Daikin Industries Ltd.
Annual Report 2015

Plain-text annual report

A n n u a l R e p o r t 2 0 1 5 D A I K I N I N D U S T R I E S , L T D . Annual Report 2015 Fiscal Year Ended March 31, 2015 Daikin—Aiming to Be a Truly Global Excellent Company through Continued Reforms in Preparation for the 100th Anniversary of its Founding In October 2014, Daikin celebrated the 90th anniversary of its founding. A company with core businesses in the fields of air-conditioning systems, fluorochemicals, oil hydraulics, and defense products, Daikin has continually evolved in step with the times and in response to social paradigm shifts. In its pursuit of improved energy conservation performance and environment-friendliness, Daikin has repeatedly realized important innovations with respect to air-conditioning and refrigerant technologies. The Company’s development of new applications for fluoroplastics, fluororubbers, and fluorochemicals has spurred major changes in people’s work and lives. Our main market foci have been gradually shifting from Japan to overseas, and overseas sales have grown to account for more than 70% of our total net sales. Going forward, we will sustain our efforts to augment our corporate value by increasing our contributions to global environmental conservation and energy control as well as our contributions to elevating levels of amenity and convenience in the daily lives of people throughout the world. As we advance toward the 100th anniversary of our founding, we are striving to be a “Truly Global and Excellent Company,” by implementing business model reforms and establishing organizational and man- agement systems tailored to the requirements of a multinational enterprise. 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 The Global Market .................. 14 Chemicals ................................. 16 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 ... 68 Corporate Data ......................... 69 Forward-Looking Statements This annual review contains statements regarding the future plans and strategies of Daikin Industries, Ltd. (the Company), as well as the Company’s future performance. These statements are not statements of past facts but are based on judgments made by the Company on the basis of information known at the time. Therefore, readers should refrain from drawing conclusions based only on these statements regarding the future performance of the Company. The actual future performance of the Company may be influenced by economic trends, strong competition in the industrial sectors where it conducts its operations, foreign currency exchange rates, and changes in taxation and other systems. For these reasons, these forward-looking statements are subject to latent risk and uncertainty.  1 2 3 4 5 6 7 8 9 Our Group Philosophy Create New Value by Anticipating the Future Needs of Customers Contribute to Society with World-Leading Technologies Realize Future Dreams by Maximizing Corporate Value Think and Act Globally Be a Flexible and Dynamic Group 1. Flexible Group Harmony 2. Build Friendly yet Competitive Relations with Our Business Partners to Achieve Mutual Benefit Be a Company that Leads in Applying Environmentally Friendly Practices 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 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 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” DAIKIN INDUSTRIES, LTD. ANNUAL REPORT 2015 1 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 1) Net cash 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 Millions of yen 2014 2015 ¥1,787,679 568,323 156,537 92,787 ¥1,915,014 649,902 190,588 119,675 ¥179,713 (80,835) 98,878 (38,249) ¥160,423 (77,331) 83,092 (83,073) ¥2,011,870 801,853 ¥2,263,990 1,024,725 ¥ 318.33 2,748.08 50.00 339 ¥ 410.19 3,511.34 100.00 285 31.79% 8.76 13.07 39.86 33.94% 9.95 13.10 45.26 Notes: 1. Free cash flow = Net cash provided by operating activities + net cash used in investing activities. 2. Accompanying a change in accounting policy, effective from April 1, 2014, the consolidated financial statements for the fiscal year ending March 31, 2014 and subsequent years have been revised. Net Sales, Gross Profit, and Gross Profit Margin Operating Income and Operating Income Margin (¥ billion) 2,000 1,500 1,000 500 0 (%) 40 30 20 10 0 (¥ billion) 200 150 100 50 0 ROE （%） 15 12 9 6 3 0 (%) 12 9 6 3 0 2011 2012 2013 2014 2015 2011 2012 2013 2014 2015 2011 2012 2013 2014 2015 Net Sales Gross Profit Gross Profit Margin Operating Income Operating Income Margin 2 At a Glance Percentage of Net Sales Air-Conditioning 89.3% Chemicals 7.8% Defense 0.9% Oil Hydraulics 1.7% Net Sales and Operating Income (Loss) Major Products Description Air- Conditioning (¥ billion) 2,000 170.5 1,710.9 1,500 1,000 500 0 (¥ billion) 200 150 100 50 0 2011 2012 2013 2014 2015 Since becoming the first in Japan to manufacture packaged air-condition- ing systems in 1951, Daikin has sup- ported comfortable living based on the strengths of technologies that it has itself nurtured as the world’s sole manufacturer to create a full line of products from refrigerants to air conditioners. • 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 Chemicals (¥ billion) (¥ billion) 160 120 80 40 0 16.6 149.6 24 18 12 6 0 2011 2012 2013 2014 2015 • Fluorocarbons • Fluoroplastics • Fluoroelastomers • Fluoropaints • Fluoro coatings • Fluorinated oils • Water and oil repellent agents • Mold release agents • Pharmaceuticals and intermediates • Semiconductor-etching products • Dry air suppliers In 1933, Daikin was the first in Japan to engage in research on fluorinated refrigerants. Today, our activities range from research and development to commercialization, and we offer a lineup of more than 1,800 fluorine compounds. Oil Hydraulics (¥ billion) 40 30 20 10 0 2.2 33.1 (¥ billion) 40 30 20 10 0 -10 Defense 2011 2012 2013 2014 2015 (¥ billion) (¥ billion) 20 15 10 5 0 0.7 17.6 0.8 0.6 0.4 0.2 0 2011 2012 2013 2014 2015 • Oil hydraulic pumps • Oil hydraulic units • Oil hydraulic valves • Cooling equipment and systems • Hydrostatic transmissions • Centralized lubrication units and systems Daikin’s unique hydraulic technologies offer outstanding energy-conservation performance and are contributing to the development of industry by unleashing the potential of power control. • Warheads for Japan’s Ministry of Defense • Warhead parts for guided missiles • Home-use oxygen therapy equipment Daikin’s superior machining and quali- ty control technologies are used in the production of defense-related products and other industries where high levels of precision and performance are critical. 3 DAIKIN INDUSTRIES, LTD. ANNUAL REPORT 2015Financial Highlights/At a GlanceA Message from the CEOInterview with the CEOReview of OperationsCorporate GovernanceFinancial SectionA Message from the CEO 4 Continuing the momentum of record results in fiscal 2014, Daikin has welcomed fiscal 2015, which is the 90th anniversary of our found- ing. Going forward, the Daikin Group will expand business global- ly while reforming its business model and improving the environ- mental performance of its products and technologies. June 2015 Masanori Togawa President and CEO Moving Further Ahead toward the 100th Anniversary of Daikin’s Founding In fiscal 2015, ended March 31, 2015, Daikin com- in 145 countries around the world, and non-Japa- memorated the 90th anniversary of its founding by nese employees have grown to account for approx- attaining new record high levels of consolidated imately 80% of our human resources. While net sales and net income for the fifth consecutive increasing the cohesiveness and integration of our year. In fiscal 2016, the Daikin Group will sustain its operations with their respective countries and process of dynamic corporate reforms and evolu- regions, we are striving to provide work environ- tion with the goal of overcoming fierce global ments that enable each and every employee— competition as it proceeds toward its 100th anni- regardless of their nationality, age, or gender—to versary. maintain high levels of vitality and motivation, In accordance with the fundamental policy of make the most of their talents and skills, and Daikin’s FUSION 15 strategic management plan— achieve personal growth as employees and as indi- concurrently achieving environmental contributions viduals. In particular, within Japan, we are stepping and business expansion—we have promoted up our efforts to promote the career development broader-scale use of high-efficiency air-conditioner of our female employees as well as augmenting products, provided energy conservation solutions, our support systems designed to make it easier for undertaken environmental innovation-centered those employees to balance their work with their business, and taken many other similar initiatives. personal responsibilities. And we have implemented these measures on a Looking ahead toward the 100th anniversary of global scale. Aiming to accelerate and increase the Daikin’s founding, we intend to sustain the rapid sophistication of our environmental technology pace of our corporate evolution and growth. While development during fiscal 2016, we are preparing fulfilling our wide range of responsibilities to soci- to inaugurate our new Technology Innovation ety, we will be doing our utmost to elevate our Center. While broadening our focus from “air con- enterprise value. Being determined to generate ditioning” to “air” and from “buildings” to “spac- business results that live up to the expectations of es,” we are endeavoring to realize the innovations our shareholders as well as our great number of required to create a sustainable society. stakeholders throughout the world and inspire still Human resources are a key driver of the Daikin further increases in the trust and confidence they Group’s growth, and we will be progressively have with respect to Daikin, we will seek to under- increasing our emphasis on fostering human take management decision-making processes in an resource development going forward. Currently, expeditious and optimal manner. our operations have expanded to include presences 5 DAIKIN INDUSTRIES, LTD. ANNUAL REPORT 2015Financial Highlights/At a GlanceA Message from the CEOInterview with the CEOReview of OperationsCorporate GovernanceFinancial Section Interview with the CEO Comprehensively Completing FUSION 15 and Realizing the Objective of Making Daikin a “Truly Global and Excellent Company” During fiscal 2015, Daikin attained new record high levels of revenue and profit. Fiscal 2015 was the penultimate year covered by the five-year FUSION 15 strategic management plan, and, during the year, Daikin was able to achieve the operating income target set for the final year of the plan, a year ahead of schedule. Fiscal 2016 will be a year in which Daikin makes further steady progress toward comprehensive- ly completing FUSION 15 and realizing the objective of becoming a “truly global and excellent company.” Q1 Please explain the market environment in fiscal 2015 and consumption following the consumption our businesses, we proactively responded tax rate hike, and there continued to be to the changes taking place with respect Daikin’s business results which have many difficult-to-predict elements of the to each geographic region and each prod- continued to reach record highs. global situation. uct category. By taking measures to aug- Since the Daikin Group’s overseas sales ment our marketing and sales power and Concertedly Rallying the Group’s ratio has risen to approximately 74%, reduce our fixed costs along with such Comprehensive Range of Strengths we faced a harsh operating environment measures as those to shift a portion of Togawa: Regarding the global economy during the year. However, we adopted a manufacturing operations to Japan in during fiscal 2015, the United States was New Year Policy for 2014—a landmark response to foreign exchange rate trends, able to expand its economy against the year insofar as it marked the 90th we strove to elevate our performance. backdrop of robust domestic demand. anniversary of Daikin’s founding—of Concertedly rallying Group strengths in The European economy got support from “Let’s all accomplish our goals now. accordance with the 2014 New Year Policy monetary easing and lower crude oil pric- ~keep on actions one after another~.” In enabled us to achieve extremely robust es, but the trend of recovery was weak line with that policy, we strove to make performance. Consolidated net sales overall, and the pace of expansion in strategy adjustments designed to enable increased by 7.1% year over year, to emerging country economies centered on us to attain the targets for the final year ¥1,915,014 million. Consolidated operat- China slackened. Economic recovery in of the FUSION 15 strategic management ing income increased by 21.8%, to Japan was sluggish owing to a drop in plan a year ahead of schedule. In each of ¥190,588 million. Consolidated net 6 June 2015 Masanori Togawa President and CEO FUSION 15 Target for FY2016 (FY2014–2016) Net sales Aiming to increase consolidated net sales to ¥2,060 billion—in excess of the FUSION 15 target Operating income Reached our target a year ahead of plan 1,915.0 1,787.7 2,060.0 2,050.0 (¥ billion) 2,500 2,000 1,500 1,000 0 (¥ billion) (%: Operating income margin) 212.0 (10.3%) 190.6 (10.0%) 190.0 (9.3%) 156.5 (8.8%) 250 200 150 100 0 FY2014 actual results FY2015 actual results FY2016 initial plan FY2016 goal FY2014 actual results FY2015 actual results FY2016 initial plan FY2016 goal 7 DAIKIN INDUSTRIES, LTD. ANNUAL REPORT 2015Financial Highlights/At a GlanceA Message from the CEOInterview with the CEOReview of OperationsCorporate GovernanceFinancial SectionInterview with the CEO income increased by 29.0%, to ¥119,675 while boosting our operating income ratio Q2 What are your fundamental million. This represented a second consec- to above 10%. It is also highly significant strategies for fiscal 2016, the final utive year in which we attained new that our net income surpassed the year of FUSION 15? record high levels of both revenue and ¥100 billion level for the first time in profitability. the Group’s history. Strategic Adjustments for Attaining Moreover, we surpassed the FUSION 15 final-year operating income target of ¥190 billion a year ahead of schedule 8 Still Higher Targets Togawa: The quantitative targets of our plan (drafted in November 2013) for the last three years of FUSION 15 were ¥2,050 billion in consolidated net sales and ¥190 billion in consolidated operating income. However, we were able to attain the operating income target a year ahead of schedule, in fiscal 2015. In view of that, we have raised our fiscal 2016 targets to ¥2,060 billion in net sales (up 8% year on year) and ¥212 billion in operating income (up 11% year on year) and begun work- ing to reach those targets. We have draft- ed and begun implementing appropriate plans for the measures required to attain the new targets, and we will continue adjusting our strategies as we move ahead. The current fiscal year is a period for comprehensively completing FUSION 15, and we are aiming to link the results of the plan to the characteristics of our next strategic management plan. We are anticipating gradual expansion of the global economy, but there are risks of temporary deterioration in economic conditions in China and Europe. Euro depreciation and the general tendency to depreciate seen among emerging country currencies have a large negative impact on Daikin’s performance, as we record con- siderable shares of our sales in Asian and European markets. To overcome this impact, we will continue augmenting our marketing and sales power, placing partic- ular emphasis on the deeper cultivation of air-conditioning markets in North America and Asia, while seeking to expand our performance in each region of the world. Since building a solid and resilient business structure is of crucial importance, strongly promoting sales of such products costs, we are working to expand our we are moving further ahead with such will enable us to greatly expand our sales profitability in fiscal 2016. measures as those to reduce fixed costs. over the medium-to-long term. In the Japanese air-conditioner market, Q3 Could you explain by region the details of the measures you are Regarding the Asia region, we greatly we are aiming to alleviate the negative increased our air-conditioner product sales impact of yen depreciation by promoting in the region as a whole during fiscal greater sales of high-value-added prod- 2015, and we were able to become the ucts and moving further ahead with taking to more-deeply cultivate No. 1 company in terms of sales in cost-cutting measures, and we, thereby, air-conditioning markets in North Vietnam. We plan to continue augment- will endeavor to sustain growth in profit- America and Asia? ing our efforts to develop additional mar- ability during fiscal 2016. Moreover, tak- keting outlets and promote greater sales ing full advantage of the opportunities Potential for Becoming No. 1 in North of our VRV air-conditioning systems (mul- presented by the increasing rigor of envi- America and Already Becoming No. 1 tiple air-conditioning systems for office ronmental regulations, we are working to in Asian Markets buildings). Aiming to expand our overall increase our shares of markets for both Togawa: Regarding North American share of the residential market, we are residential- and commercial-use products air-conditioning business, we achieved promoting greater sales of residential-use by offering products and services that are large sales growth during fiscal 2015 in high-value-added products from an exten- increasingly appealing owing to our each principal segment of our business— sive lineup that includes models using the strong energy conservation technologies. residential unitary products that are the new refrigerant R32, a new refrigerant Fiscal 2016 will be a year during which mainstream products in that region, with low global-warming potential (GWP), we will be making full-scale efforts to applied (large-scale commercial-use), and while concurrently launching additional obtain orders associated with the large- Japanese-style ductless products that offer volume-zone inverter products. We are scale redevelopment projects being under- outstanding energy conservation perfor- aiming to become the No. 1 company in taken in preparation for the Tokyo mance—and we were able to record terms of sales in India and Thailand during Olympic Games in 2020. Since the capital growth in both revenue and profitability. fiscal 2016, and we are also seeking to region accounts for approximately 40% of We are steadily realizing additional syn- attain the No. 1 position in Indonesia as Japan’s total demand for air-conditioning ergies with U.S.-based Goodman, which early as possible. products, we are shifting marketing staff we acquired in 2012. In the second year Our air-conditioning business in China to that region to intensify our marketing following the acquisition, we moved fur- continues to face challenging market con- activities there to the greatest possible ther ahead with such rationalization mea- ditions, including a decline in large-scale degree. sures as those designed to promote the investments and real estate projects stem- Regarding our air-conditioning business integration of procurement functions and ming from the slackening of China’s in Europe, harsh economic conditions the elevation of distribution efficiency, and economic growth. To overcome those along with challenges presented by such our full-scale efforts to promote greater challenges, we are leveraging our power- factors as cool summer weather in south- sales of ductless products made a signifi- ful marketing systems centered on the ern Europe caused our overall sales in the cant contribution to our performance. We nationwide Daikin PROSHOP network of region to decline during fiscal 2015. are determined to achieve our target of specialty and ordinary retail sales outlets In fiscal 2016, we will be responding to increasing the cumulative amount of while stepping up our proposal-based conditions in each European region by annual quantitative synergies generated marketing operations in the residential- reinforcing our product lineup as well as to ¥24 billion in operating income in fiscal use market, where demand is robust, implementing marketing strategies finely 2016, the third year following the acquisi- as well as in the commercial-use market. tailored to address the needs of each tion. Through those efforts, the launch of such region and, against the backdrop of Energy-conserving types of products new products as highly differentiated mul- increasingly strict environmental regula- have not yet greatly penetrated the North tiple air-conditioning systems for residen- tions, we will strive to expand our sales American market, and we believe that tial use, and sustained measures to reduce of heat-pump hot-water-supply and 9 DAIKIN INDUSTRIES, LTD. ANNUAL REPORT 2015Financial Highlights/At a GlanceA Message from the CEOInterview with the CEOReview of OperationsCorporate GovernanceFinancial Section Interview with the CEO room-heating systems. We are continuing acquisition will also allow Daikin to lever- manufacturing technologies with Daikin’s to strengthen our business systems in age Solvay’s lineup of automobile-use advanced manufacturing technologies, we Europe as a means of preparing to quickly refrigerants to further strengthen its rela- anticipate realizing a large increase in expand our profitability there when eco- tionships with automobile manufacturers manufacturing efficiency and the timely nomic conditions improve in the future. and thereby expand the scope of its busi- market launches of strategic products ness operations. Q4 What kinds of measures will you be implementing in your Q5 You will be inaugurating a with a high level of cost-competitiveness. Through these initiatives, we will be pro- gressively augmenting our presence in the U.S. market, which is the world’s largest Chemicals business? new strategic business plan from fis- air-conditioning product market. cal 2017. Please explain the kinds of In November 2015, we plan to com- Establishing a Full-Scale Presence in measures you will be implementing plete and begin operating our Technology the European Refrigerants Market during fiscal 2016 in preparation for Innovation Center (TIC) on the grounds of Togawa: Despite challenges presented by initiatives during the five-year period the Yodogawa Plant, in Osaka. the increasing strength of local chemical of the upcoming plan. As the core R&D base for Daikin’s global manufacturers in China, we are concerted- operations, the TIC will undertake R&D ly employing our research, technology, and Large-Scale Upfront Investments for a related to world-leading advanced tech- marketing strengths to accelerate our Consolidated Goodman Facility in the nologies, and we intend to use the tech- development of new applications and U.S. and for R&D System Renovation nologies created by the TIC to greatly expand our sales in such robust markets as Togawa: We are currently proceeding increase the efficiency and speed of our those associated with automobiles, infor- with the drafting of the new strategic programs to develop core technologies for mation terminals, and semiconductors. business plan, and we are also implement- such strong Daikin businesses as those in In February 2015, Daikin acquired the ing upfront investments that provide a heat pumps, inverters, and fluorochemi- refrigerant business in Europe (FY2013 strong foundation for a surge of corporate cals. We anticipate that the TIC will enable sales of approximately 53 million) of growth in the future. Daikin to generate a continuing series of Solvay S.A., a major Belgium-based chem- Aiming to expand U.S.