net increase 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. 40 (45,874) 78,901 (54) 1,531 335 (1,652) (31,510) (8,228) (1,315) 499 19,140 12,846 9,238 5,512 (12,309) 27,060 179,713 (53,647) 1,738 (857) (26,742) 84 (410) (1,001) (80,835) (19,180) 15 (5,024) (11,946) (2,604) 297 193 (38,249) 10,896 71,525 199 185,571 ¥257,295 (29,688) 51,524 (117) 12,651 497 (1,063) (22,587) 10,299 (3,924) (306) 343 1,801 1,672 (204) 786 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 Daikin inDustries, LtD.Financial Highlights/At a GlanceA Message from the CEOInterview with the CEOReview of OperationsCorporate GovernanceFinancial Section Notes to Consolidated Financial Statements Daikin Industries, Ltd. and Consolidated Subsidiaries Year Ended March 31, 2014 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 (“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 2013 consolidated financial statements to conform to the classification used in 2014. 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, 2014, Goodman Global Group, Inc. and 21 other companies changed their fiscal year-end from December 31 to March 31. 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 by directly charging to retained earnings as an effect of the 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 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 of accounting for property, plant and equipment and investment properties and incorporation of the cost model of 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 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 of accounting for property, plant and equipment and investment properties and incorporation of the cost model of accounting; and (e) exclusion of minority interests from net income, if contained in net income. 41 ANNUAL REPORT 2014 Business Combinations The Group acquired Goodman Global Group, Inc. and its subsidiaries on November 1, 2012. The Group accounted for business combinations 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. The Group had no short-term investments at March 31, 2014 and 2013. 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 receivables outstanding. Inventories Inventories of the Company and its consolidated domestic subsidiaries are stated at the lower of cost, principally determined by the average method, or net selling value. Inventories of consolidated foreign subsidiaries are stated at the lower of cost, princi- pally 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 asset by the amount of the liability. The asset retirement cost is subse- quently 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. 42 Daikin inDustries, LtD.Financial Highlights/At a GlanceA Message from the CEOInterview with the CEOReview of OperationsCorporate GovernanceFinancial Section 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 9 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 method of attributing expected benefit to the current period in calculation of projected benefit obligation is based on straight-line attribution. Actuarial gains and losses are amortized by the straight-line method over certain periods (mainly 10 years), which is within the average remaining service period of employees at the time of recognition. Past service costs are amortized by the straight-line method over certain periods (mainly 10 years), which is within the average remaining service period of employees at the time of recognition. In May 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 related practical guidance, and were followed by partial amendments from time to time through 2009. The Group applied these accounting stan- dard and guidance from the end of the annual period beginning on April 1, 2013 (except for the regulations stipulated under Article 35 of the Accounting Standard for Retirement Benefits and Article 67 of Guidance on Accounting Standard for Retirement Benefits). Under the revised accounting standard, actuarial gains and losses and past service costs that are yet to be recognized in profit or loss are recognized within equity (accumulated other comprehensive income), after adjusting for tax effects, and any resulting deficit or surplus is recognized as a liability (liabilities for retirement benefits) or asset (assets for retirement benefits). The revised accounting standard does not change how to recognize actuarial gains and losses and past service costs in profit or loss. Those amounts are recognized in profit or loss over a certain period no longer than the expected average remaining work- ing 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 are included in other comprehensive income and actuarial gains and losses and past ser- vice 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 (see Note New Accounting Pronouncements). In accordance with the transitional measure stipulated under Article No. 37 of the standard, the amount of financial impact caused by this change in accounting policy is added to or subtracted from remeasurements of the defined benefit plan under accumulated other comprehensive income. As a result, net defined benefit assets of ¥10,070 million and net defined benefit liability of ¥9,975 million were recorded as of March 31, 2014, and accumulated other comprehensive income and minority interest for the year ended March 31, 2014 decreased by ¥4,883 million and ¥14 million, respectively. 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 recognizes compensation expense over the vesting period as consideration 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 presented 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. 43 ANNUAL REPORT 2014 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 rate. 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. Bonuses to Directors and Audit & Supervisory Board Members Bonuses to directors and auditors & supervisory board members are accrued at the year-end to which such bonuses are attribut- able. Accrued bonuses are included in accrued expenses. 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 manage 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 manage the risk of fluctuation of commodity prices 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. 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 previous requirements, actuarial gains and losses and past service costs that were yet to be recognized in profit or loss were 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, was 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 (liabilities for retirement benefits) or asset (assets 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. 44 Daikin inDustries, LtD.Financial Highlights/At a GlanceA Message from the CEOInterview with the CEOReview of OperationsCorporate GovernanceFinancial Section(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 Group adopted the revised accounting standard for (a) and (b) above effective April 1, 2013, and expects to adopt (c) above from April 1, 2014. The adoption of (c) above will cause increases of the beginning balance of net defined benefit assets and retained earnings in the consolidated balance sheet by ¥3,064 million and ¥4,788 million, respectively, at April 1, 2014. The effect of this adoption will not have a material impact on the Group’s consolidated financial statement for the year ending March 31, 2015. 3. Inventories Inventories at March 31, 2014 and 2013 consisted of the following: Finished products and merchandise Semifinished products and work in process Raw materials and supplies Total Millions of yen 2014 2013 ¥217,186 ¥191,195 41,557 57,913 41,381 52,593 ¥316,656 ¥285,169 4. Marketable and Investment Securities The acquisition costs and aggregate fair values of marketable available-for-sale securities included in investment securities at March 31, 2014 and 2013 were as follows: Securities classified as available-for-sale: Equity securities Debt securities Total Securities classified as available-for-sale: Equity securities Debt securities Total Millions of yen 2014 Unrealized Gains Unrealized Losses Fair Value ¥54,030 2 ¥54,032 ¥(432) ¥(432) ¥145,514 102 ¥145,616 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 ¥91,916 100 ¥92,016 Cost ¥66,833 125 ¥66,958 The information of available-for-sale securities which were sold during the years ended March 31, 2014 and 2013 was as follows: March 31, 2014 Available-for-sale: Equity securities Millions of yen Proceeds Realized Gains Realized Losses ¥84 ¥55 (1) 45 ANNUAL REPORT 2014 March 31, 2013 Available-for-sale: Equity securities Millions of yen Proceeds Realized Gains Realized Losses ¥518 ¥117 The impairment losses on marketable available-for-sale securities for the years ended March 31, 2014 and 2013 were ¥1,529 million and ¥12,651 million, respectively. 