-based new technologies, products, and services ical group. In accordance with its special Goodman’s air-conditioning product busi- in line with the demands of our customers responsibility as the world’s only enterprise ness in North America over the medium- and of society at large. To do this, we will with capabilities for manufacturing both to-long term, we are constructing a new be deepening our relationships with air-conditioning equipment and refriger- facility in a suburb of Houston, Texas, universities, research institutions, and ants, the Daikin Group is seeking to pro- where Goodman’s headquarters is locat- companies from diverse other industries mote the use of refrigerants with low ed. The new facility is designed to inte- throughout the world as we strive to pro- global-warming coefficients and thereby grate the operations of Goodman’s four mote collaborative creation of innovation help restrain the global-warming trend. manufacturing and distribution bases in that integrates the technologies and The restrictions on fluoron gases that con- the United States as well as to help con- expertise of the various partners. tribute to global warming are becoming solidate marketing and support functions. We believe this approach will enable us stricter owing to Europe’s F-Gas Besides augmenting manufacturing to make sustained contributions to global Regulations, which are requiring a shift to capabilities in preparation for future society while also allowing us to outcom- the use of refrigerants with relatively low growth, the new facility will unify previ- pete rival companies. global-warming coefficients. Using its new ously scattered manufacturing and distri- local capabilities for producing such low bution units in a way that will greatly global-warming coefficient refrigerants, shrink lead times and enable the building Daikin is undertaking measures to estab- of manufacturing systems that can flexibly lish a full-scale presence in European respond to demand trends. Moreover, by refrigerant markets. The business integrating Goodman’s low-cost 10 Q6 Please explain your thoughts commemorate the 90th anniversary of conditioners of the earth,” and we are, about Daikin’s fundamental policy on Daikin’s founding by recording growth in therefore, striving through the “Forests for shareholder returns and about divi- both revenue and profit for the fifth con- the Air” project to protect virgin forests in dend levels in fiscal 2015 and fiscal secutive year, and we attained record high the Amazon basin and six other regions of 2016. levels of both consolidated net sales and the world from the primary causes of for- consolidated net income. Cash dividends est loss. Strong Performance Reflected in applicable to fiscal 2015, including a spe- In view of the many voices currently Shareholder Returns cial ¥10 dividend commemorating the demanding that companies do a better Togawa: Corporate operating environ- 90th anniversary, amounted to ¥100 per job measuring and managing the diverse ments are changing at a dizzying speed, share, a ¥50 increase from the previous kinds of impact they exert on society, we and Daikin has responded to date by fiscal year. For fiscal 2016, the Company are giving strong emphasis to further taking measures to accelerate its global plans to distribute a total annual cash strengthening our corporate governance business development and promote dividend of ¥110 per share. systems and expanding the scope of our environmental innovation business as well as to realize speedy business expansion through acquisitions, alliances, and collab- Q7 In the context of your pursuit CSR activities to encompass the entirety of our value chains. Going forward, we will do our utmost orations. We have decisively moved ahead of profits, what kind of CSR measures to continue implementing FUSION 15 in with the implementation of growth- are you implementing? Also, please ways that concurrently achieve environ- oriented investments, and we have been give us a concise message to Daikin’s mental contributions and business expan- able to expand our business results by shareholders. steadily reaping the fruits of those invest- sion, help build a sustainable society, and elevate our enterprise value as well as our ments. Going forward, we do not intend Endeavoring to Alleviate Climate market value in the medium-to-long term. to change this fundamental approach. Change, Promote High-Amenity As we move ahead toward the 100th Aiming to become a truly global and Lifestyles, and Elevate Enterprise anniversary of Daikin’s founding, I hope excellent company, we will proceed with Value for your continued understanding and measures to achieve FUSION 15 targets Togawa: Since its principal business is support. and prepare for an additional surge of focused on air-conditioning products, business development and growth by which account for a large share of electric undertaking strategic investments power consumption, the Daikin Group is designed to promote global business strongly conscious of its responsibility to development, the development of undertake CSR activities that protect the products with outstanding environment- global environment. friendly characteristics, and will tirelessly Besides providing products with out- endeavor to upgrade our competitive standing energy conservation perfor- power and our business performance. At mance and other products and services the same time, aiming to build a highly that help restrain greenhouse gas emis- sound financial position, we are accelerat- sions, the Daikin Group is emphasizing ing our efforts to reduce our interest- measures to promote the global diffusion bearing debt ratio, increase our working of refrigerants with low global-warming capital efficiency, and otherwise create a coefficients. In addition, the Group has highly resilient corporate structure. noted that forest destruction is another Moreover, we are intending to further factor contributing to climate change, and augment shareholder returns. it, therefore, began implementing its In fiscal 2015, with the support of “Forests for the Air” project in fiscal 2015. our shareholders, we were able to We consider forests to be “the natural air 11 DAIKIN INDUSTRIES, LTD. ANNUAL REPORT 2015Financial Highlights/At a GlanceA Message from the CEOInterview with the CEOReview of OperationsCorporate GovernanceFinancial Section Review of Operations Current Highly Differentiated, High-Value-Added Offerings Support Strong Sales of Commercial-Use Products While the Japanese commercial air-condi- products as those of the Ve-up series of energy conservation standards prior to tioning equipment market during fiscal multiple air-conditioning systems for their introduction, and other high-value- 2015 was impacted by a demand slump office buildings, and the Group’s sales added models, but the large impact of the following accelerated demand in advance of commercial-use products surpassed decrease in overall demand caused the of the consumption tax rate hike, support their level in the previous fiscal year. Group’s sales of residential air-condition- from an increase in capital investment and In Japan’s residential air-conditioning ing products to fall below their level in the the government’s energy conservation market, unfavorable summer weather previous fiscal year. investment support policies kept the level trends and a delay in the post-consump- The Group’s overall sales of commercial of demand at roughly the same level as in tion tax hike recovery of consumption and residential air-conditioning products the previous year. The Daikin Group kept demand lower than in the previous were higher than in the previous year. moved ahead with its marketing promo- fiscal year. The Daikin Group worked to Reflecting this, selling price setting poli- tion activities for such highly differentiat- differentiate its products by making all its cies designed to reflect the rise in materi- ed products as FIVE STAR ZEAS, which wall-mounted room air-conditioner mod- als procurement costs owing to yen uses the low global-warming factor refrig- els compatible with R32 refrigerant and depreciation, and thorough cost reduction erant R32, and Eco-ZEAS80 models as worked to promote sales of the Urusara 7 measures, a year-on-year increase in oper- well as for such high-value-added room air conditioner, which met 2015 ating income was achieved. Air Conditioning The Japanese Market 12 Solutions business operations provide new value by addressing needs through means not limited to the marketing of equipment products. Promoting sales of highly differentiated, high-value-added products with outstanding energy conservation performance and environment-friendliness Such air-conditioning equipment selling price policies, the Company will addition, in response to the imple- demand-related economic indices as per- aim to realize increases in both sales and mentation of Japan’s revised Act on the sonal consumption, housing construction profitability. Rational Use of Energy (2013) and Act on starts, and private-sector capital invest- Regarding commercial air conditioners, the Rational Use and Proper Management ments are all projected to show year-on- Daikin will emphasize sale promotion of Fluorocarbons (2015) Daikin will year increases during fiscal 2016. programs for such highly differentiated endeavor to provide new value through its In its domestic air-conditioning equip- products as the FIVE STAR ZEAS and solutions business centered on energy-con- ment business, Daikin will fully leverage Eco-ZEAS80. Because air-conditioning serving equipment and related services and the profit base it has built to date while needs associated with the large-scale rede- thereby aim to expand its market share. strengthening its marketing activities velopment projects being undertaken in With respect to residential air condi- tailored to the special situations of each preparation for the 2020 Tokyo Olympic tioners, Daikin will seek to promote great- region to accelerate the development of Games are expected to become full- er sales of high-value-added products additional marketing outlets and markets fledged during fiscal 2016, Daikin intends centered on Urusara 7 models while also and while undertaking fundamental to augment and strengthen its marketing further increasing its competitive power in reforms of its marketing capabilities. In systems in the capital region and strive to the volume-zone product sector as a addition, by thoroughly maintaining its obtain orders related to those projects. In means of expanding its market share. Reinforcing Marketing Systems with an Eye to the Upcoming Tokyo Olympic Games Future 13 DAIKIN INDUSTRIES, LTD. ANNUAL REPORT 2015Financial Highlights/At a GlanceA Message from the CEOInterview with the CEOReview of OperationsCorporate GovernanceFinancial Section Review of Operations Current Strong Performance in the United States, China, and Southeast Asia During fiscal 2015, global air-condition- Increased sales were also recorded in ing equipment business sales grew in all the Asia and Oceania region. Major fac- countries and regions other than Europe, tors contributing to this increase included and overall sales surpassed their level in the forceful promotion of new marketing the previous year. outlet development and the launch of In North America, in advance of an highly differentiated products that offer increase in the rigor of energy-conserva- superior energy-conservation perfor- tion regulations, Daikin recorded strong mance and use R32 refrigerant. Strong sales of its mainstay residential-use uni- performance was achieved in each coun- tary air-conditioning equipment prod- try in which Daikin has established a ucts as well as of ductless products, presence, and particularly strong sales which are mainstream offerings in the increases were recorded in Vietnam and Japanese market. The ductless product Indonesia, where the expansion of lineup centers on the VRV air-condition- demand for air conditioners has been ing systems (multiple air-conditioning especially large. systems for office buildings) marketed Although operations in Europe faced through Goodman channels. As a result, challenges stemming from the delay of a year-on-year increases were achieved in recovery in the EU economy as well as sales of residential-use products and from relatively cool summer weather in light commercial-use products for southern European countries that are medium-scale office buildings. Sales principal markets, Daikin’s implementa- in applied (large-scale commercial) tion of marketing policies focused on air-conditioning equipment business also addressing recoveries in construction- expanded, reflecting growing sales of related demand in the U.K. and Germany high-value-added products. enabled strong performance in sales of In China, Daikin expanded its nation- commercial-use products. In France, wide marketing network centered on which has increased the rigor of its envi- ordinary retailers as well as exclusive ronmental regulations, Daikin emphasized Daikin PROSHOP retail sales outlets and the marketing of heat-pump hot-water- was able to expand its sales, particularly supply and room-heating systems. sales of residential-use multiple air-condi- tioning systems. Applied business also grew, and overall sales in China were above the level in the previous year. In addition, such measures as those to increase the share of components inter- nally produced at Daikin factories in China and to utilize Daikin’s Shanghai R&D Center with respect to local procurement programs enabled improved profitability. Air Conditioning The Global Market Promoting comprehensive cost-reduction mea- sures, including those leveraging the Shanghai R&D Center’s local component procurement capabilities 14 Strengthening marketing networks in China centered on the Daikin PROSHOP network of specialty and ordinary retail sales outlets Air Conditioning The Global Market Launching new products designed to meet the different needs of each individual country’s market Utilizing Goodman’s sales network to expand the scope of ductless air-conditioner marketing in the United States During fiscal 2016, Daikin will implement that market through such measures as newly launched New Life Multi Series resi- global air-conditioning business marketing those to launch new products and estab- dential-use multi air conditioners. strategies that respond to changes in the lish local manufacturing systems. Regarding commercial-use offerings, markets of individual countries and regions. In the Asia and Oceania region, the Daikin is emphasizing the broad-scale In North America, Daikin will strive to development of additional retail market- implementation of a bipolar marketing leverage synergies with respect to residen- ing outlets has been a primary factor strategy focused on highly differentiated tial-use unitary air-conditioning equip- propelling Daikin’s business expansion. products and volume-zone products. The ment products by making good use of Aiming to augment its profitability, the Company is aiming to expand its profit- Goodman’s outstanding strengths regard- Company will forcefully promote addition- ability by concertedly managing its devel- ing low-cost manufacturing operations. al marketing outlet development while opment, manufacturing, marketing, and Amid expectations of a counter-reaction also fostering close relations with outlets service systems in an integrated manner. accompanying an increase in the strictness that have strong proposal-based market- In Europe, Daikin is implementing a of energy-conservation regulations, Daikin ing capabilities, and expand its lineup of detailed marketing strategy adapted to will take such measures as those to launch residential-use high-value-added products the different characteristics of individual highly differentiated ducted unitary as well as VRV and applied offerings. In countries’ operating environments. inverter models with outstanding energy Thailand and India, Daikin is aiming to be Regarding room-heating products, the conservation performance. In applied the No. 1 company in terms of net sales. Company is augmenting its lineup of both business, the Company will strive to In China, factors including a tendency heat-pump and combustion-type offerings increase sales by strengthening its service toward economic deceleration are con- as it seeks to further expand sales. Daikin system. The North American market for tinuing to create a harsh operating envi- is also stepping up its efforts to realize ductless products is rapidly growing ronment, but Daikin is leveraging its greater profitability through fixed cost owing to the high level of such products’ Daikin PROSHOP network of exclusive re- reductions and other measures designed energy-conservation performance, and tail sales outlets to strengthen proposal- to create a stronger business structure. Daikin will seek to expand its business in based marketing programs focused on Strengthening Global Marketing Power and Profitability Future Aiming to earn the No. 1 share of India’s growth market 15 DAIKIN INDUSTRIES, LTD. ANNUAL REPORT 2015Financial Highlights/At a GlanceA Message from the CEOInterview with the CEOReview of OperationsCorporate GovernanceFinancial Section Review of Operations Anti-smudge surface-coating agents for touch screens and other applications Chemicals Recording robust sales of fluororubber products for automotive applications in the United States and China 16 ZEFFLE anti-fouling and weather-resistance coatings used to improve the dura- bility of solar- and wind-power equipment Current Growth in Sales and Profitability Achieved by Responding to Automobile-Related Demand Despite differing demand trends seen infrastructure projects and of U.S. agents were robust in Asia, Europe, and with respect to individual products and demand related to LAN cable and semi- the United States. This and abundant regions during fiscal 2015, overall sales conductor applications, a year-on-year Chinese demand for an anti-smudge sur- of Chemicals business operations were increase in sales was realized owing to face coating agent for smartphone touch higher than in the previous year. such factors as the strength of U.S. screens boosted chemical products sales Reflecting benefits stemming from the demand for automotive applications. to a level higher than that achieved in sustained forceful implementation of Despite slack Chinese demand for fluoro- the previous year. measures to reduce fixed costs and lower elastomers, Daikin was able to record a Demand for fluorocarbon gases manufacturing costs, a year-on-year higher level of fluoroelastomer sales than decreased in Japan, China, and other increase in operating income was also in the previous year as a result of strong Asian countries, and Daikin’s restraint of achieved. sales for automotive applications in the marketing activities as a means of sup- Regarding fluoroplastics resins, despite United States and Asia. porting the level of selling prices kept the sluggishness of Chinese demand In the chemical products business, its fluorocarbon gas sales below the related to railway and communications Daikin’s sales of water and oil repellent previous year’s level. Future Responding to Opportunities in Diverse Fields Diverse opportunities for new kinds of needs. By coordinating business opera- ness with automobile makers to promote fluorochemical business are emerging tions related to individual products as its fluoroplastics resin sales and other- with respect to numerous products and well as drafting common short- and wise accelerate its business expansion. markets. Daikin is augmenting its appli- medium- to long-term strategies for mul- As demand in Asian fluorochemical cation development operations and tiple products, the Company is strength- markets is expected to expand in the expanding its marketing of highly differ- ening its efforts to globally expand its future, Daikin is emphasizing thorough entiated products, placing particular fluorochemical business. marketing programs focused on end emphasis on applications related to auto- In February 2015, Daikin acquired the users as it seeks to greatly expand its mobiles, information terminals, semicon- refrigerant gas business in Europe of shares of those markets. ductors, and lithium-ion batteries as well Solvay S.A., a major Belgium-based To further strengthen its business as applications in the new energy field, chemical manufacturer. Besides enabling structure, the Company is radically low- such as coatings for wind-power genera- Europe-based refrigerant production and ering inventory levels while also proceed- tion equipment. Daikin is also strength- full-scale participation in business supply- ing with comprehensive cost reduction ening its marketing capabilities in the ing refrigerants for automotive applica- programs involving such measures as United States and Europe, which have tions, the business acquisition will allow those to streamline production processes the world’s highest levels of leading-edge Daikin to leverage Solvay’s base of busi- and shrink production lead times. 