5. Goodwill Amortization expenses for goodwill were ¥23,784 million and ¥12,077 million for the years ended March 31, 2014 and 2013, respectively, which were included in selling, general and administrative expenses. 6. Related Party Transactions Material transactions and balances with related parties for the years ended March 31, 2014 and 2013 were as follows: (1) 2014 (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 2014 ¥435 Account Other current liabilities 2014 ¥39 Millions of yen Transactions Resulting Account Balances Description of Transaction Commission for moving business and delivery business 2014 ¥64 Account Other current liabilities 2014 ¥ 4 Sales of products and other 88 Accounts receivable 24 The terms and conditions applicable to the above-mentioned transactions have been determined on an arm’s length basis and by reference to the normal market price. (2) 2013 (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 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 an arm’s length basis and by reference to the normal market price. 46 Daikin inDustries, LtD.Financial Highlights/At a GlanceA Message from the CEOInterview with the CEOReview of OperationsCorporate GovernanceFinancial Section7. Short-Term Borrowings and Long-Term Debt Short-term borrowings of the Group at March 31, 2014 and 2013 consisted of the following: Bank overdrafts and notes to banks Commercial paper Total Millions of yen 2014 ¥43,325 ¥43,325 2013 ¥63,408 1,927 ¥65,335 Unused short-term bank credit lines were ¥150,000 million at March 31, 2014. Weighted-average interest rates of bank overdrafts and notes to banks at March 31, 2014 and 2013 were 1.67% and 1.37%, respectively. The weighted-average interest rate of commercial paper at March 31, 2013 was 0.25%. Long-term debt at March 31, 2014 and 2013 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 of 1.75%, due through 2019 Collateralized loans from banks and others, payable in foreign currencies, with interest of 4.75% (2013), due through 2013 Unsecured loans from banks and others, payable in foreign currencies, with interest ranging from 0.59% to 5.90% (2014) and from 0.71% to 5.90% (2013), due through 2022 Unsecured loans from banks and others with interest ranging from 0.26% to 3.59% (2014) and from 0.30% to 3.59% (2013), due through 2023 Total Less current portion Long-term debt, less current portion Annual maturities of long-term debt outstanding at March 31, 2014, were as follows: Year Ending March 31 2015 2016 2017 2018 2019 2020 and thereafter Total Millions of yen 2014 ¥ 30,000 30,000 10,000 40,000 10,000 30,000 20,000 2013 ¥ 30,000 30,000 10,000 40,000 10,000 30,000 20,000 28 161,334 152,088 315,027 646,361 (95,886) ¥550,475 315,043 637,159 (4,126) ¥633,033 Millions of yen ¥ 95,886 36,338 71,895 66,436 72,235 303,571 ¥646,361 At March 31, 2014, property, plant and equipment; time deposits; trade accounts receivables; inventories; and others with book values of ¥2,663 million, ¥107 million, ¥11,755 million ¥8,127 million and ¥5,711 million, respectively, were pledged as collateral for short-term borrowings. 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. Certain 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. 47 ANNUAL REPORT 2014 8. 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. The Group accounts for part of the defined benefit obligation and benefit costs for retirement lump-sum payment using the simplified method. Year ended March 31, 2014 1. Defined benefit plans (1) The changes in defined benefit obligation for the year ended March 31, 2014 were as follows (excluding the benefit plan for which the simplified method was applied): Balance at beginning of year Service cost Interest cost Net actuarial gains Past service cost Benefits paid Effect of changes in the scope of consolidation Effect of change of the fiscal year-end Foreign currency translation adjustments Others Balance at end of year Millions of yen 2014 ¥83,770 4,098 1,919 (993) 8 (4,065) 72 (121) 5,079 (134) ¥89,633 (2) The changes in plan assets for the year ended March 31, 2014 were as follows (excluding the benefit plan for which the simplified method was applied): Balance