17 DAIKIN INDUSTRIES, LTD. ANNUAL REPORT 2015Financial Highlights/At a GlanceA Message from the CEOInterview with the CEOReview of OperationsCorporate GovernanceFinancial Section Review of Operations An EcoRich energy-efficient oil hydraulic drive unit Oil Hydraulics Current Robust Sales Performance in All Product Fields In its oil hydraulics business operations, large margin, as sales were effectively Daikin supplies diverse kinds of oil promoted by the Company’s emphasis hydraulic equipment used to realize on high-value-added solutions business smooth movements on the parts of con- involving technical consultations, struction equipment and industrial equip- after-services, unit designs, and other ment (such as processing machinery in processes designed to meet Japanese factories, etc.) as well as tractors and needs for electric power conservation. other small-scale vehicles. Sales of oil hydraulic equipment for con- Oil hydraulics business sales in fiscal struction equipment and motor vehicles 2015 were higher than in the previous also increased, reflecting Daikin’s employ- year. Daikin’s sales of oil hydraulics ment of integrated manufacturing and equipment for industrial machinery marketing systems to effectively respond surpassed the previous year’s level by a to robust demand in Japan and overseas. Future Elevating Profitability in Japan and Augmenting Efforts to Expand Global Operations In Japan, the application of top runner manufacturing equipment markets, and standards* will be broadened to cover it is striving to strengthen its marketing, motors during fiscal 2016, and this is cost, and quality power with respect to expected to act as a tailwind in support- such products. In addition, Daikin is aim- ing sales of high-value-added oil hydrau- ing to expand its business supplying lic units for applications related to hydrostatic transmissions (HSTs) for such high-efficiency IPM motors. Aiming to agricultural machinery as combines. elevate the profitability of its operations Daikin is working to expand its busi- in Japan, Daikin is taking measures to ness base in the United States through promote its sales of such units by increas- measures centered on its maintenance, ing the proactiveness of its marketing repair, and operations (“MRO”) business, activities based on systems proposals and which has sustained strong performance. hydraulic circuit proposals. The MRO business model also has In China, Daikin is moving ahead with great potential in European and Asian super unit (energy-saving high-perfor- markets, and Daikin is making progress mance oil hydraulic unit) development in preparing concrete plans for launching programs centered on needs in the MRO business in those markets. molding equipment and general-use Oil hydraulic units providing drive power for construction equipment and vehicles 18 *Energy-consumption efficiency target standards have been greatly elevated based on the 2013 revision of Japan’s Energy Conservation Law. Daikin’s defense business encompasses In fiscal 2015, defense business sales operations designing and manufacturing surpassed their level in the previous year, various kinds of artillery shells, missile reflecting growth in orders from the warheads, fuses, aircraft components, Ministry of Defense for artillery shell and other products for Japan’s Ministry components and aircraft components. of Defense. Expanding the scope of its Regarding oxygen concentration devices leveraging of associated precision pro- for home-use oxygen therapy, Daikin cessing technologies, the Company has expanded sales by augmenting its product undertaken the manufacture of other lineup through the launch of units offer- products requiring high levels of preci- ing improved performance with respect to sion, functionality, and quality, such as ease of maintenance, energy-conservation home-use oxygen therapy equipment. performance, and other characteristics. Current Strong Sales in Both Defense and Civil- Sector Fields Defense Future Further Cultivating Japanese and Chinese Markets for Civil-Sector Fields Based on the assumption that Regarding civil-sector fields, Daikin is defense-related orders will tend to seeking to strengthen its base of business decline going forward, Daikin is seeking in home-use oxygen therapy equipment to reinforce its profitability by progres- through efforts to reduce costs and devel- sively implementing measures to increase op new products as well as to strengthen operational efficiency and to concentrate marketing and sales capabilities in Japan. its operations by strategically narrowing Plans for the global development of this the scope of manufacturing processes business call for launching operations in and facilities. At the same time, the China during fiscal 2015, building up Company is determined to maintain and business centered in the Shanghai region, strengthen the special manufacturing and then promoting sales growth skills and technologies it has developed through the creation of marketing routes for this business field. in the Beijing region. 19 DAIKIN INDUSTRIES, LTD. ANNUAL REPORT 2015Financial Highlights/At a GlanceA Message from the CEOInterview with the CEOReview of OperationsCorporate GovernanceFinancial Section 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 management 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 transparency. In addition, to realize an increase in corporate value, the Group will continually consider and reevaluate its concepts regarding the most-appropriate forms of corporate governance 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 execution, the Group has adopted an “integrated management” system that calls for directors to bear responsibility for management 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 execution. 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. The Group appoints directors while giving emphasis to the diversity of directors’ backgrounds regarding such characteristics as nationality, gender, and career history. As of June 2015, 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 performing sound supervision for the entire Group. Daikin’s Board of Directors included two external directors as of June 2015. Daikin seeks to recruit external directors who, conditional upon their being free of any conflict of interest, 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 director, etc., in a listed enterprise is a principal nomination criterion for external director recruitment. None of Daikin’s external directors have five or more concurrent posts. To ensure that the external directors can effectively contribute 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 Daikin-related information, early notice of Board of Directors meetings, and prior notice of Board of Directors meeting agenda items, as well as implementing prior explanations of particularly important agenda items. 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 director with an explanation of the proceedings of the meeting and provide other assistance. Audit System Daikin employs an Audit and Supervisory Board and seeks to nominate two or more outside members to its Audit and Supervisory Board. As of June 2015, Daikin’s four Audit and Supervisory Board members included two external Audit and Supervisory Board 20 Shareholders’ Meeting Audit Appointment, dismissal Accounting Auditor Board of Directors Appointment, supervision Audit & Supervisory Board Audit & Supervisory Board Members Group Auditors Meeting CSR Committee, Corporate Ethics and Risk Management Committee, Development Committee for Operational Adequacy Promotion System, Information Disclosure Committee Member of the Advisory Council HRM and Compensation Advisory Committee Group Management Meeting Executive Officers Meeting Group Steering Meeting Executive Officers (The rest is abbreviated) External Directors’ Principal Activities Name Principal Activities Chiyono Terada Kosuke Ikebuchi Having attended 15 out of 16 meetings of the Board of Directors of the fiscal year under review, Chiyono Terada offered timely proposals as needed, based on her abundant experience and deep insight as a corporate manager and from her broad and advanced perspective, including proposals concerning management based on the viewpoints of consumers, such as the importance of the brand of the Company and measures to further promote achievements of female employees. Having attended 15 out of 16 meetings of the Board of Directors of the fiscal year under review, Kosuke Ikebuchi provided timely proposals as needed, based on his abundant experience and deep insight as a corporate manager and from his broad and advanced perspective, including viewpoints concerning manufacturing, such as production innovation, cost reduction, and enhancement of reliability and productivity. members. The principal nomination criteria for external 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. 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 related to management and performance when necessary and also investigates relevant units, confirms approval of documents, and regularly exchanges opinions with representative directors, executive officers, and the independent auditors. In addition, the Audit and Supervisory Board Member Office has been established to provide assistance in audit and supervisory activities. The Audit and Supervisory Board Member Office staff perform their duties under the orders and direction of the Audit and Supervisory Board members, and the Audit and Supervisory Board’s opinions are respected with regard to personnel transfers, work evaluations, and other matters pertaining to the Audit and Supervisory Board Member Office staff members. External Audit and Supervisory Board Members’ Principal Activities Name Principal Activities Yoshiyuki Kaneda Ryu Yano Having attended all 16 meetings of the Board of Directors and all 14 meetings of the Audit and Supervisory Board of the fiscal year under review, from his broad and advanced perspective, Yoshiyuki Kaneda offered timely proposals as needed, regarding technology development, based on his abundant experience and deep insight as a corporate manager. Having attended 14 out of 16 meetings of the Board of Directors and 13 out of 14 meetings of the Audit and Supervisory Board of the fiscal year under review, from his broad and advanced perspective, Ryu Yano offered timely proposals as needed, with respect to overseas business, based on his abundant experience overseas and deep insight as a corporate manager. Systems for Supporting Speedy Management Daikin has reduced the number of directors, and those directors are, therefore, able to realize speedy decision making based on substantive deliberations. Daikin has three main decision-making institutions—the Board of Directors, the Group Steering Meeting, and the Executive Officers Meeting—and each of these meets once per month. 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 fiscal 2015, it met eight times. The Board of Directors is the decision-making institution for all matters related to the Group as a whole that are stipulated by laws and regulations and by the articles of incorporation, and it also performs supervision to ensure sound and appropriate operational execution. In fiscal 2015, it met 16 times, and the average attendance rates of external directors and external Audit and Supervisory Board members at those meetings were 94% and 94%, respectively. The Group’s management system also includes such units as an Advisory Council that offers opinions and advice regarding management issues from an independent standpoint. In addition, to respect and protect the interests of diverse stakeholders other than stockholders, Daikin has, based on the Board of Directors, established its CSR Committee, Corporate Ethics/Risk Management Committee, and Information Disclosure Committee. Corporate Officer Remuneration, Etc. To ensure the transparent management of its corporate officer personnel and remuneration processes, Daikin has established the Compensation Advisory Committee. This committee engages in discussions and deliberations regarding issues including corporate officer nomination criteria, corporate officer candidates, and remuneration. The Committee consists of four members, including two external directors and two in-house directors, with the Committee chairman being chosen from the external directors. The remuneration of directors and Audit and Supervisory Board Members is determined so as to fall within the aggregate remuneration ceiling for directors and Audit and Supervisory Board Members 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 Audit and Supervisory Board Members’ 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 performance over the medium-to-long term and thereby contributing to a rise in the Group’s corporate value. Directors’ remuneration includes “fixed compensation,” “performance-linked compensation” that reflects the Group’s short- term performance (net sales and operating income) and each director’s job responsibilities, and “stock options” that reflect the Group’s medium- to long-term performance. The remuneration of external directors and corporate auditors includes “fixed compensation” only. Compensation levels are determined based on consideration of Daikin’s performance and remuneration levels compared 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. 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 compensation is sufficient. Total Compensation for Directors and Audit and Supervisory Board Members (Fiscal 2015) Position Number of Individuals Directors Audit and Supervisory Board Members Total 11 2 13 Fixed Compensation (Millions of yen) Basic 691 61 752 Performance-linked Compensation (Millions of yen) Stock Options 162 Bonus 300 Total Compensation (Millions of yen) 1,154 — — 61 162 300 1,215 Total Compensation for External Directors and External Corporate Auditors (Fiscal 2015) Position Number of Individuals Fixed Compensation (Millions of yen) Basic Performance-linked Compensation (Millions of yen) Stock Options Bonus Total Compensation (Millions of yen) Total Compensation for External Directors and External Audit and Supervisory Board Members 4 59 — — 59 Corporate Officers Receiving Total Compensation and Other Exceeding ¥100 Million (Fiscal 2015) Name Position Company Name Noriyuki Inoue Masanori Togawa Ken Tayano Masatsugu Minaka Director Director Director Chair- man Director Director Guntaro Kawamura Director Daikin Industries, Ltd. Daikin Industries, Ltd. Daikin Industries, Ltd. Consolidated Subsidiary, Daikin (China) Investment Co., Ltd. Daikin Industries, Ltd. Consolidated Subsidary, Daikin Europe N.V. Daikin Industries, Ltd. Fixed Compensation (Millions of yen) Basic Performance-linked Compensation (Millions of yen) Stock Options Bonus Total Compensation (Millions of yen) 177 33 83 294 117 33 53 204 115 16 37 9 — — 5 16 26 67 — — 179 116 68 16 27 112 Total Compensation and Other for Independent Auditors (Fiscal 2015) Audit expense 242 (Millions of yen) Group Governance To meet governance needs on a Group basis including M&A-related Group companies, Daikin holds meetings of the Group Steering Meeting. By working to thoroughly ensure that all Group units share the Group’s important management policies and by endeavoring to promote and strengthen support for the resolutions of challenges of Group companies, the Group Steering Meeting seeks to make the Group undertake corporate activities based on unified objectives. Principal Group companies appoint Group auditors to participate in Group Auditors’ meetings, which seek to strengthen Groupwide auditing and auditing functions by undertaking activities to strengthen the operation of those functions. To further strengthen corporate governance and Group management as a multinational company, Daikin has appointed a Chief Global Group Officer, who endeavors to further improve the Group’s cohesiveness. 21 DAIKIN INDUSTRIES, LTD. ANNUAL REPORT 2015Financial Highlights/At a GlanceA Message from the CEOInterview with the CEOReview of OperationsCorporate GovernanceFinancial Section Corporate Governance Directors, Audit and Supervisory Board Members, and Executive Officers (As of June 26, 2015) Position(s) Responsibilities & Principal Jobs Name Chairman of the Board and Chief Global Group Officer President and CEO, Member of the Board Noriyuki Inoue Masanori Togawa Member of the Board (external) Chiyono Terada President 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) 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 Responsible for Global Operations Division and Manufacturing Technology and Subleader of TIC Establishment Project Takashi Matsuzaki Responsible for North America Research and Development (including Applied Solution Business, Refrigeration Business, and Filter and Dust Collection Business) and Subleader of TIC Establishment Project 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. Audit and Supervisory Board Member Kenji Fukunaga Audit and Supervisory Board Member Kosei Uematsu 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 Shigeki Hagiwara Responsible for Applied Solution Business, Service Operations and Training, and General Manager of Applied Solution Business Division Senior Executive Officer Senior Executive Officer Shinya Okada Responsible for CSR, Global Environment Affairs, and Refrigeration Business and Chairman of CSR Committee Yoshikazu Tayama General Manager of Budget and Administration Group, Finance and Accounting Division Senior Executive Officer Yoshiyuki Uemura Senior Executive Officer Masayuki Moriyama Director of Goodman Global Group, Inc., EVP for Cooperation and Strengthening Technological Capabilities, and President of Daikin Holdings (Houston), Inc. 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 Executive Officer Katsuyuki Sawai Responsible for Corporate Communication, Human Resources, and General Affairs and General Manager of Shiga Plant Toshitaka Tsubouchi Vice President of Daikin Europe N.V. (in charge of existing business) and General Manager of Sales Division Hiroo Sakai Responsible for Chemicals Environment/Safety and General Manager of Chemicals Division Yoshihiro Mineno General Manager of Global Operations Division, Director (non-resident) of Goodman Global Group, Inc., Director of Daikin Holdings (Houston), Inc. Executive Officer Hitoshi Jinno Responsible for PL/Quality, Air-Conditioning/Refrigeration/Applied, General Manager of Air-Conditioning Manufacturing Division, Chairman of PD Alliance Promotion Committee, and General Manager of Sakai Plant Executive Officer Executive Officer Executive Officer Executive Officer Kota Miyazumi Responsible for Corporate Planning, General Manager of Marketing Research Division, Director of Planning Group in Marketing Research Division Tsutomu Morimoto Responsible for Executive Secretarial Department, Goodman Group Business Yuji Yoneda Responsible for Air-Conditioning Research and Development (including Applied Solution Business and Refrigeration Business) and Subleader of TIC Establishment Project Masaki Saji General Manager of Human Resources Division Executive Officer Masafumi Yamamoto Responsible for Corporate Ethics, Compliance, Legal Affairs, General Manager of the Legal Affairs, Compliance and Intellectual Property Center, Department Manager of Domestic Legal Affairs Group, and Chairman of Corporate Ethics and Risk Management Committee Executive Officer Satoshi Funada General Manager of Air-Conditioning Sales Division 22 CSR (Corporate Social Responsibility) Air-conditioning systems, Daikin’s core business, are essential prerequisites for economic development and affluent lifestyles, and demand for air-conditioning products is expanding in emerging countries and elsewhere. As the industry’s top specialist air-conditioning systems Developing and Marketing Low Global-Warming Factor Refrigerant: Freon air-conditioner refrigerants have a greenhouse effect several hundred times to 2,000 times greater than that of CO2. As a manufacturer of air-conditioning systems that employ low global-warming factor refrigerants, the Daikin Group believes manufacturer, the Daikin Group aims to provide a comfortable it has a responsibility to proceed with the development of low and affluent lifestyle to people everywhere in the world while global-warming factor refrigerants. It has judged the next- taking into account the impact of its entire value chain, using generation refrigerant R32, which has a global-warming factor of its accumulated technological expertise to reduce the burden about one-third, to be optimal for household as well as on the environment, and thereby contributing to the commercial use air conditioners. R32 offers superior energy sustainable development of society overall. efficiency, with less refrigerant needed per air-conditioner unit, Given the nature and scope of its business, the Daikin and has the added advantages of being easily recyclable and Group has made “the environment,” “quality and customer reusable. Daikin first launched residential-use air conditioners that satisfaction,” “human resources,” and “contribution to use R32 in Japan, in fiscal 2013. Similar products were launched in society” its four strategically emphasized CSR themes. The Europe in 2013 and in Australia in 2014, and R32 models were Group promotes these CSR themes based on the ISO26000 international CSR standards, alongside its other fundamental being sold in 43 countries around the world at the end of fiscal 2015. initiatives in such areas as corporate governance, compliance, Daikin encourages other companies to easily adopt R32 as a low and human rights. Environment The Daikin Group considers climate change resulting from GWP refrigerant through offering free access to many of its patents to air conditioners, cooling equipment, and heat pump equipment using R32 as a single component refrigerant. Daikin also participates in support programs for emerging markets run by Japan’s Ministry of Economy, Trade, and Industry and the Japan International greenhouse gas emissions to be the largest societal problem that it Cooperation Agency (JICA). Further, the Group hosts groups of should help solve, and it is leveraging its technological and human trainees from emerging countries and proactively offers resource strengths to make related contributions. technological support to local manufacturers and dealers. Providing Energy-Saving Products: Through its products, Daikin is working to reduce CO2 emissions by (1) promoting the widespread use of energy-saving inverter products, (2) promoting the widespread use of heat pump solutions that emit less CO2 than previous combustion-type heating devices, (3) growing its energy-saving Daikin also continues to seek alternative refrigerants that are optimal for each application, including those for such products as water heaters, chillers, refrigerators, and freezers. Minimizing the Environmental Impact of Production Activities: Regarding the environmental impact of manufacturing operations, solutions business, and (4) developing next-generation refrigerants. Daikin considers the reduction of greenhouse gas emissions to be its Daikin’s factory in Suzhou, China, which is one of the Group’s largest, most-important challenge, and its FUSION 15 strategic management with annual capacity of 1.5 million units, is manufacturing inverter air plan aims to reduce such emissions to one-third (67% below) of the conditioners that are sold globally. In fiscal 2015, Daikin developed fiscal 2006 level by fiscal 2016. As of fiscal 2015, a 65% reduction high-volume-price-range inverters for regions in Asia that require only had been achieved. The Group is working steadily toward the air-cooling functions. The products are progressively penetrating the attainment of its target by fiscal 2016. Daikin is also making efforts markets of those regions, facilitated by the strengthening of energy to reduce water usage. In fiscal 2015, water usage per production conservation regulations in Southeast Asia and an increase in that unit at domestic Group companies was 1% lower than fiscal 2011 region’s consciousness of the need to conserve energy. Thanks to the levels and 13% lower at overseas Group companies. Emissions of benefits of these products and other factors, the Group estimates that it was able to reduce CO2 emissions by 28 million tons in fiscal 2015. Its emissions reduction target for fiscal 2016 is 30 million tons. chemicals subject to PRTR regulations were 30% lower than fiscal 2011 levels in fiscal 2015. In fiscal 2006, Daikin established the “Green Heart Factory” Going forward, Daikin will promote inverter products in North in-house standards to certify factories with advanced environment- America as well as in emerging markets. friendliness. As of fiscal 2015, 23 Daikin plants in Japan and abroad For heat pump heating solutions, Daikin is undertaking a large- had been certified as Green Heart Factories, with seven of these scale project in the United Kingdom to verify the effectiveness of receiving Super Green Factory certification. energy conservation methods related to heating and water heating. This project, taken on at the behest of Japan’s New Energy and Industrial Technology Development Organization (NEDO), is scheduled for completion in March 2017. Through this project, Daikin is Quality and CS (Customer Satisfaction) In April 2014, the Daikin Group established the “Regulations for working to promote heat pump product usage in cooperation with Global Quality Assurance.” The Group continues to expand its national and local governments and energy providers. product development, production, and sales operations globally. In 23 DAIKIN INDUSTRIES, LTD. ANNUAL REPORT 2015Financial Highlights/At a GlanceA Message from the CEOInterview with the CEOReview of OperationsCorporate GovernanceFinancial Section CSR (Corporate Social Responsibility) view of this, these regulations define the approach to quality that is to be shared by the entire Group, as well as defining the scope Evaluation and Working Conditions: Daikin seeks to build workplaces characterized by equality of opportunity and fairness of of related responsibilities and authority to promote the smooth outcome, where people with the desire to grow are rewarded for implementation of quality monitoring and correction measures. taking advantage of opportunities and producing results. All of Daikin’s production bases have ISO9001 certified quality control systems to thoroughly ensure quality control and quality level maintenance in every division from development and procurement to Promoting Diversity: Daikin is an organization that employs diverse people who respect different value systems irrespective of age, manufacturing. gender, nationality, race, temporary or permanent employment Further, based on each year’s Group New Year policy, each status, and traditional or mid-career joining status. Daikin employees business division determines its top-priority quality issues and sets seek to leverage this diversity to improve their organizational related targets. For fiscal 2015, the air-conditioning business strength and endeavor to attain ambitious goals. Daikin believes that addressed quality control issues while focusing on three goals— this kind of organization serves as a primary source of the Group’s ensuring a level of product development quality that eliminates new dynamic strength. Accordingly, the Group Compliance Guidelines lot claims, undertaking post-shipment product monitoring to state “We shall respect the diversity in values and approach to work effectively minimize problems at early stages, and comprehensively of all employees, accept differences, seek harmony, and gather assessing quality-related situations on a global level and implementing timely quality improvement measures at each location. strengths so that each and every employee can pursue his or her dreams boldly with passion and tenacity.” Pursuing Customer Satisfaction: To further raise customer satisfaction levels, it is crucial to quickly and accurately grasp needs Daikin Industries has also been systematically promoting the appointment of women in managerial roles, and the number of women in management has been increasing steadily. In March 2015, in each overseas market and make use of this understanding within the Company was selected by the Tokyo Stock Exchange and Japan’s product development operations. In this connection, Daikin is Ministry of Economy, Trade and Industry, as Nadeshiko Meigara strengthening its global marketing research functions by shifting (company that cherishes female workers) for fiscal 2015 because of from a unipolar R&D system centered on Japan to a system in which its excellent work in promoting the active participation of women. bases in overseas regions also autonomously conduct R&D. Regional The Daikin Group also actively employs people with disabilities. In bases unearth local needs and preferences by, for instance, Japan, Daikin has established Daikin Sunrise Setsu, Inc., as a special conducting surveys to learn about local design preferences or getting subsidiary company, and as of the end of March 2015, people with local customers to try products out before their official launches. disabilities accounted for 2.19% of domestic employees, which is Daikin Group companies in Japan and overseas also undertake above the legal requirement. In China, Daikin Air-conditioning customer satisfaction surveys, and the feedback from those surveys (Shanghai) Co., Ltd. actively employs people with disabilities; is employed to further enhance product and service quality. currently, 65 such persons are at the company. The Company was recognized by China as a vocational training base for people with Customer Support: In Japan, for the air-conditioning business, the Daikin Contact Center accepts inquiries from all customers, 24 hours disabilities in April 2014. Daikin works to help people with disabilities improve their skills, and 12 of its employees won individual prizes at a day, 365 days a year. Every year, the Service Division implements a a regional vocational skills contest for people with disabilities. In questionnaire survey to gain an understanding of the level of customer addition, Daikin Industries (Thailand) Ltd. employs 23 people with satisfaction with the Group’s after-sales services. The overall disabilities, and Daikin Compressor Industries, Ltd. employs 19 such satisfaction level for fiscal 2015 was 4.10 on a five-point scale, persons. indicating that customer satisfaction continues to improve by the year. Overseas as well, Daikin has established strong after-sales service systems that emphasize the concepts “fast, accurate, and kind” as Work-Life Balance: Daikin Industries has introduced diverse work policies that offer flexible work modes and time schedules suitable they strive to respond to customers’ diverse requests in line with for diverse employees. In particular, Daikin has strengthened its conditions in each country and region. Daikin has contact centers childcare leave and childcare support system, and encourages male in major countries, and via this support system strives to increase employees to use these systems as well. customer satisfaction. In fiscal 2014, to support smooth transitions back to workplaces after childcare leaves, Daikin established the “Hokatsu Concierge.” As an authorized company under the Act on Advancement of Human Resources (Labor Practices) The Daikin Group considers people to be a fundamental source Measures to Support Raising Next-Generation Children, in fiscal 2015, Daikin began implementing the fourth action plan, which of competitive strength. The Group works to create organizations aims to create a workplace environment that promotes balancing that accept and respect individual differences regarding gender, work and child rearing. As a part of this, it has increased the menu nationality, and ethnicity, seek harmony among all members, and of choices in the childcare support cafeteria plan system* available enable each individual member to develop their talents and abilities to employees returning early from childcare leave. Daikin is also to the maximum. 24 expanding support by further increasing subsidies for early returners. In fiscal 2015, in an effort to help full-time employees demonstrate their work skills while preserving a good work-life balance, the improve management capabilities of manager-class employees, Group allowed them to work from home for up to once a week on a Daikin launched the Management Dojo training program for division trial basis. The Group aims to transform this scheme into a full-scale managers in fiscal 2014. In fiscal 2015, it expanded the program to system in fiscal 2016. include section managers. Over a period of two years, a total of 450 * Childcare support cafeteria plan system: a subsidy system for childcare services used when dual-income family employees with children work overtime or go on business trips, or when the children are sick Labor Relations: The Daikin Group believes good labor relations to be fundamental in management and considers partnership and people have undergone training at this Dojo. *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 mutual trust between management and labor to be highly important. At Daikin Industries, all employees except for manager- Social Contribution As a global organization with business interests in many class and contract employees are labor union members. Daikin and communities throughout the world, the Daikin Group organizes the union hold dynamic discussions, and when business plans are employee-driven social contribution activities centering on the formulated, Daikin holds meetings to explain the new plans to the themes of “environmental protection,” “support for education,” union. In fiscal 2015, such meetings were held 24 times. and “coexistence with local communities” in an effort to put down roots in the communities where it does business. Occupational Safety and Health: In accordance with the Group Compliance Guidelines, which state that “in addition to ensuring safety in the workplace, the Group shall take all possible precautions Environmental Protection: In 2014, to commemorate the 90th year of its founding, Daikin Industries began its “Forests for the Air” for safe operations based on a “safety first” attitude, in order to project in seven countries around the world, with the aim of gain the trust of the local community,” Daikin endeavors to ensure contributing to the future of the planet by nurturing and cultivating that all employees and employees of subcontractors have safe work forests, which help freshen the air around us. Daikin began its environments. To this end, and to promote the peace of mind of efforts to help harmonize the residents’ lifestyles with the people in communities near Group facilities, Daikin strives to realize conservation of forests and biodiversity in Shiretoko Peninsula, a a “zero accident” workplace at each of its facilities. UNESCO World Heritage Site, in Japan, and is currently working to The Group’s domestic and overseas production facilities all have expand these efforts to communities in Indonesia, Brazil, Cambodia, their own occupational health and safety management system India, China and Liberia. Apart from this, Daikin also conducts (OHSMS), and at the end of fiscal 2015, three domestic plants and activities to restore forests and waterways in many locations around 19 overseas Group companies had received the OHSAS18001 the world. certification, which is the international standard for occupational health and safety. The Group also implements safety training and safety patrols aimed at achieving zero workplace injuries. In fiscal Support for Education: Since 2010, Daikin Industries has been providing elementary school children in Japan with learning materials 2015, the O.Y.L. Manufacturing Company raised awareness of related to its environmental education program on the topic of workplace safety via a training program involving the simulation of biodiversity called Circle of Life. It also conducts visiting lectures by operations-related dangers associated with accidents, and 1,329 its employees. In fiscal 2015, about 1,900 children from 30 schools employees participated in that program. With a view to sharing participated in this program, and visiting lectures were held at 16 of expertise and increasing safety levels across the Group, joint sessions these schools. The same year, the program won the Award of on safety and disaster prevention are held twice a year. Excellence within MITI’s Fifth Career Education Awards in recognition of outstanding education support activities conducted by business Human Resource Development: Daikin considers realizing its management philosophy of “The pride and enthusiasm of each communities. Daikin offers student scholarships in support of the Ministry employee is the driving force of our Group” and utilizing people- of Education’s “Tobitate! Ryugaku Japan!” (“Go abroad! Study centered management methods to be essential bases for the Group’s overseas, Japan!”) public-private partnership program to encourage growth. The Group’s corporate philosophy states that “The high school and university students to study overseas while combined growth of all Group employees, regardless of nationality representing Japan. Apart from this, Daikin offers scholarships and or specific Group unit they are with, is the basis for the Group’s internships mainly aimed at science-stream students from emerging advancement.” Based on the concept that “people grow by means of work experience,” Daikin believes that on-the-job training (OJT)*1 is a fundamental human resource development method for countries to help expand student job opportunities. Overseas, Daikin Air Conditioning, Italy, supports the Roma Tre University team in the Solar Decathlon competition, which discovering the characteristics of each employee and assigning jobs challenges student teams from around the world to design and build 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 developing managers for the front next-generation solar-powered houses. Daikin supports its team by supplying products, providing financial assistance, and loaning the services of its younger engineers. The Roma Tre University team won lines of the Group’s global business operations. Overseas office the Solar Decathlon Europe 2014. training for younger employees is another example. Further, to 25 DAIKIN INDUSTRIES, LTD. ANNUAL REPORT 2015Financial Highlights/At a GlanceA Message from the CEOInterview with the CEOReview of OperationsCorporate GovernanceFinancial SectionCSR (Corporate Social Responsibility) Apart from this, Daikin Group companies around the world comprehensive risk assessments from a global perspective and proactively organize factory tours for students in an effort to institute Group-wide systems for alleviating risks. Each year, after encourage their interest in technology. Coexistence with Local Communities—Contribution to Sports: Since 1988, Daikin Industries has organized the Daikin Orchid Ladies conducting divisional risk assessments to identify major risks, Daikin drafts and implements countermeasures for each division separately. Based on the assessment results, the most-serious risks for the company as a whole are identified. In fiscal 2015, efforts were made Golf Tournament, an LPGA of Japan Tour event held, in an effort to to mitigate six kinds of risks: risks related to earthquakes, product revitalize the economy of Okinawa as well as promote economic liability and quality, intellectual property, information leakage risks, exchanges with the local community. Daikin uses the event as a fund- overseas crisis management, and inappropriate accounting raising opportunity which it has named “Orchid Bounty,” and later processes. presents those funds to organizations working to promote art, culture, education, and sports in Okinawa. Daikin also provides support for sports clubs and events in numerous other locations throughout the world. Strengthening Information Leakage Risk Measures: In dealing with the risk of information leakage, positioned as one of the most-serious risks faced by the Group in fiscal 2015, the IT and Compliance divisions worked together, and information managers Coexistence with Local Communities—Contribution to Art and Culture: Daikin supports the activities of the Kansai