at beginning of year Expected return on plan assets Net actuarial gains Contributions from the employer Benefits paid Effect of changes in accounting period Foreign currency translation adjustments Others Balance at end of year Millions of yen 2014 ¥80,088 3,057 3,908 4,839 (3,733) 168 3,845 57 ¥92,229 (3) The changes in defined benefit obligation for the year ended March 31, 2014 using the simplified method were as follows: Balance at beginning of year Periodic benefit cost Benefits paid Balance at end of year Millions of yen 2014 ¥ 301 2,963 (763) ¥2,501 48 Daikin inDustries, LtD.Financial Highlights/At a GlanceA Message from the CEOInterview with the CEOReview of OperationsCorporate GovernanceFinancial Section (4) Reconciliation between the liabilities recorded in the consolidated balance sheet and the balances of defined ben- efit obligation and plan assets at March 31, 2014 was as follows (including the benefit plan for which the simplified method was applied): Funded defined benefit obligation Plan assets Unfunded defined benefit obligation Net amount of liabilities and assets recorded in consolidated balance sheet Liabilities for retirement benefits Assets for retirement benefits Net amount of liabilities and assets recorded in consolidated balance sheet (5) The components of net periodic benefit costs for the year ended March 31, 2014 were as follows: Service cost Interest cost Expected return on plan assets Recognized net actuarial gains Amortization of past service cost Periodic benefit cost calculated by the simplified method Others Total Millions of yen 2014 ¥(88,051) 92,229 4,178 (4,083) ¥ 95 ¥ (9,975) 10,070 ¥ 95 Millions of yen 2014 ¥4,098 1,919 (3,057) (113) (42) 2,963 70 ¥5,838 (6) The components of accumulated other comprehensive income (amount before income tax effect) for the year ended March 31, 2014 were as follows: Unrecognized past service cost Unrecognized net actuarial losses Total (7) Plan assets (a) Components of plan assets Plan assets consisted of the following: Domestic debt securities Domestic equity securities Foreign debt securities Foreign equity securities Insurance assets (general account) Cash and cash equivalents Real estate Others Total Millions of yen 2014 ¥ (18) 6,801 ¥6,783 % 2014 6% 8 24 18 17 2 2 23 100% (b) Method of determining the expected rate of return on plan assets The expected rate of return on plan assets is determined considering the long-term rates of return which are expected currently and in the future from the various components of the plan assets. (8) Assumptions used for the year ended March 31, 2014 were set forth as follows: Discount rate Expected rate of return on plan assets 2014 Mainly 1.2% Mainly 2.5% 2. Defined contribution plan The amount of contribution required to defined contribution plan paid by the Company and its subsidiaries was ¥4,181 million for the year ended March 31, 2014. 49 ANNUAL REPORT 2014Year ended March 31, 2013 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, consisted of the following: Projected benefit obligation Fair value of plan assets Unrecognized past service cost Unrecognized actuarial gains Net assets Assets for retirement benefits Liabilities for retirement benefits The components of net periodic benefit costs for the years ended March 31, 2013 were as follows: Service cost Interest cost Expected return on plan assets Amortization of past service cost Recognized actuarial losses Net periodic benefit costs Contribution to defined contribution pension plan and other Total Assumptions used for the years ended March 31, 2013, were set forth as follows: Discount rate Expected rate of return on plan assets Amortization period of past service cost Recognition period of actuarial gains/losses 9. Equity Millions of yen 2013 ¥84,070 (80,088) 225 (10,816) (6,609) (10,569) ¥3,960 Millions of yen 2013 ¥4,015 1,856 (2,210) (46) 557 4,172 2,922 ¥7,094 2013 Mainly 1.2% 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 including (1) having a Board of Directors, (2) having independent auditors, (3) having an Audit & Supervisory Board, and (4) the term of service of the directors is prescribed as one year rather than two years of normal term by its articles of incorporation, 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. 