Philharmonic Orchestra and the National Museum of Art, both of which are based and IT security managers assigned to each division led the efforts to mitigate the risk. In addition to educating employees about targeted email attacks, the threat of which has increased in recent years, the in Osaka, Daikin’s birthplace. In the Czech Republic, Daikin Industries Group also conducts mock targeted email attack drills a few times Czech Republic s.r.o. supports the Pilsen Philharmonic Orchestra, and a year, in an effort to strengthen damage prevention. in China, Daikin (China) Investment Co., Ltd., has sponsored concerts each year since 2007 with the goal of promoting artistic and cultural activities. Fundamental Initiatives  Compliance The Daikin Group has established the Corporate Ethics and Risk Strengthening Earthquake Risk Measures: In dealing with the risk of earthquakes, also positioned as one of the most-serious risks faced by the Group in fiscal 2015, individual issues were identified and separate teams were set up and assigned to tackle each issue. For instance, based on disaster damage scenarios (extremely strong earthquakes, extremely high tsunamis, etc.) from Japan’s Central Disaster Prevention Council, Daikin has reinforced production Management Committee with the purpose of undertaking the facilities for greater earthquake resistance, implemented tsunami integrated promotion of compliance (business ethics and legal plans for chemicals facilities, and formulated and held evacuation compliance) and risk management throughout the Group. The senior drills at locations susceptible to tsunamis. Daikin is also further executive in charge of corporate ethics and compliance serves as the building its business continuity planning (BCP) system, assessing chair, and other Committee members include all division managers many risks, and formulating and enacting action policies in this and presidents of the principal domestic Group companies. The process. Group companies are also taking similar measures regarding Committee meets twice each year, in principle. natural disaster risks. A compliance and risk management leader (CRL) is assigned to each division and principal domestic Group company and plays a central role in ensuring rigorous compliance. Compliance committees are also established at the overseas Group companies, taking into Increasing Transparency Related to Client Entertainment and Gift Giving: The Daikin Group has instituted a compliance policy regarding client entertainment and gift giving of “Client account the state of affairs in those companies, and at the various entertainment and gift giving in moderation and according to social overseas business regions. The Daikin Handbook for Corporate Ethics norms, following all national and regional regulations.” The Group is published and widely circulated, and self-assessments and risk has also established policies on “Maintaining fair and transparent assessments are implemented. Further, the members of the Daikin relationships with government officials,” “Complying with the Industries Corporate Ethics and Risk Management Group make Political Funds Control Act and Public Offices Election Act,” and regular visits to the various overseas Group companies to confirm “Entertainment and gift giving in moderation to business partners.” what efforts are being undertaken and to share information. The Group implements in-house training to ensure thorough Through this process, Daikin works toward a mutual enhancement compliance with these rules. In fiscal 2015, the Group drafted of activities, such as by introducing the advanced efforts being behavioral guidelines for entertainment and gift giving for public undertaken at the various overseas Group companies to Daikin officials both domestically and overseas, and circulated these Industries as well. guidelines across the Group globally.  Risk Management Regarding risk management, in light of the Group’s rapid business expansion, Daikin is endeavoring to accurately and quickly execute Group Compliance Guidelines (formulated 2008) http://www.daikin.com/csr/management/management_09.html 26  R&D and Intellectual Property Respect for Intellectual Property Rights: Daikin considers intellectual property (IP) to be an important corporate asset, and Human Rights Education: The Daikin Group conducts human rights awareness training separately for different levels of staff, including all senior executives, newly appointed managers including Daikin’s Group Compliance Guidelines clearly articulate the need to those of affiliated companies, and new employees. Daikin’s endeavor to protect IP and use it effectively. The guidelines also employee newsletter contains articles on human rights, and make clear that other firms’ IP is to be respected and not infringed production facilities have held human rights catchphrase contests. upon. With this in mind, Daikin has incorporated specific compliance Through these kinds of measures, Daikin is working to elevate points in its Compliance Policies. The policies call for R&D managers human rights consciousness among employees. to realize that they are responsible for patents, and for R&D staff to realize that “IP activities are the essence of these efforts,” and proactively obtain patents, use them, and prevent infringement.  Responsibility to Shareholders and Investors To live up to the expectations of shareholders and investors, the Daikin has a patent and compliance review system in place as part Daikin Group believes that it must increase its corporate value. It of the design review process for new product and technology therefore emphasizes free cash flow as a source of corporate value development. Also, when cooperating with other companies in R&D, and works to augment its profitability while lowering the levels of Daikin works to separate technologies and know-how into those its trade receivables and inventories. 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 Stable Levels of Cash Dividends: Daikin works to maintain its consolidated ratio of dividends on equity (DOE) at 3.0% or higher, mainly by legal and compliance teams and the IP Center. IP officers and it is seeking to set stable levels of dividends based on a are also placed in R&D teams in all business lines. These IP managers comprehensive consideration of such factors as consolidated work together to handle day-to-day IP work (including patent performance, financial position, and funding requirements. applications, application follow-ups, analyzing infringement risk of other companies’ patents, and dealing with infringements on Daikin patents). The officers also implement IP training programs for Daikin Respect for the Exercise of Voting Rights: To enable shareholders to exercise voting rights after due consideration of resolution items, employees in different functions and at different seniority levels, Daikin provides shareholders with invitations to general shareholders’ promote new inventions, and promote the strategic use of IP. To this meetings and ancillary materials a week or more in advance of the end, together with R&D staff, the IP officers are strengthening statutory deadline. Non-Japanese institutional investors are provided functions to build an effective patent network as well as functions with English-language versions of the invitations and ancillary in Daikin’s global patent research. materials, and both English- and Japanese-language versions of the invitations and ancillary materials are posted on the Company’s website.  Human Rights The Daikin Group fundamentally respects human rights. It tries to Furthermore, Daikin has established systems that enable shareholders to exercise their voting rights via personal computers grasp and apply the various international norms related to human and mobile phones. rights, taking into account the laws of various countries and regions. Since 2008, the Group has participated in the UN’s Global Compact—a strategic policy initiative representing universal Information Disclosure: Recognizing that it has an important responsibility to increase its management transparency from the principles on human rights, treatment of labor, and environmental perspectives of shareholders and investors, Daikin is proactively protection—and has been promoting staff education and awareness working to disclose relevant information by executing diverse kinds with the aim of building an organization that values people and is of IR activities. rich in diversity and creativity. The Group has also incorporated For analysts and institutional investors, Daikin holds performance human rights-related topics into the yearly self-assessments explanation briefings when announcing its second-quarter and full- undertaken by all employees, thereby encouraging them to increase year financial results, and telephone conference briefings are their consciousness of human rights issues. organized when announcing first-quarter and third-quarter financial Respect for Human Rights: The Daikin Group Compliance Guidelines, in accordance with labor regulations, prohibit child labor results. The Company also undertakes visits to institutional investors in Japan and overseas and organizes meetings and other modes of interaction with individual investors. and forced labor, and mandate respecting human rights and diversity Daikin’s website offers access to such legally mandated materials in values and attitudes to work. In fiscal 2016, the Group plans to as securities reports (yuka shoken hokoku-sho) as well as other formulate Supply Chain CSR Promotion Guidelines, which will corporate performance-related materials that are posted as soon include guidelines for respecting human rights throughout the as they are prepared. Daikin endeavors to post these reports and Group’s supply chains. 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. 27 DAIKIN INDUSTRIES, LTD. ANNUAL REPORT 2015Financial Highlights/At a GlanceA Message from the CEOInterview with the CEOReview of OperationsCorporate GovernanceFinancial Section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 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Millions of yen ¥729,414 256,289 196,083 24,583 60,206 83,630 38,083 ¥43,970 (42,091) 1,879 ¥792,837 269,906 203,359 26,648 66,547 95,816 40,146 ¥63,511 (63,420) 91 ¥911,749 312,688 231,934 27,204 80,754 115,315 45,420 ¥ 83,725 (305,251) (221,526) ¥1,291,081 441,549 313,451 32,075 128,098 179,469 74,822 ¥103,329 (76,428) 26,902 3,534 (4,284) 245,975 3,367 48,382 (34,942) (37,623) (1,113) 143,520 (38,249) (83,073) ¥615,596 166,442 271,716 ¥ 144.24 1,031.73 18.00 35.14% 8.25 11.47 15.06 44.14 ¥716,440 172,995 340,523 ¥ 152.11 1,293.41 22.00 34.04% 8.39 12.09 13.11 47.53 ¥1,161,364 456,074 397,542 ¥1,210,094 356,928 545,641 ¥ 172.66 1,511.47 28.00 ¥ 262.24 1,867.79 38.00 34.30% 8.86 12.65 12.31 34.23 34.20% 9.92 13.90 15.87 45.09 ¥1,202,420 ¥1,023,964 ¥1,160,331 ¥1,218,701 ¥1,290,903 ¥1,787,679 ¥1,915,014 363,660 302,266 30,535 61,394 118,325 21,755 ¥62,238 (99,302) (37,065) 319,301 275,263 28,220 44,038 96,462 19,391 ¥129,227 (39,848) 89,379 361,665 286,210 30,771 75,455 127,168 19,873 ¥78,411 (23,306) 55,105 371,902 290,709 32,987 81,193 131,719 41,172 ¥44,967 (62,955) (17,988) 388,046 299,419 33,569 88,627 140,151 43,585 568,323 411,786 40,177 156,537 235,439 92,787 649,902 459,314 42,892 190,588 268,354 119,675 ¥103,161 (218,386) (115,225) ¥179,713 ¥160,423 (80,835) 98,878 (77,331) 83,092 ¥1,117,418 ¥1,139,656 ¥1,132,507 ¥1,160,564 ¥1,735,836 ¥2,011,870 ¥2,263,990 417,919 471,686 399,313 496,179 372,481 487,876 389,891 502,309 705,871 618,118 693,944 801,853 662,413 1,024,725 ¥ 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 ¥ 318.33 2,748.08 50.00 ¥ 410.19 3,511.34 100.00 30.24% 31.19% 31.17% 30.52% 30.06% 31.79% 33.94% 5.11 9.84 4.28 42.21 4.30 9.42 4.01 43.54 6.50 10.96 4.04 43.08 6.66 10.81 8.30 43.28 6.87 10.86 7.78 35.61 8.76 13.17 13.07 39.86 9.95 14.01 13.10 45.26 Notes: 1. R&D expenses are included within general and 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. 4. Accompanying a change in accounting policy, effective from April 1, 2014, the consolidated financial statements for the fiscal year ending March 31, 2014 and subsequent years have been revised. Net Sales (¥ billion) 2,000 1,500 1,000 500 0 Operating Income Net Income (¥ billion) 200 150 100 50 0 (¥ billion) 120 90 60 30 0 05 06 07 08 09 10 11 12 13 14 15 05 06 07 08 09 10 11 12 13 14 15 05 06 07 08 09 10 11 12 13 14 15 28 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 ¥729,414 256,289 196,083 24,583 60,206 83,630 38,083 ¥43,970 (42,091) 1,879 ¥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 ¥911,749 ¥1,291,081 312,688 231,934 27,204 80,754 115,315 45,420 441,549 313,451 32,075 128,098 179,469 74,822 ¥63,511 (63,420) 91 ¥ 83,725 (305,251) (221,526) ¥103,329 (76,428) 26,902 ¥716,440 ¥1,161,364 ¥1,210,094 172,995 340,523 456,074 397,542 356,928 545,641 ¥ 152.11 1,293.41 22.00 ¥ 172.66 1,511.47 28.00 ¥ 262.24 1,867.79 38.00 35.14% 34.04% 34.30% 34.20% 8.39 12.09 13.11 47.53 8.86 12.65 12.31 34.23 9.92 13.90 15.87 45.09 Notes: 1. R&D expenses are included within general and 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. 4. Accompanying a change in accounting policy, effective from April 1, 2014, the consolidated financial statements for the fiscal year ending March 31, 2014 and subsequent years have been revised. 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Millions of yen ¥1,202,420 363,660 302,266 30,535 61,394 118,325 21,755 ¥1,023,964 319,301 275,263 28,220 44,038 96,462 19,391 ¥1,160,331 361,665 286,210 30,771 75,455 127,168 19,873 ¥1,218,701 371,902 290,709 32,987 81,193 131,719 41,172 ¥1,290,903 388,046 299,419 33,569 88,627 140,151 43,585 ¥1,787,679 568,323 411,786 40,177 156,537 235,439 92,787 ¥1,915,014 649,902 459,314 42,892 190,588 268,354 119,675 ¥62,238 (99,302) (37,065) ¥129,227 (39,848) 89,379 ¥78,411 (23,306) 55,105 ¥44,967 (62,955) (17,988) ¥103,161 (218,386) (115,225) ¥179,713 (80,835) 98,878 ¥160,423 (77,331) 83,092 3,534 (4,284) 245,975 3,367 48,382 (34,942) (37,623) (1,113) 143,520 (38,249) (83,073) ¥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 ¥2,011,870 693,944 801,853 ¥2,263,990 662,413 1,024,725 ¥ 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 ¥ 318.33 2,748.08 50.00 ¥ 410.19 3,511.34 100.00 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% 8.76 13.17 13.07 39.86 33.94% 9.95 14.01 13.10 45.26 Research and Development Expenses Shareholders’ Equity Total Assets (¥ billion) 50 40 30 20 10 0 (¥ billion) 1,200 900 600 300 0 (¥ billion) 2,500 2,000 1,500 1,000 500 0 05 06 07 08 09 10 11 12 13 14 15 05 06 07 08 09 10 11 12 13 14 15 05 06 07 08 09 10 11 12 13 14 15 29 DAIKIN INDUSTRIES, LTD. ANNUAL REPORT 2015Financial Highlights/At a GlanceA Message from the CEOInterview with the CEOReview of OperationsCorporate GovernanceFinancial Section Financial Review Overview of Net Sales SG&A Expenses and Operating Income Looking at economic conditions throughout the world during fiscal 2015, the U.S. As a result of a rise in personnel expenses and product shipping costs, SG&A economy expanded against the backdrop of robust domestic demand. The expenses increased to ¥459.3 billion (11.5% higher year on year). The ratio of fundamental state of conditions in the European economy remained weak, but SG&A expenses to net sales was 24.0%, almost the same level as in the previous quantitative expansion measures and lower oil prices had a supportive effect. In fiscal year. Operating income grew 21.8%, to ¥190.6 billion, and the operating emerging countries centered on China, the pace of economic growth slackened. income margin rose 1.2 percentage points, to 10.0%. In Japan, the reaction to the consumption tax rate hike caused economic conditions to become more sluggish. The entire Daikin Group has worked R&D Expenses concertedly to improve its performance by augmenting marketing and sales capabilities and reducing fixed costs while also shifting a portion of component In response to an increase in worldwide concern regarding global warming and manufacturing operations to Japan and taking other measures aimed at realizing energy issues, the Group is engaging in leading-edge R&D programs designed to the potential benefits from yen depreciation and otherwise responding to foreign proactively contribute to the resolution of global environmental issues while also exchange rate trends. The Group’s performance benefitted from strong overseas expanding the Group’s business operations. In fiscal 2015, R&D expenses sales of its mainstay air-conditioning business centered on the markets of China, included in cost of goods sold and SG&A expenses amounted to ¥42.9 billion and other Asian countries, and the United States. The strength of overseas sales corresponded to 2.2% of net sales. along with the higher yen-denominated value of those sales owing to yen depreciation helped the Group attain new record high levels of both sales and • Air-Conditioning and Refrigeration Equipment profitability. Consolidated net sales totaled ¥1,915.0 billion, up 7.1% from the R&D expenses for air-conditioning and refrigeration equipment operations totaled level in the previous fiscal year. Consolidated operating income was ¥190.6 ¥37.5 billion. billion (up 21.8%). Net income totaled ¥119.7 billion (up 29.0%). The levels of In Japanese residential-use air-conditioner business, Daikin offers housing net sales and operating income were the highest ever recorded by the Group, and multi air-conditioner models that are the first of their type to employ the new the operating income target within the FUSION 15 strategic management plan refrigerant HFC32 (R32) and provide improved energy conservation performance (¥190.0 billion) was attained a year ahead of schedule. while also realizing a degree of compactness that enables them to be placed in Currency Exchange Rates restricted spaces available on apartment balconies. Wall-mounted-type Urusara 7 models during the air-conditioning season offer even more-precise temperature control than was previously possible along with fully sufficient dehumidification The yen depreciated substantially against the U.S. dollar and euro compared to capabilities and during the winter offer humidification functions, so that optimal the previous year’s levels, and the average currency exchange rate during the humidity levels can be maintained throughout the year. fiscal year was ¥110 to one U.S. dollar and ¥139 to one euro. As a result of these Regarding commercial-use air-conditioner business, leveraging the technolo- movements in foreign currency exchange rates, Daikin consolidated net sales gies and experience that boosted cumulative production volume of commercial were estimated to be ¥86.0 billion higher and operating income ¥10.0 billion air conditioners past the 10 million unit landmark level, in May 2014, Daikin higher, compared with the previous year, than they would have been without launched FIVE STAR ZEAS and Eco-ZEAS air-conditioning systems for stores and movements in exchange rates. Yen-U.S. dollar rate Yen-euro rate Fiscal 2014 Fiscal 2015 ¥100 ¥134 ¥110 ¥139 offices that use R32 refrigerant and realize high levels of energy-saving perfor- mance. With respect to multiple air-conditioning systems for office buildings, Daikin has emphasized the development of technology to boost efficiency during the low-load operating periods that account for about 90% of annual operating time, and it has thereby been able to realize improved energy conservation in the context of actual operating conditions. Domestic and Overseas Sales Operating Income and Operating Income Margin Net Income (¥ billion) 2,000 1,500 1,000 500 0 (¥ billion) 200 150 100 50 0 (%) 12 (¥ billion) 120 9 6 3 0 90 60 30 0 2011 2012 2013 2014 2015 2011 2012 2013 2014 2015 2011 2012 2013 2014 2015 Domestic Overseas sales Operating income Operating income margin 30 In North America, Daikin responded to the market’s energy-conservation needs Dividend Policy and Dividends Applicable in September 2014 by expanding the scope of the WME 700-ton magnetic bearing to the Fiscal Year chiller series to include large-scale models with capacities of up to 1,500 tons. In China, Daikin responded to rising consciousness of environmental issues by With the goal of augmenting corporate value and elevating shareholder returns, launching high-efficiency, two-stage turbo inverter models and high-efficiency, Daikin continues to make strategic investments and expand its business while magnetic bearing turbo models equipped with economizers. also proceeding with such structural reforms as those to promote comprehensive With respect to Europe, in October 2014, Daikin launched energy-conserving, cost reductions and strengthen its financial position. compact air-handling unit models that are compact but offer heat-recovery Specifically, in accordance with its fundamental goal of providing stable and functions. • Chemicals continuous returns to shareholders, Daikin is striving to keep its consolidated ratio of dividends on equity (DOE) at levels of 3.0% or above while also seeking to increase its consolidated dividend payout ratio and thereby further expand R&D expenses for Chemicals operations totaled ¥4.4 billion. shareholder returns. Daikin’s chemicals business conducts R&D for new products and new applica- Internal reserves will