50 Daikin inDustries, LtD.Financial Highlights/At a GlanceA Message from the CEOInterview with the CEOReview of OperationsCorporate GovernanceFinancial Section(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. 10. Stock Options The stock options outstanding for the year ended March 31, 2014, were as follows: Number of Options Granted 292,000 shares Date of Grant Exercise Price Exercise Period 2007.7.17 ¥4,640 Stock Option 2007 Stock Option 2008 Stock Option 2009 Stock Option 2010 Stock Option 2011 Stock Option 2012 Stock Option 2013 Stock Option Persons Granted 9 directors 42 employees 8 directors 44 employees 8 directors 42 employees 8 directors 41 employees 10 directors 39 employees 10 directors 41 employees 10 directors 38 employees The stock option activity was as follows: 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 ¥2,186 286,000 shares 2013.7.12 ¥4,500 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 From July 13, 2015 to July 12, 2019 2006 Stock Option 2007 Stock Option 2008 Stock Option Shares 2009 Stock Option 2010 Stock Option 2011 Stock Option 2012 Stock Option 2013 Stock Option 234,700 266,000 242,000 (234,700) (40,000) 202,000 (46,000) 220,000 Year Ended March 31, 2013 Vested April 1, 2012—Outstanding Granted Exercised Canceled March 31, 2013—Outstanding Year Ended March 31, 2014 Vested April 1, 2013—Outstanding Granted Exercised Canceled March 31, 2014—Outstanding Exercise price Average stock price at exercise Fair value price at grant date The assumptions used to measure fair value of 2013 Stock Option Black-Scholes option pricing model Estimate method: Volatility of stock price: 34.6% Estimated remaining outstanding period: 4 years Estimated dividend: Risk-free interest rate: (40,000) (10,000) 170,000 ¥5,924 ¥6,246 ¥ 803 ¥36 per share 0.2% ¥4,640 ¥4,397 ¥1,035 (8,000) (194,000) 202,000 220,000 ¥ 736 ¥3,790 294,000 (16,000) (66,000) 212,000 212,000 (186,000) 26,000 ¥3,250 ¥4,924 ¥ 899 290,000 296,000 300,000 (39,000) 251,000 296,000 300,000 251,000 296,000 300,000 286,000 (219,000) (195,000) 32,000 ¥3,050 ¥5,036 ¥1,113 101,000 ¥2,970 ¥5,350 ¥ 935 300,000 ¥2,186 286,000 ¥4,500 ¥ 676 ¥1,220 51 ANNUAL REPORT 201411. 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, 2014 and 2013. The tax effects of significant temporary differences and tax loss carryforwards that resulted in deferred tax assets and liabilities, at March 31, 2014 and 2013 were as follows: Deferred tax assets: Provision for product warranties Inventories Investment securities Tax loss carryforwards Software and other intangible assets Accrued bonus Liabilities for retirement benefits Foreign income tax credit Allowance for doubtful receivables 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 Assets for retirement benefits Deferred gains on sales of property Other Total deferred tax liabilities Net deferred tax liabilities Millions of yen 2014 2013 ¥ 13,857 13,798 8,105 7,169 4,083 4,012 2,439 1,736 1,160 20,284 (20,056) ¥ 56,587 ¥ 58,123 21,084 13,561 3,586 1,906 9,149 ¥107,409 ¥ (50,822) ¥ 11,583 9,474 7,434 15,325 3,243 3,430 878 1,436 1,352 17,112 (21,927) ¥ 49,340 ¥ 47,895 14,197 8,346 3,697 1,961 7,772 ¥ 83,868 ¥(34,528) 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 year ended March 31, 2013 was as follows: Normal effective statutory income tax rate Difference in foreign subsidiaries’ tax rates Taxes and tax effects 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 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% A reconciliation of difference between the normal effective statutory tax rates and the actual effective tax rates is not disclosed since the difference is less than 5% of the normal effective statutory income tax rate for the year ended March 31, 2014. On March 31, 2014, new tax reform laws were enacted in Japan, which changed the effective statutory tax rate from approxi- mately 37.9% to 35.6% effective for the fiscal year beginning on or after April 1, 2014. The effect of this change on the consolidat- ed financial statements is not material. During the previous 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- ed to ¥1,841 million and was presented as income taxes-prior years in the consolidated statement of income for the year ended March 31, 2013. 