be applied to strategic investments aimed at expanding tions based on rich experience in fluorine products and fluorochemical technolo- business operations and increasing competitiveness by such means as further gy. In fluoropolymer resins and fluororubbers, using fluorochemicals’ good strengthening management systems, accelerating the development of global properties in heat resistance, low drug reactivity, and dielectric properties, Daikin businesses, and accelerating the development of environment-friendly products. is developing new differentiated products for automotive, semiconductor, IT field, For the fiscal year ended March 31, 2015, including a special ¥10 dividend and other applications. commemorating the 90th anniversary of its founding that was included in the Also emphasizing the next-generation energy field, Daikin is developing such interim dividend, Daikin distributed a total annual cash dividend of ¥100 per products as electrolyte solutions, additives, positive electrode binders, gaskets, share (an interim dividend of ¥40 per share and a year-end dividend of ¥60 per and other components needed to increase the capacity and safety of lithium ion share), a ¥50 increase from the previous fiscal year. For the current fiscal year secondary batteries. During fiscal 2015, the Company launched the VW700 series ending March 31, 2016, the Company plans to distribute a total annual cash of PVDF binder products for use as a positive electrode binder material. dividend of ¥110 per share (an interim dividend of ¥55 per share and a year-end • Other operations R&D expenses for oil hydraulics, defense systems, and other operations totaled Performance by Business Segment dividend of ¥55 per share). ¥1.0 billion. In oil hydraulics, Daikin is commercializing a large-capacity series of products • Air-Conditioning and Refrigeration Equipment and developing new applications by leveraging the special characteristics of its Total sales of the Air-Conditioning and Refrigeration Equipment segment hybrid oil hydraulic system technology that combines oil hydraulic technology and increased to ¥1,710.9 billion, up 7.1% from the previous fiscal year. Operating inverter technology to realize energy conservation and high functionality that income increased 21.9%, to ¥170.5 billion. could not be attained with previously existing hydraulic systems. In defense systems, Daikin conducts R&D related to artillery shell and guided Japan missile components for Japan’s Ministry of Defense. In Japan’s commercial air-conditioning equipment market, Daikin moved ahead Other Income (Expenses) and Net Income FIVE STAR ZEAS (which uses the low global-warming factor refrigerant R32, with its marketing promotion activities for such highly differentiated products as which has a global-warming potential only one-third that of conventional refriger- Despite the recording of impairment losses as extraordinary losses, consolidated net ants) and Eco-ZEAS80 models as well as for such high-value-added products as income amounted to ¥119.7 billion, 29.0% higher than in the previous fiscal year. those of the Ve-up series of multiple air-conditioning systems for office buildings, Selling, General and Administrative Expenses Revenues by Segment Segment Profit (¥ billion) 480 360 240 120 0 (¥ billion) 2,000 1,500 1,000 500 0 (¥ billion) 200 150 100 50 0 2011 2012 2013 2014 2015 2011 2012 2013 2014 2015 2011 2012 2013 2014 2015 Air conditioning Chemicals Other Air conditioning Chemicals Other 31 DAIKIN INDUSTRIES, LTD. ANNUAL REPORT 2015Financial Highlights/At a GlanceA Message from the CEOInterview with the CEOReview of OperationsCorporate GovernanceFinancial Section Financial Review Unit Sales of Air-Conditioning Systems in the Japanese Air-Conditioning Industry (Fiscal 2015) (1,000 units) First half Year on year Second half Year on year Full year Year on year Residential use Commercial use 5,248 441 91% 101% 2,845 398 78% 100% 8,094 839 86% 101% and its sales of commercial-use products surpassed their level in the previous With respect to emerging country markets, Daikin’s sales in Middle Eastern and fiscal year. African markets increased as a result of the Company’s efforts to expand its In Japan’s residential air-conditioning equipment market, industry shipments business foundation. Because the impact of economic deceleration and cool showed period-on-period decreases with respect to the first half of the fiscal year summer weather in Turkey caused a large drop in sales of residential air condi- as well as the fiscal year as a whole. The Daikin Group worked to differentiate its tioners in that country, however, Daikin’s overall sales in emerging country products by making all its wall-mounted room air-conditioner models compatible markets within the Europe region were below the level in the previous year. with R32 refrigerant and worked to promote sales of the Urusara 7 room air conditioner, which met 2015 energy-conservation standards prior to their • China introduction, and other high-value-added models, but the large impact of the In China, the Daikin Group emphasized sales through retailers and was able to decrease in overall demand caused the Group’s sales of residential air-condition- realize a year-on-year increase in its overall sales in China. The Group’s market- ing products to fall below their level in the previous fiscal year. ing network has been extended from major cities to encompass an increasing Overseas • Europe Region number of regional cities. Particularly with respect to the residential air-condition- er market, the strengthening of the Daikin PROSHOP network of exclusive retail sales outlets and the launch of such new offerings as New Life Multi Series In Europe, Daikin recorded slight year-on-year sales increases in the third and residential-use multi air conditioners led to sales expansion. In the large-scale fourth quarters of fiscal 2015, but the impact of relatively cool weather during air-conditioning system (applied) field, although capital investment restraint July and August in southern European countries that are principal markets kept accompanying economic deceleration has been causing demand growth to sales for the fiscal year as a whole below the level in the previous year. Regarding slacken, Daikin’s sales of such products as turbo chillers and air-handling units residential air-conditioning equipment, sales expansion was achieved for grew, supporting a year-on-year rise in the Company’s net sales. premium models developed in Europe with an emphasis on design elegance, and Daikin continued to strengthen its sales promotion efforts for relatively inexpen- • Asia/Oceania Region sive models, but the considerable impact of the cool summer weather in southern In Australia, growing demand for residential-use air-conditioning products European countries caused the Company’s sales to decline year on year. enabled Daikin to record a robust performance, and the Company’s sales in Regarding commercial-use products, however, Daikin was able to realize a Thailand also exceeded their level in the previous fiscal year. Daikin has progres- year-on-year increase in sales owing to its implementation of marketing policies sively strengthened its marketing networks in the region’s emerging countries, focused on addressing recoveries in construction-related demand in the U.K. and and the Company’s responsiveness to expanding demand for both residential- Germany along with its highly detailed retailer-focused follow-up measures and and commercial-use products in Vietnam and Indonesia enabled sales in those order-acquisition campaigns in each of the region’s countries. Daikin also countries to surpass their level in the previous year by considerable margins. recorded a year-on-year increase in sales of heat-pump hot-water-supply and As a result, Daikin realized a year-on-year increase in its overall sales in the room-heating systems, reflecting a sales surge in the mainstay market of France. Asia/Oceania region. Composition of Sales Others 2.9% Chemicals 7.8% 32 Research and Development Expenses (¥ billion) 48 Air-Conditioning 89.3% 36 24 12 0 2011 2012 2013 2014 2015 • Americas Region • Other operations In the Americas region, year-on-year increases were achieved in Daikin’s sales of Total sales in the Others segment amounted to ¥54.5 billion, up 9.3% from residential-use products and light commercial-use products for medium-scale the previous fiscal year. The segment’s operating income surged 50.9%, to office buildings. Although cool summer weather impacted sales in some regions, ¥3.6 billion. the sales increase year on year reflected the Company’s ability to respond to Daikin recorded robust sales of oil hydraulics equipment for industrial machin- accelerated demand prior to an increase in the rigor of energy-conservation ery in Japan and the United States, and its overall sales of such products were regulations as well as the Company’s success in increasing its market share higher than in the previous year. Sales of oil hydraulic equipment for construction through its implementation of highly detailed marketing measures focused on equipment and motor vehicles also increased, reflecting the strength of demand individual retail outlets in the region. While demand in the market for applied from principal customers in Japan as well as the strength of overseas demand. products was roughly the same as in the previous year, growth in sales of Daikin Regarding defense business, Daikin recorded robust sales of products for products centered on air-handling units enabled the Company to realize a Japan’s Ministry of Defense as well as of home-use oxygen therapy products, and year-on-year sales increase in that market. • Chemicals its overall sales of such products were higher than in the previous year. With respect to electronic systems business, sales of database systems for design and development applications exceeded the level in the previous year, Daikin’s Chemicals segment’s total sales increased 6.3% from the previous year, reflecting an increase in product quality and growth in demand for IT systems. to ¥149.6 billion, and the segment’s operating income grew to ¥16.6 billion, up 15.6% from the previous year. Outlook for Fiscal 2016 Regarding fluorochemical resins, the sluggishness of Chinese demand related to railway and communications infrastructure projects kept sales in China below For fiscal 2016, the last year of the period covered by the FUSION 15 strategic the previous year’s level. The strength of U.S. demand for automotive and other management plan, the Daikin Group has adopted the slogan “Create the Future, applications enabled the Company to realize a year-on-year sales increase in the Exceed in a Changing World.” In accordance with that slogan, the Group is United States. With respect to fluoroelastomers, Daikin was able to record a endeavoring to perspicaciously identify incipient structural changes in the world’s higher level of sales than in the previous year as a result of strong sales centered economic and societal systems and take full advantage of the opportunities on sales for automotive applications in the United States and Asia. Despite associated with those changes to expand its business operations going forward. deceleration of demand growth for certain application fields in each region and Specifically, the Group intends to upgrade its capabilities for product develop- market, the Company’s overall sales of fluorochemical resins exceeded the level ment, manufacturing, procurement, and quality assurance; build resiliently strong in the previous year. marketing networks; and further increase the sophistication of its human resource In the chemical products business, robust demand for Daikin’s water and oil development programs. It is moving ahead with the implementation of such core repellent agents enabled the Company to record a year-on-year increase in its growth strategies within its strategic management plan as those calling for the sales of those products. Abundant Chinese demand for anti-smudge surface expansion of volume-zone business in emerging countries, solutions business, coating agents for touch screens and other applications boosted Daikin’s sales and environmental innovation business. At the same time, the Group will seek to of those agents to considerably above the previous year’s level. Demand for realize growth in both sales and profitability by promoting a highly selective semiconductor-related etching agents was robust in Japan and other Asian approach to investments, radical reductions of fixed costs, and other measures countries, and the Company’s sales of those agents surpassed the previous year’s designed to build a highly profitable business structure. level. As a result, the Company’s overall sales of chemical products were higher The Daikin Group’s performance outlook on a consolidated basis for fiscal than in the previous year. 2016 is for a 7.6% increase in net sales, to ¥2,060.0 billion, an 11.2% increase With respect to fluorocarbon gases, sluggish demand in Japan and decreased in operating income, to ¥212.0 billion, and an 8.6% increase in net income sales to air-conditioner manufacturers in China and other Asian countries caused attributable to owners of the parent, to ¥130.0 billion. Foreign currency exchange Daikin’s fluorocarbon gas sales to fall below the previous year’s level. rates assumed for fiscal 2016 are ¥115/U.S. dollar and ¥125/euro. Total Assets Working Capital and Current Ratio Attributable to Owners of the Parent Shareholders’ Equity and Shareholders’ Equity Ratio (¥ billion) 2,400 1,800 1,200 600 0 (¥ billion) 600 400 200 0 (%) 240 160 80 0 (¥ billion) 1,200 900 600 300 0 (%) 48 36 24 12 0 2011 2012 2013 2014 2015 2011 2012 2013 2014 2015 2011 2012 2013 2014 2015 Working capital Current ratio Shareholders’ equity Shareholders’ equity ratio 33 DAIKIN INDUSTRIES, LTD. ANNUAL REPORT 2015Financial Highlights/At a GlanceA Message from the CEOInterview with the CEOReview of OperationsCorporate GovernanceFinancial Section Financial Review Assets, Liabilities, and Total Equity Depreciation and amortization expense amounted to ¥52.8 billion, down ¥2.3 billion from the previous fiscal year. • Assets At the end of fiscal 2015, total assets amounted to ¥2,264.0 billion, up ¥252.1 Cash Flows billion from the end of the previous fiscal year. Current assets amounted to ¥1,082.6 billion, up ¥115.4 billion from the end of the previous fiscal year, owing Net cash provided by operating activities amounted to ¥160.4 billion, down to factors including an increase in cash and cash equivalents and trade receiv- ¥19.3 billion compared with the previous fiscal year, due to factors including the ables. Noncurrent assets were ¥136.7 billion higher than at the end of the increase in income before income taxes and minority interests as well as a previous fiscal year, at ¥1,181.4 billion, due to purchases and valuation changes decrease in trade payables. Net cash used in investing activities amounted to of investment securities as well as other factors. ¥77.3 billion, ¥3.5 billion less than that used in the previous fiscal year, owing to • Liabilities and Total Equity factors including a decrease in expenditure for the acquisition of investment securities. Net cash used in financing activities amounted to ¥83.1 billion, ¥44.8 Total liabilities rose to ¥1,215.7 billion, up ¥27.7 billion from the end of the billion more than that used in the previous fiscal year, owing to an increase of previous fiscal year, reflecting a rise in deferred tax liabilities and other factors. expenditure for the repayment of long-term borrowings and other factors. The interest-bearing debt to total assets ratio improved to 29.3%, from 34.5% at As a result of these changes, cash and cash equivalents as of March 31, 2015 the end of the previous fiscal year. amounted to ¥287.0 billion, up ¥29.7 billion from the previous fiscal year-end. Despite a decrease due to cash dividend payments, net assets increased ¥224.5 billion, to ¥1,048.3 billion, due to factors including net income for the Principal Risks Associated year and foreign currency translation adjustments booked in equity. with the Daikin Group’s Operations As a result, the equity ratio rose to 45.3%, from 39.9% at the end of the previous fiscal year, and shareholders’ equity per share grew to ¥3,511.34, from • Sharp changes in politico-economic conditions  ¥2,748.08 at the end of the previous fiscal year. or supply-demand relationships in principal markets Capital Investment and Depreciation and Amortization possibility that Group performance could be impacted if politico-economic The Group provides goods and services throughout the world, and there is a changes occur in such markets as Japan, Europe, North America, China, and In accordance with the Daikin Group’s fundamental strategy of concentrating other countries in the Asian region. management assets in business fields that offer high profitability, the Group In particular, the Group is proactively developing business operations outside made total capital investment of ¥78.4 billion in fiscal 2015, largely in the Japan through measures including constructing new air-conditioning equipment air-conditioning and chemicals business fields. In the air-conditioning field, Daikin manufacturing facilities and acquiring air-conditioning equipment dealers in invested ¥18.0 billion, mainly for R&D related to room air conditioners and Europe as well as establishing manufacturing and marketing companies in China. package air conditioners and for rationalization objectives. At Goodman Global There is, thus, a possibility that the Group’s performance could be impacted by Group, Inc., investments of ¥7.8 billion were made primarily to increase capacity. business environment changes in one or more global regions. These changes In the chemicals field, the Group invested ¥8.1 billion, mainly for increasing could include the deterioration of economic conditions, raw material price surges, production capacity and for rationalization objectives, and Daikin Fluorochemicals and/or the intensification of competition with other companies. In the United (China) Co., Ltd., implemented ¥5.7 billion in capital investments, mainly for States, on November 1, 2012, Daikin completed all procedures for the acquisition increasing its production capabilities. of Goodman Global Group, Inc. (Head Office: Houston, Texas—hereinafter, The main sources of funds for these investments were bank borrowings and “Goodman”) for a purchase price of US$3.7 billion (including the refinancing of retained earnings. Goodman’s existing debt). ROE (%) 15 12 9 6 3 0 34 ROA (%) 6 5 4 3 2 1 0 Capital Investment and Depreciation and Amortization (¥ billion) 80 60 40 20 0 2011 2012 2013 2014 2015 2011 2012 2013 2014 2015 2011 2012 2013 2014 2015 Capital investment Depreciation and amortization (excluding amortization of goodwill)  By means of this acquisition, Daikin intends to reinforce Goodman’s sales and similar instruments. Daikin also undertakes medium- to long-term measures network—the largest sales network in the U.S. residential and commercial to continuously adjust procurement and manufacturing operations and optimize air-conditioning equipment market—through the launch of environment-friendly them for changing currency exchange-rate trends, and to balance imports and products incorporating Daikin’s state-of-the-art environmental technologies. exports in each currency. Through this, the Group works to realize a business Doing this, Daikin aims to bring about new trends in the U.S. air-conditioner structure that is not greatly impacted by changes in currency exchange rates. market that will enable the Group to realize business expansion and contribute to However, currency exchange rate-related risks cannot be completely avoided. environmental protection. Furthermore, Daikin hopes to further improve its competitiveness by leveraging Goodman’s low-cost management know-how to • Major product quality claims develop business in emerging economies and volume-zone markets. Daikin also The Group strives to ensure thorough quality management for all its products, hopes to use this know-how to reform the Group’s earnings structure, including regardless of whether they are manufactured in Japan or overseas. With respect at operations in advanced economies. There is a possibility that the degree of to new product development, all four related elements—design, production progress toward realizing those objectives could impact the Daikin Group’s technology, and purchasing units and suppliers—work in an integrated manner performance. to concurrently move ahead with the collaborative development of process innovation measures, aiming to implement innovations related to quality, costs, • Cold summer weather and other unusual weather patterns  and product development speed. The Group also has purchased liability insurance accompanied by changes in demand for air conditioners to cover unexpected quality-related claims, but, in the case that a major quality Air-conditioning and refrigeration operations accounted for 89.3% of the Daikin claim situation were to occur, there is a possibility that it could have an impact Group’s consolidated net sales in fiscal 2015. Therefore, the Group strives to on the Group’s performance. accurately monitor weather information and weather-related demand trends in the world’s principal markets. It also employs flexible manufacturing methods • Major problems in manufacturing and marketing policies designed to minimize the impact of those demand trends The Group strives to implement thorough preventative maintenance measures on its performance. However, depending on the magnitude of demand changes at all its production facilities, regardless of whether they are in Japan or overseas. resulting from cold summer weather or other unusual weather patterns, there is In addition, particularly with respect to the chemical business, the Group is a possibility that the Group’s performance could be impacted. working to strengthen its facility safety audits, security management systems, and • Large fluctuations in currency exchange rates Group has purchased insurance to cover facility damage and foregone earnings, Overseas sales accounted for 74.0% of the Daikin Group’s consolidated net sales but, in the case that a major problem were to occur in manufacturing operations, in fiscal 2015. The acceleration of global business development going forward is there is a possibility that it could have an impact on the Group’s performance. other related systems. Moreover, with respect to manufacturing problems, the expected to further elevate this overseas sales ratio. Consolidated financial statements are prepared by translating local currency-denominated items for • Major changes in the market prices of securities and other assets Group operations in each global region, including sales, expenses, and assets. The Group’s holdings of securities are primarily holdings designed to strengthen Accordingly, depending on currency exchange rates at the time of the currency collaborative business expansion measures in cooperation with business partners translation, there may be an impact on yen translation values even when there and to strengthen relationships with business partners. However, in the case of has been no change in local currency-denominated figures. In addition, because large fluctuations in securities markets, bankruptcies of business partners, and the Group engages in foreign currency-denominated transactions in raw materials similar situations, there is a possibility that it could have an impact on the and component procurement and in the sale of goods and services, there is a Group’s performance. possibility that changes in currency exchange rates could impact manufacturing costs and sales performance. To avoid such currency exchange rate-related risks, • Impairment of long-lived assets the Group undertakes short-term risk hedging via forward exchange contracts In connection with its business assets, goodwill generated on the occasion of Free Cash Flow (¥ billion) 120 60 0 -60 -120 2011 2012 2013 2014 2015 corporate acquisitions, and similar items, the Group records various types of tangible and intangible long-lived assets. With respect to these assets, in cases going forward when such factors as performance trends and market price drops prevent the generation of expected cash flows, there may be cases in which the assets in question may require impairment treatment. In the case of such impairment of long-lived assets, there is a possibility that it could have an impact on the Group’s performance. • Natural disasters In the case that such natural disasters as major earthquakes and typhoons occur and exert an impact on the Group’s manufacturing, marketing, and distribution bases, there is a possibility that it could have an impact on the Group’s perfor- mance. 35 DAIKIN INDUSTRIES, LTD. ANNUAL REPORT 2015Financial Highlights/At a GlanceA Message from the CEOInterview with the CEOReview of OperationsCorporate GovernanceFinancial Section Consolidated Balance Sheet Daikin Industries, Ltd. and Consolidated Subsidiaries March 31, 2015 ASSETS Current assets: Cash and cash equivalents (Notes 9 and 16) Trade receivables (Notes 8 and 16): Notes Accounts Allowance for doubtful receivables Inventories (Note 4) Deferred tax assets (Note 13) Prepaid expenses and other current assets Total current assets Property, plant and equipment: Land Buildings and structures Machinery and equipment Furniture and fixtures Lease assets (Note 15) Construction in progress Total Accumulated depreciation Net property, plant and equipment Investments and other assets: Investment securities (Notes 6 and 16) Investments in and advances to unconsolidated subsidiaries and associated companies Goodwill (Note 7) Customer relationships Other intangible assets Deferred tax assets (Note 13) Assets for retirement benefits (Note 10) Other assets Total investments and other assets Total See notes to consolidated financial statements. 36 Millions of yen 2015 2014 ¥ 286,950 ¥ 257,295 54,064 300,417 (6,897) 354,159 38,746 55,176 1,082,615 37,562 260,576 493,647 164,070 5,890 33,834 995,579 (647,823) 347,756 200,451 20,336 369,965 137,971 68,789 2,933 19,427 13,747 59,984 257,601 (6,598) 317,561 29,898 51,469 967,210 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 11,346 833,619 744,943 ¥2,263,990 ¥2,011,870 LIABILITIES AND EQUITY Current liabilities: Short-term borrowings (Notes 9 and 16) Current portion of long-term debt (Notes 9 and 16) Current portion of long-term lease obligations (Note 15) Trade payables (Note 16): Notes Accounts Income taxes payable (Note 16) Deferred tax liabilities (Note 13) Provision for product warranties Accrued expenses (Note 8) Other current liabilities (Note 8) Total current liabilities Long-term liabilities: Long-term debt (Notes 9 and 16) Long-term lease obligations (Note 15) Liabilities for retirement benefits (Note 10) Deferred tax liabilities (Note 13) Other long-term liabilities Total long-term liabilities Commitments and contingent liabilities (Notes 15 and 17) Equity (Notes 11, 12 and 21): Common stock—authorized, 500,000,000 shares; issued 293,113,973 shares in 2015 and 2014 Capital surplus Stock acquisition rights Retained earnings Treasury stock, at cost: 1,280,652 shares in 2015 and 1,326,704 shares in 2014 Accumulated other comprehensive income (loss): Unrealized gain on available-for-sale securities Deferred (loss) gain on derivatives under hedge accounting Foreign currency translation adjustments Remeasurements of defined benefit plans Subtotal Minority interests Total equity Total Millions of yen 2015 2014 ¥ 57,898 ¥ 43,325 39,010 1,913 8,362 145,576 21,515 22,659 50,547 96,376 81,768 95,886 1,731 9,380 152,704 17,429 13,356 46,113 84,618 68,925 525,624 533,467 560,875 550,475 2,718 10,710 95,116 20,635 2,526 9,975 73,300 18,269 690,054 654,545 85,032 83,444 993 617,129 (5,221) 67,819 (464) 179,566 (2,580) 1,025,718 22,594 1,048,312 ¥2,263,990 85,032 83,550 842 514,093 (4,549) 40,066 606 87,938 (4,883) 802,695 21,163 823,858 ¥2,011,870 37 DAIKIN INDUSTRIES, LTD. ANNUAL REPORT 2015Financial Highlights/At a GlanceA Message from the CEOInterview with the CEOReview of OperationsCorporate GovernanceFinancial Section Consolidated Statement of Income Daikin Industries, Ltd. and Consolidated Subsidiaries Year Ended March 31, 2015 Net sales (Note 8) Cost of sales (Note 14) Gross profit Selling, general and administrative expenses (Notes 7, 8 and 14) Operating income Other income (expenses): Interest and dividend income Interest expense Exchange gains Gain on sales of land Losses on disposals of property, plant and equipment and other intangible assets Losses on impairment of long-lived assets (Note 5) Gains on sales of investment securities (Note 6) Impairment losses on investment securities (Notes 6 and 16) Equity in earnings of unconsolidated subsidiaries and associated companies Gains on reversal of stock acquisition rights Loss on termination of a defined benefit plan (Note 10) Other—net Other income (expenses)—net Income before income taxes and minority interests Income taxes (Note 13): Current Deferred Total income taxes Net income before minority interests Minority interests in net income Net income Amounts per common share (Note 19): Basic net income Diluted net income Cash dividends applicable to the year See notes to consolidated financial statements. Millions of yen 2015 ¥1,915,014 1,265,112 649,902 459,314 190,588 2014 ¥1,787,679 1,219,356 568,323 411,786 156,537 8,874 (9,064) 2,955 43 (481) (4,578) 4,007 880 101 (812) (5) 1,920 192,508 60,969 6,996 67,965 124,543 (4,868) 6,478 (9,454) 483 159 (335) 54 (1,531) 1,652 209 (137) (2,422) 154,115 50,390 5,569 55,959 98,156 (5,369) ¥ 119,675 ¥ 92,787 Yen ¥410.19 409.75 100.00 ¥318.33 317.94 50.00 38 Consolidated Statement of Comprehensive Income Daikin Industries, Ltd. and Consolidated Subsidiaries Year Ended March 31, 2015 Net income before minority interests Other comprehensive income (Note 18): Unrealized gains on available-for-sale securities Deferred (losses) gains on derivatives under hedge accounting Foreign currency translation adjustments Remeasurements of defined benefit plans Share of other comprehensive income in affiliates accounted for using the equity method Total other comprehensive income Millions of yen 2015 ¥124,543 2014 ¥ 98,156 27,752 (1,071) 93,434 2,318 1,674 124,107 21,632 1,218 59,499 2,823 85,172 Comprehensive income ¥248,650 ¥183,328 Total comprehensive income attributable to: Company’s shareholders Minority interests See notes to consolidated financial statements. ¥240,224 8,426 ¥176,479 6,849 Consolidated Statement of Changes in Equity Daikin Industries, Ltd. and Consolidated Subsidiaries Year Ended March 31, 2015 Outstanding Number of Common Shares Issued Common Stock Capital Surplus Stock Acquisition Rights Retained Earnings Treasury Stock Millions of yen Accumulated Other Comprehensive Income (Loss) Unrealized Gain on Available- for-Sale Securities Deferred (Loss) Gain on Derivatives under Hedge Accounting Foreign Currency Translation Adjustments Remeasure- ments of Defined Benefit Plans Total Minority Interests Total Equity 291,139,930 ¥85,032 ¥83,017 ¥1,335 ¥438,671 ¥(6,772) ¥18,431 ¥ (146) ¥ (115) ¥ 619,453 ¥16,544 ¥ 635,997 291,139,930 85,032 83,017 1,335 437,273 (6,772) 18,431 (146) (115) 618,055 16,544 634,599 (1,398) (1,398) (1,398) Balance, April 1, 2013 (as previously reported) Cumulative effect of account- ing change (Note 3. a) Balance, April 1, 2013 (as restated) Effect of change of the fiscal year-end of certain consoli- dated subsidiaries (Note 2. a) Net income Net change in the year Balance, March 31, 2014 (as restated) Cumulative effect of account- ing change (Note 2. n) Balance, April 1, 2014 (as restated) Effect of change of the fiscal year-end of certain consoli- dated subsidiaries (Note 2. a) Net income Cash dividends, ¥50 per share Repurchase of treasury stock Disposal of treasury stock (663) 648,002 (4,021) 92,787 (11,946) 533 (493) (4) 2,227 21,635 (4,021) 92,787 (11,946) (4) 2,760 105,064 4,619 (4,021) 92,787 (11,946) (4) 2,760 109,683 88,053 ¥(4,883) 87,938 (4,883) 802,695 21,163 823,858 752 606 291,787,269 85,032 83,550 842 514,093 (4,549) 40,066 291,787,269 85,032 83,550 842 517,157 (4,549) 40,066 606 87,938 (4,883) 805,759 21,163 826,922 3,064 3,064 3,064 Cash dividends, ¥100 per share Repurchase of treasury stock Disposal of treasury stock (310,948) 357,000 (157) 119,675 (19,546) (106) (2,095) 1,423 Net change in the year Balance, March 31, 2015 291,833,321 ¥85,032 ¥83,444 151 27,753 ¥ 993 ¥617,129 ¥(5,221) ¥67,819 (1,070) ¥ (464) 91,628 ¥179,566 See notes to consolidated financial statements. (157) 119,675 (19,546) (2,095) 1,317 122,196 ¥(2,580) ¥1,025,718 ¥22,594 ¥1,048,312 (157) 119,675 (19,546) (2,095) 1,317 120,765 2,303 1,431 39 DAIKIN INDUSTRIES, LTD. ANNUAL REPORT 2015Financial Highlights/At a GlanceA Message from the CEOInterview with the CEOReview of OperationsCorporate GovernanceFinancial Section Consolidated Statement of Cash Flows Daikin Industries, Ltd. and Consolidated Subsidiaries Year Ended March 31, 2015 Operating activities: Income before income taxes and minority interests ¥192,508 ¥154,115 Millions of yen 2015 2014 Adjustments for: Income taxes—paid Depreciation and amortization Losses on impairment of long-lived assets Gains on sales of investment securities Impairment losses on investment securities Losses 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, without 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, after deduction for net of cash and cash equivalents acquired Proceeds from sales of shares of subsidiaries resulting in change in the scope of consolidation Payment for acquisition of shares of associated company Payments for acquisition of investment securities Proceeds from sales of investment securities (Note 6) Payment for transfer of business Other—net Net cash used in investing activities Financing activities: Net increase (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 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 (60,214) 77,767 4,578 (4,007) 481 (880) (18,997) (16,631) 2,777 (4,303) (16,557) 6,059 3,685 497 (6,340) (32,085) 160,423 (71,760) 1,773 1,793 (1,324) (10,698) 7,452 (4,567) (77,331) 13,346 24,909 (95,922) (19,546) (2,257) (3,603) (83,073) 29,837 29,856 (201) 257,295 ¥286,950 (45,874) 78,901 (54) 1,531 335 (1,652) (36,125) (5,088) (1,315) 499 19,140 12,846 9,238 5,512 (12,296) 25,598 179,713 (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 Notes to Consolidated Financial Statements Daikin Industries, Ltd. and Consolidated Subsidiaries Year Ended March 31, 2015 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 (IFRSs). 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 readers outside Japan. In addition, certain reclassifications have been made in the 2014 consolidated financial statements to conform to the classification used in 2015. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. 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 and influence concepts, 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 investments for which the value has been permanently impaired, for which appropriate write-downs are recorded. If these subsidiaries and associated companies had been consolidated or accounted for using the equity method, respectively, the effect on the accompanying consolidated 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. For the year ended March 31, 2015, PT. Daikin Applied Solutions Indonesia and one other company 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 included in assets resulting from transactions within the Group is eliminated. b. 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 policies and procedures applied to a parent company and its subsidiaries for similar transactions and events under similar circumstances should, in principle, be unified for the preparation of the consolidated financial statements. However, financial statements prepared by foreign subsidiaries in accordance with either IFRSs or generally accepted accounting principles in the United States of America (U.S. GAAP) tentatively may be used for the consolidation process, except for the following 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 recorded in equity through other comprehensive income; (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 (see Note 2.v). c. 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,” adjustments are 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 IFRSs or U.S. GAAP 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 amortization of actuarial gain or loss of pensions that has been recorded in the equity through other comprehensive income; (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 (see Note 2.v). 41 DAIKIN INDUSTRIES, LTD. ANNUAL REPORT 2015Financial Highlights/At a GlanceA Message from the CEOInterview with the CEOReview of OperationsCorporate GovernanceFinancial Section d. 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, 2015 and 2014. e. 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. f. 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, principally determined by the average method, or market. g. Property, Plant and Equipment - Property, plant and equipment are stated at cost. Depreciation of property, plant and equipment of the Company and its consolidated subsidiaries is principally computed by the straight-line method 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 8 to 15 years for machinery and equipment. The useful lives for lease assets are the terms of the respective leases. h. 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 obligation imposed either by law or contract that results from the acquisition, construction, development and normal operation of a tangible 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 capitalized by increasing the carrying amount of the related fixed asset by the amount of the liability. The asset retirement cost is subsequently 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 retirement cost. i. 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. j. 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 standard 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. 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. k. 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 applicable 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. 42 l. 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). m. Provision for Product Warranties - The Group repairs or exchanges certain products without charge under specific circumstances. The provision for product warranties is stated in amounts considered to be appropriate based on the past experience and an evaluation of potential losses on the product warranties. n. Employee’ 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. In calculating the projected benefit obligation, expected benefit is attributed to the current period on a benefit formula basis. 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 other related practical guidance, and were followed by partial amendments from time to time through 2009. (a) 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). (b) 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 service period 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 service costs that were recognized in other comprehensive income in prior periods and then recognized in profit or loss in the current period, are treated as reclassification adjustments (see Note 18). (c) The revised accounting standard also made certain amendments relating to the method of attributing expected benefit to periods, the discount rate, and expected future salary increases. This 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, all with earlier application being permitted from the beginning of annual periods beginning on or after April 1, 2013. However, no retrospective application of this accounting standard to consolidated financial statements in prior periods is required. The Company applied the revised accounting standard and guidance for retirement benefits for (a) and (b) above, effective March 31, 2014, and for (c) above, effective April 1, 2014. With respect to (c) above, the Company changed the method of attributing the expected benefit to periods from a straight-line basis to a benefit formula basis, the method of determining the discount rate from using the period which approximates the expected average remaining service period to using a single weighted-average discount rate reflecting the estimated timing and amount of benefit payment, and recorded the effect of (c) above as of April 1, 2014, in retained earnings. As a result, net defined benefit assets and retained earnings as of April 1, 2014, increased by ¥4,788 million and ¥3,064 million, respectively. The impact of this change on the operating income, income before income taxes and minority interests for the year ended March 31, 2015, is insignificant (see Note 19 for the impact of this change on basic net income per share (EPS) and diluted net EPS). o. Stock Options - In accordance with ASBJ Statement No. 8, “Accounting Standard for Stock Options,” the Company measures the cost of employee 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 sheet, the stock option is presented as a stock acquisition right as a separate component of equity until exercised. p. 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 consolidated 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 DAIKIN INDUSTRIES, LTD. ANNUAL REPORT 2015Financial Highlights/At a GlanceA Message from the CEOInterview with the CEOReview of OperationsCorporate GovernanceFinancial Section q. 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 separate component of equity. r. Bonuses to Directors and Audit & Supervisory Board Members - Bonuses to Directors and Audit & Supervisory Board Members are accrued at the year-end to which such bonuses are attributable. Accrued bonuses are included in accrued expenses. s. Income Taxes - The provision for current income taxes is computed based on 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. t. 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 exposure 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. u. 