52 Daikin inDustries, LtD.Financial Highlights/At a GlanceA Message from the CEOInterview with the CEOReview of OperationsCorporate GovernanceFinancial Section At March 31, 2014, the Company and certain consolidated subsidiaries had tax loss carryforwards aggregating approximately ¥16,665 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 Millions of yen 2015 2016 2017 2018 2019 2020 and thereafter Total ¥ 334 1,104 700 2,328 980 11,219 ¥16,665 12. 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 13. Research and Development Costs Research and development costs included in cost of sales and selling, general and administrative expenses were ¥40,177 million and ¥33,569 million for the years ended March 31, 2014 and 2013, respectively. 14. 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, 2014, were as follows: Due within one year Due after one year Total Millions of yen Finance Leases Operating Leases ¥1,731 2,526 ¥4,257 ¥13,669 20,746 ¥34,415 53 ANNUAL REPORT 2014Millions of yen 2014 ¥17 8 ¥25 2013 ¥27 25 ¥52 Millions of yen 2014 ¥25 25 2013 ¥87 87 Pro Forma Information for the Years ended March 31, 2014 and 2013 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, 2014 and 2013 were as follows: Furniture and Fixtures ¥98 87 ¥11 2014 Others ¥95 81 ¥14 Millions of yen Total ¥193 168 ¥ 25 Furniture and Fixtures ¥147 120 ¥ 27 2013 Others ¥111 86 ¥ 25 Total ¥258 206 ¥ 52 Acquisition cost Accumulated depreciation Net leased property Obligations under finance leases: Due within one year Due after one year Total The amounts of acquisition cost and obligations under finance leases include the imputed interest expense. Lease payments and depreciation expense under finance leases: Lease payments Depreciation expense Depreciation expense, which is not reflected in the accompanying consolidated statement of income, was computed using the straight-line method. 15. 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. 54 Daikin inDustries, LtD.Financial Highlights/At a GlanceA Message from the CEOInterview with the CEOReview of OperationsCorporate GovernanceFinancial Section 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 the liquidity risk along with adequate financial planning by the corpo- rate finance department. In addition, the Group 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 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 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, 2014 Fair Value ¥257,295 319,449 145,616 ¥722,360 ¥162,084 43,325 17,429 654,516 ¥877,354 ¥ 751 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 Carrying Amount ¥257,295 319,449 145,616 ¥722,360 ¥162,084 43,325 17,429 646,361 ¥869,199 ¥ 751 Carrying Amount ¥185,571 263,323 93,740 ¥542,634 ¥127,364 65,335 14,694 637,159 ¥844,552 ¥ 893 Unrealized Loss ¥8,155 ¥8,155 Unrealized Loss ¥10,338 ¥10,338 Assets Cash and cash equivalents The carrying values of cash and cash equivalents approximate fair value because of their short maturities. Trade notes and accounts receivable The carrying values of trade notes and accounts receivable approximate fair values 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. Fair value information of the investment securities by classification is included in Note 4. 55 ANNUAL REPORT 2014Liabilities 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 val- ues 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 rates, 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 relat- ed to the loans and the interest rate swaps at the Group’s assumed corporate borrowing rate. Derivatives The fair values of derivatives are measured at the quoted price obtained from the financial institution. The contracts or notional amounts of derivatives that are shown in the table below 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, 2014 Contract Amount Due after One Year Fair Value Unrealized Gain (Loss) ¥ (21) (126) 147 (82) 42 (15) 29 1 (9) (10) (310) (3) (29) 2 ¥ (21) (126) 147 (82) 42 (15) 29 1 (9) (10) (310) (3) (29) 2 ¥ (70) ¥ (70) Contract Amount ¥ 3,108 43,964 18,473 4,879 321 1,893 4,957 26 1,279 2,495 1,447 8,288 231 1,337 1,580 ¥ 628 Forward exchange contracts: Selling: GBP EUR USD AUD NZD ZAR CZK NOK HKD SGD MYR TRY BRL INR Buying: CNY Commodity future contracts: Buying: Metal 56 Daikin inDustries, LtD.Financial Highlights/At a GlanceA Message from the CEOInterview with the CEOReview of OperationsCorporate GovernanceFinancial Section Forward exchange contracts: Selling: GBP EUR USD AUD NZD ZAR CZK HKD PLN SGD MYR TRY BRL Buying: EUR CNY USD Commodity future contracts: Buying: Metal 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 ¥ (47) ¥ (47) 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 Derivative transactions to which hedge accounting is applied Forward exchange contracts: Selling: GBP EUR USD ZAR CZK PLN TRY Buying: CNY Commodity future contracts: Buying: Metal Interest rate swaps: Fixed rate payment, floating rate receipt Fixed rate payment, floating rate receipt* Millions of yen March 31, 2014 Contract Amount Due after One Year Hedged Item Receivables Receivables Receivables Receivables Receivables Receivables Receivables Payables Contract Amount ¥ 7,465 32,906 545 1,025 8,110 1,051 3,580 7,864 Raw materials ¥ 1,310 Long-term debt Long-term debt ¥188,024 215,000 ¥177,222 165,000 Fair Value ¥ (70) (311) 3 3 17 (8) 15 (161) ¥ 27 ¥1,690 57 ANNUAL REPORT 2014 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) * The above interest rate swaps that qualify for hedge accounting and meet specific matching criterion 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 values of such interest rate swaps are 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 The impairment losses on nonlisted equity securities for the year ended March 31, 2014 were ¥2 million. Maturity analysis for financial assets and securities with contractual maturities Millions of yen Carrying Amount 2014 ¥8,178 566 ¥8,744 2013 ¥8,180 668 ¥8,848 Millions of yen March 31, 2014 Due after One Year through Five Years Due after Five Years through Ten Years Due after Ten Years ¥318 75 ¥393 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 Due in One Year or Less ¥257,295 319,131 25 ¥576,451 Due in One Year or Less ¥185,571 263,290 25 ¥448,886 Cash and cash equivalents Trade notes and accounts receivable Investment securities: Available-for-sale securities with contractual maturities (corporate bonds) Total Cash and cash equivalents Trade notes and accounts receivable Investment securities: Available-for-sale securities with contractual maturities (corporate bonds) Total Please see Note 7 for annual maturities of long-term debt. 58 Daikin inDustries, LtD.Financial Highlights/At a GlanceA Message from the CEOInterview with the CEOReview of OperationsCorporate GovernanceFinancial Section 16. Commitments and Contingent Liabilities Commitments for capital expenditures outstanding at March 31, 2014 totaled approximately ¥41,794 million. At March 31, 2014, contingent liabilities for trade notes endorsed and repurchase obligation for liquidation of notes receivables totaled ¥4,452 million and ¥1,237 million, respectively. 17. Comprehensive Income The components of other comprehensive income for the years ended March 31, 2014 and 2013 were as follows: Unrealized gains on available-for-sale securities: Gains arising during the year Reclassification adjustments to profit or loss Amount before income tax effect Income tax effect Total Deferred gains (losses) on derivatives under hedge accounting: Gains (losses) 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 Reclassification adjustments to profit or loss Amount before income tax effect Income tax effect Total Share of other comprehensive income in affiliates accounted for using the equity method: Adjustments arising during the year Total other comprehensive income 18. Net Income Per Share Millions of yen 2014 2013 ¥25,373 1,474 26,847 (5,215) ¥21,632 ¥ 4,152 (2,366) 1,786 (568) ¥ 1,218 ¥59,500 (1) 59,499 ¥14,173 12,534 26,707 (8,273) ¥18,434 ¥ (191) 90 (101) 29 ¥ (72) ¥64,782 64,782 ¥59,499 ¥64,782 ¥ 2,823 ¥ 1,483 ¥85,172 ¥84,627 Reconciliation of the differences between basic and diluted net income per share (“EPS”) for the years ended March 31, 2014 and 2013, was as follows: Year Ended March 31, 2014 Basic EPS: Net income available to common shareholders Effect of dilutive securities Stock options Diluted EPS: Net income for computation Millions of yen Thousands of shares Net Income Weighted Average Shares Yen EPS ¥91,800 291,485 ¥351.21 353 ¥91,800 291,838 ¥314.83 59 ANNUAL REPORT 2014 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 19. Segment Information 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 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 regularly evaluated by the Company’s Board of Directors 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, 2014 Air Conditioning Chemicals Total Other Total Reconciliations Consolidated ¥1,592,885 842 1,593,727 138,478 1,618,355 ¥140,178 7,453 147,631 14,189 176,020 ¥1,733,063 ¥50,014 407 50,421 2,414 30,840 8,295 1,741,358 152,667 1,794,375 ¥ 41,304 23,767 ¥ 12,111 17 ¥ 53,415 ¥ 1,671 23,784 ¥1,783,077 8,702 1,791,779 155,081 1,825,215 ¥ 55,086 23,784 ¥ (8,702) (8,702) (6) 187,316 ¥1,783,077 1,783,077 155,075 2,012,531 ¥ 55,086 23,784 10,880 5,605 16,485 16,485 16,485 37,113 20,359 57,472 1,878 59,350 59,350 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 60 Daikin inDustries, LtD.Financial Highlights/At a GlanceA Message from the CEOInterview with the CEOReview of OperationsCorporate GovernanceFinancial Section 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 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” amounted to ¥196,125 million and ¥118,702 million at March 31, 2014 and 2013, respectively, which consisted mainly of the Company’s cash, time deposits and investment securities. 3. The aggregated amount of segment profit equals operating income in the consolidated statement of income. 4. Intersegment sales are recorded at values that approximate market prices. 4. Supplemental Information (1) Information about Geographical Areas (a) Sales Millions of yen March 31, 2014 Japan USA China Europe Asia and Oceania Other Consolidated ¥512,754 ¥359,122 ¥322,884 ¥247,059 ¥239,633 ¥101,625 ¥1,783,077 Millions of yen March 31, 2013 Japan USA China Europe Asia and Oceania Other ¥494,284 ¥113,253 ¥234,774 ¥195,053 ¥186,219 ¥67,320 Consolidated ¥1,290,903 Note: Sales are classified by country or region based on location of customers. (b) Property, Plant and Equipment Millions of yen March 31, 2014 Japan ¥95,318 China USA ¥80,119 ¥52,375 Europe ¥34,485 Millions of yen March 31, 2013 Japan ¥91,759 China USA ¥69,951 ¥42,717 Europe ¥31,460 Asia and Oceania ¥31,595 Asia and Oceania ¥32,615 Other ¥5,825 Consolidated ¥299,717 Other ¥5,699 Consolidated ¥274,201 61 ANNUAL REPORT 2014 (2) Information about Goodwill (a) Balance of Goodwill by Reportable Segment Goodwill for each reportable segment at March 31, 2014 and 2013 was as follows: Goodwill Goodwill Millions of yen 2014 Chemicals Other Eliminations and Corporate Millions of yen 2013 Chemicals Other Eliminations and Corporate Air Conditioning ¥361,667 Air Conditioning ¥348,411 Consolidated ¥361,667 Consolidated ¥348,411 20. Subsequent Events Resolutions approved by the Company’s Board of Directors at the meeting held on May 8, 2014, are subject to approval at the general shareholders’ meeting planned to be held on June 27, 2014. Appropriations of Retained Earnings Payment of a year-end cash dividend of ¥27 per share to shareholders at March 31, 2014, totaling ¥7,878 million was approved. 62 Daikin inDustries, LtD.Financial Highlights/At a GlanceA Message from the CEOInterview with the CEOReview of OperationsCorporate GovernanceFinancial SectionIndependent Auditors’ Report 63 ANNUAL REPORT 2014Corporate Data (As of March 31, 2014) 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 34,798 Major Shareholders • The Master Trust Bank of Japan, Ltd. (Trust account) • Japan Trustee Services Bank, Ltd. (Trust account) • Sumitomo Mitsui Banking Corporation • Japan Trustee Services Bank, Ltd. Retirement Benefit Trust Account for Nippon Steel & Sumitomo Metal Industries, Ltd. • Japan Trustee Services Bank, Ltd. Retirement Benefit Trust Account for The Norinchukin Bank • The Bank of Tokyo-Mitsubishi UFJ, Ltd. • State Street Bank and Trust Company 505225 • Japan Trustee Services Bank, Ltd. (Trust account 4) • Sumitomo Life Insurance Company • BNP Paribas Securities (Japan) Limited Number of Subsidiaries and Subsidiaries: 209 Affiliates: 9 Affiliated Companies Number of Employees 56,240 (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 64 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 E 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 DAIKIN INDUSTRIES, LTD. A n n u a l R e p o r t 2 0 1 4 D A I K I N I N D U S T R I E S , L T D . 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(14-09-003)IB

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