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 EPS of common stock assumes full exercise of the outstanding stock options which have a dilutive effect at the beginning of year (or at the time of issuance). Cash dividends per share presented in the accompanying consolidated statement of income are dividends applicable to the respective years including dividends to be paid after the end of year. v. New Accounting Pronouncements Business Combinations - In September, 2013, the ASBJ issued revised ASBJ Statement No. 21, “Accounting Standard for Business Combinations,” revised ASBJ Guidance No. 10, “Guidance on Accounting Standards for Business Combinations and Business Divestitures,” and revised ASBJ Statement No. 22, “Accounting Standard for Consolidated Financial Statements.” Major accounting changes are as follows: (a) Transactions with noncontrolling interest - A parent’s ownership interest in a subsidiary might change if the parent purchases or sells ownership interests in its subsidiary. The carrying amount of minority interest is adjusted to reflect the change in the parent’s ownership interest in its subsidiary while the parent retains its controlling interest in its subsidiary. Under the current accounting standard, any difference between the fair value of the consideration received or paid and the amount by which the minority interest is adjusted is accounted for as an adjustment of goodwill or as profit or loss in the consolidated statement of income. Under the revised accounting standard, such difference shall be accounted for as capital surplus as long as the parent retains control over its subsidiary. (b) Presentation of the consolidated balance sheet - In the consolidated balance sheet, “minority interest” under the current accounting standard will be changed to “noncontrolling interest” under the revised accounting standard. (c) Presentation of the consolidated statement of income - In the consolidated statement of income, “income before minority interest” under the current accounting standard will be changed to “net income” under the revised accounting standard, and “net income” under the current accounting standard will be changed to “net income attributable to owners of the parent” under the revised accounting standard. (d) Provisional accounting treatments for a business combination - If the initial accounting for a business combination is incomplete by the end of the reporting period in which the business combination occurs, an acquirer shall report in its financial statements provisional amounts for the items for which the accounting is incomplete. Under the current accounting standard guidance, the impact of adjustments to provisional amounts recorded in a business combination on profit or loss is recognized as profit or loss in the year in which the measurement is completed. Under the revised accounting standard guidance, during the measurement period, which shall not exceed one year from the acquisition, the acquirer shall retrospectively adjust the provisional amounts recognized at the acquisition date to reflect new information obtained about facts and circumstances that existed as of the acquisition date and that would have affected the measurement of the amounts recognized as of that date. Such adjustments shall be recognized as if the accounting for the business combination had been completed at the acquisition date. 44 (e) Acquisition-related costs - Acquisition-related costs are costs, such as advisory fees or professional fees, which an acquirer incurs to effect a business combination. Under the current accounting standard, the acquirer accounts for acquisition-related costs by including them in the acquisition costs of the investment. Under the revised accounting standard, acquisition-related costs shall be accounted for as expenses in the periods in which the costs are incurred. The above accounting standards and guidance for (a) transactions with noncontrolling interest, (b) presentation of the consolidated balance sheet, (c) presentation of the consolidated statement of income, and (e) acquisition-related costs are effective for the beginning of annual periods beginning on or after April 1, 2015. Earlier application is permitted from the beginning of annual periods beginning on or after April 1, 2014, except for (b) presentation of the consolidated balance sheet and (c) presentation of the consolidated statement of income. In the case of earlier application, all accounting standards and guidance above, except for (b) presentation of the consolidated balance sheet and (c) presentation of the consolidated statement of income, should be applied simultaneously. Either retrospective or prospective application of the revised accounting standards and guidance for (a) transactions with noncontrolling interest and (e) acquisition-related costs is permitted. In retrospective application of the revised standards and guidance, the accumulated effects of retrospective adjustments for all (a) transactions with noncontrolling interest and (e) acquisition-related costs that occurred in the past shall be reflected as adjustments to the beginning balance of capital surplus and retained earnings for the year of the first-time application. In prospective application, the new standards and guidance shall be applied prospectively from the beginning of year of the first-time application. The revised accounting standards and guidance for (b) presentation of the consolidated balance sheet and (c) presentation of the consolidated statement of income shall be applied to all periods presented in consolidated financial statements containing the first- time application of the revised standards and guidance. The revised accounting standards and guidance for (d) provisional accounting treatments for a business combination are effective for a business combination which occurs on or after the beginning of annual periods beginning on or after April 1, 2015. Earlier application is permitted for a business combination which occurs on or after the beginning of annual periods beginning on or after April 1, 2014. The Company expects to apply the revised accounting standards and guidance for (a), (b), (c) and (e) above from April 1, 2015, and for (d) above for a business combination which will occur on or after April 1, 2015, and is in the process of measuring the effects of applying the revised accounting standards and guidance in future applicable periods. 3. CHANGES IN ACCOUNTING POLICIES a. Changes in Revenue Recognition Standard - The Company and its domestic consolidated subsidiaries formerly recognized revenue mainly upon shipment. However, from April 1, 2014, the Company and its domestic consolidated subsidiaries changed their accounting policy and recognize revenue upon delivery in accordance with the terms and conditions of the contracts. While the Company and its domestic consolidated subsidiaries previously recognized revenue mainly upon shipment, its foreign consolidated subsidiaries recognized revenue in accordance with IFRSs or U.S. GAAP upon delivery in accordance with the terms and conditions of the contracts. The Company and its domestic consolidated subsidiaries reconsidered the revenue recognition policies given the recent further expansion of the Group’s business overseas. The Company and its domestic consolidated subsidiaries determined that the unification of revenue recognition would be crucial to the Group’s business from a management standpoint. Consequently, the Company and its domestic consolidated subsidiaries, by referencing Accounting Practice Committee Research Report No. 13 “Research Report on Revenue Recognition in Japan (interim report)” from the Japanese Institute of Certified Public Accountants, reconsidered the revenue recognition policies of the Company and its domestic consolidated subsidiaries. As a result of such consideration, the Company determined that it is appropriate to unify the policies within the Group and recognize revenue upon delivery in accordance with the terms and conditions of the contracts from April 1, 2014, when the relevant computer systems and the operational management improvements for such recognition had been completed. This change in accounting policy was applied retrospectively and the consolidated financial statements for the year ended March 31, 2014 were restated. As a result, net sales for the year ended March 31, 2014, increased by ¥4,602 million, and operating income, income before income taxes and minority interests each increased by ¥1,462 million as compared with the figures prior to the retrospective application. Net assets at April 1, 2013, have been adjusted to retrospectively reflect the cumulative effects of change, which resulted in a decrease of ¥1,398 million in retained earnings (see Note 19 for the impact of this change on basic net EPS and diluted net EPS). b. Changes in Depreciation Method of Property, Plant and Equipment - The Company and its domestic consolidated subsidiaries formerly depreciated property, plant and equipment using the declining-balance method (with the exception of buildings acquired on or after April 1, 1998, which are depreciated using the straight-line method). However, from April 1, 2014, the Company and its domestic consolidated subsidiaries changed their depreciation method for property, plant and equipment to the straight-line method. 45 DAIKIN INDUSTRIES, LTD. ANNUAL REPORT 2015Financial Highlights/At a GlanceA Message from the CEOInterview with the CEOReview of OperationsCorporate GovernanceFinancial SectionIn “Fusion 15,” the Group’s strategic management plan that sets fiscal 2016 as its target year, the Group aims for further expansion of overseas business while focusing on enhancing a system that optimizes local production on a global scale and developing new products that meet diverse consumer needs. Under this plan, the Group has been transferring its production bases overseas; and in Japan, it has been advancing toward the standardization of its facilities and parts and materials in line with a review of the production system to meet domestic needs, as well as increasing its investments in research and development facilities. In light of the above, it was determined that, as the domestic facilities are expected to be utilized stably in the long term, depreciation using the straight-line method would better reflect the actual state of use and that the unification of accounting treatments with the foreign consolidated subsidiaries, which apply the straight-line method, would contribute to enhancing the precision of business management. As a result, depreciation for the year ended March 31, 2015, decreased by ¥4,723 million, and operating income, income before income taxes and minority interests each increased by ¥4,013 million as compared with the figures calculated using the previous method. 4. INVENTORIES Inventories at March 31, 2015 and 2014 consisted of the following: Finished products and merchandise Semifinished products and work in process Raw materials and supplies Total 5. LONG-LIVED ASSETS Millions of yen 2015 2014 ¥248,027 ¥218,671 40,494 65,638 40,977 57,913 ¥354,159 ¥317,561 The Group reviewed its long-lived assets for impairment for the year ended March 31, 2015. As a result, the Group recognized impairment losses recorded in other expenses for those assets which were mainly deemed to be idle assets with no future plan for utilization. The carrying amounts of those assets exceeded their fair values. Impairment losses recognized for the year ended March 31, 2015 were mainly as follows: Use Location Asset Category Millions of yen Idle assets with no future plan for utilization Jiujiang City, People’s Republic of China Buildings and structures Machinery and equipment Total ¥1,337 2,822 ¥4,159 The carrying amounts of the related assets were written down to the recoverable amount. The recoverable amounts of these assets were measured by the net selling price at disposition. No impairment loss was recognized for the year ended March 31, 2014. 46 6. MARKETABLE AND INVESTMENT SECURITIES The acquisition costs and aggregate fair values of marketable available-for-sale securities included in investment securities at March 31, 2015 and 2014 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 2015 Cost Unrealized Gains Unrealized Losses Fair Value ¥98,536 ¥92,951 ¥(320) ¥191,167 75 1 76 ¥98,611 ¥92,952 ¥(320) ¥191,243 Millions of yen 2014 Cost Unrealized Gains Unrealized Losses Fair Value ¥91,916 ¥54,030 ¥(432) ¥145,514 100 2 102 ¥92,016 ¥54,032 ¥(432) ¥145,616 Available-for-sale securities that were sold during the years ended March 31, 2015 and 2014 were as follows: March 31, 2015 Available-for-sale: Equity securities March 31, 2014 Available-for-sale: Equity securities Millions of yen Proceeds Realized Gains Realized Losses ¥7,452 ¥4,007 Millions of yen Proceeds Realized Gains Realized Losses ¥84 ¥55 ¥(1) The impairment losses on marketable available-for-sale securities for the year ended March 31, 2014 were ¥1,529 million. No impairment loss was recognized for the year ended March 31, 2015. 7. GOODWILL Amortization expenses for goodwill were ¥24,920 million and ¥23,784 million for the years ended March 31, 2015 and 2014, respectively, which were included in selling, general and administrative expenses. 8. RELATED PARTY TRANSACTIONS Material transactions and balances with related parties for the years ended March 31, 2015 and 2014 were as follows: (1) 2015 (a) The Company Name Description of Post Ownership of the Company (%) Chiyono Terada Outside Director/Chief 0.00 Executive Officer (CEO) and President of Art Corporation Millions of yen Transactions Resulting Account Balances Description of Transaction Commission for moving business and delivery business 2015 ¥469 Account Accrued expenses and other current liabilities 2015 ¥45 47 DAIKIN INDUSTRIES, LTD. ANNUAL REPORT 2015Financial Highlights/At a GlanceA Message from the CEOInterview with the CEOReview of OperationsCorporate GovernanceFinancial Section (b) The Company’s consolidated subsidiaries Name Description of Post Ownership of the Company (%) Chiyono Terada Outside Director/CEO 0.00 and President of Art Corporation Millions of yen Transactions Resulting Account Balances Description of Transaction Commission for moving business and delivery business 2015 ¥67 Account Accrued expenses and other current liabilities 2015 ¥ 7 Sales of products and other 71 Accounts receivable 14 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) 2014 (a) The Company Name Description of Post Ownership of the Company (%) Chiyono Terada Outside Director/CEO 0.00 and President of Art Corporation (b) The Company’s consolidated subsidiaries Name Description of Post Ownership of the Company (%) Chiyono Terada Outside Director/CEO 0.00 and President of Art Corporation Millions of yen Transactions Resulting Account Balances Description of Transaction 2014 Account Commission for moving business and delivery business ¥435 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. 9. SHORT-TERM BORROWINGS AND LONG-TERM DEBT Short-term borrowings of the Group at March 31, 2015 and 2014 consisted of the following: Bank overdrafts and notes to banks Commercial paper Total Millions of yen 2015 ¥41,898 16,000 ¥57,898 2014 ¥43,325 ¥43,325 Unused short-term bank credit lines were ¥150,000 million at March 31, 2015. The weighted-average interest rates of bank overdrafts and notes to banks at March 31, 2015 and 2014 were 1.25% and 1.67%, respectively. The weighted-average interest rate of commercial paper at March 31, 2015 was 0.09%. 48  Long-term debt at March 31, 2015 and 2014 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 0.38% unsecured bonds, due 2021 1.20% unsecured bonds, due 2022 0.68% unsecured bonds, due 2024 Unsecured loans from government-sponsored banks, with interest of 1.75%, due through 2019 Unsecured loans from banks and others, payable in foreign currencies, with interest ranging from 0.58% to 5.76% (2015) and from 0.59% to 5.90% (2014), due through 2022 Unsecured loans from banks and others with interest ranging from 0.22% to 3.58% (2015) and from 0.26% to 3.59% (2014), due through 2023 Total Less current portion Long-term debt, less current portion Annual maturities of long-term debt outstanding at March 31, 2015 were as follows: Year Ending March 31 2016 2017 2018 2019 2020 2021 and thereafter Total Millions of yen 2015 ¥ 30,000 10,000 40,000 10,000 10,000 30,000 10,000 20,000 2014 ¥ 30,000 30,000 10,000 40,000 10,000 30,000 20,000 169,862 161,334 270,023 599,885 (39,010) 315,027 646,361 (95,886) ¥560,875 ¥550,475 Millions of yen ¥ 39,010 75,501 74,026 74,826 89,426 247,096 ¥599,885 At March 31, 2015, a time deposit with a book value of ¥130 million was pledged as collateral without corresponding borrowing. Certain loan agreements provide that the lender may require the Group to submit proposals for paying dividends, issuing additional 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 have ever exercised these rights with respect to debt of the Group. 10. SEVERANCE INDEMNITIES AND PENSION PLANS Under the Group’s severance indemnities and pension plans, employees terminating their employment are, in most circumstances, 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 obligations and benefit costs for retirement lump-sum payment using the simplified method. 49 DAIKIN INDUSTRIES, LTD. ANNUAL REPORT 2015Financial Highlights/At a GlanceA Message from the CEOInterview with the CEOReview of OperationsCorporate GovernanceFinancial Section 1. Defined benefit plans (1) The changes in defined benefit obligations for the years ended March 31, 2015 and 2014 were as follows (excluding the benefit plans for which the simplified method was applied): Balance at beginning of year (as previously reported) Cumulative effect of accounting change Balance at beginning of year (as restated) Service cost Interest cost Net actuarial losses (gains) Past service cost Benefits paid Effect of changes in the scope of consolidation Effect of change of the fiscal year-end Decrease due to the termination of a defined benefit plan Foreign currency translation adjustments Others Balance at end of year Millions of yen 2015 ¥89,633 (4,788) 84,845 4,210 1,985 5,404 (1,349) (3,796) (2,145) 1,909 (4) 2014 ¥83,770 83,770 4,098 1,919 (993) 8 (4,065) 72 (121) 5,079 (134) ¥91,059 ¥89,633 (2) The changes in plan assets for the years ended March 31, 2015 and 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 change of the fiscal year-end Decrease due to the termination of a defined benefit plan Foreign currency translation adjustments Others Balance at end of year Millions of yen 2015 ¥ 92,229 2014 ¥80,088 3,396 6,985 3,622 (3,455) (2,145) 1,832 (14) 3,057 3,908 4,839 (3,733) 168 3,845 57 ¥102,450 ¥92,229 (3) The changes in defined benefit obligation for the years ended March 31, 2015 and 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 2015 ¥2,501 980 (807) ¥2,674 2014 ¥ 301 2,963 (763) ¥2,501 50 (4) Reconciliations between the liabilities recorded in the consolidated balance sheet and the balances of defined benefit obligation and plan assets at March 31, 2015 and 2014 were as follows (including the benefit plan for which the simplified method was applied): Funded defined benefit obligation Plan assets Total Unfunded defined benefit obligation Millions of yen 2015 ¥ (89,278) 102,450 13,172 (4,455) 2014 ¥(88,051) 92,229 4,178 (4,083) Net amount of liabilities and assets recorded in the consolidated balance sheet ¥ 8,717 ¥ 95 Liabilities for retirement benefits Assets for retirement benefits Net amount of liabilities and assets recorded in the consolidated balance sheet ¥ (10,710) 19,427 ¥ 8,717 ¥ (9,975) 10,070 ¥ 95 (5) The components of net periodic benefit costs for the years ended March 31, 2015 and 2014 were as follows: Service cost Interest cost Expected return on plan assets Recognized net actuarial losses (gains) Amortization of past service cost Periodic benefit cost calculated by the simplified method Others Subtotal (net periodic benefit costs) Loss on termination of a defined benefit plan Total Millions of yen 2015 ¥4,210 1,985 (3,396) 163 (208) 980 69 3,803 812 ¥4,615 2014 ¥4,098 1,919 (3,057) (113) (42) 2,963 70 5,838 ¥5,838 (6) Amounts recognized in other comprehensive income (before income tax effect) in respect of defined benefit plans for the year ended March 31, 2015 was as follows: Past service cost Net actuarial losses Total Millions of yen 2015 ¥(1,298) (2,245) ¥(3,543) (7) Amounts recognized in accumulated other comprehensive income (before income tax effect) in respect of defined benefit plans for the years ended March 31, 2015 and 2014 were as follows: Unrecognized past service cost Unrecognized net actuarial losses Total Millions of yen 2015 ¥(1,317) 4,557 ¥ 3,240 2014 ¥ (18) 6,801 ¥6,783 51 DAIKIN INDUSTRIES, LTD. ANNUAL REPORT 2015Financial Highlights/At a GlanceA Message from the CEOInterview with the CEOReview of OperationsCorporate GovernanceFinancial Section(8) Plan assets (a) Components of plan assets Plan assets at March 31, 2015 and 2014, 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 2015 5% 2014 6% 8 24 21 16 0 2 24 8 24 18 17 2 2 23 100% 100% (b) Method of determining the expected rate of return on plan assets To determine the expected long-term rate of return on plan assets, we consider current and target asset allocations, as well as historical and expected returns on various categories of plan assets. (9) Assumptions used for the years ended March 31, 2015 and 2014 were as follows: Discount rate Expected rate of return on plan assets Expected rate of future salary increases 2015 Mainly 1.2% Mainly 2.5% Mainly 4.5% 2014 Mainly 1.2% Mainly 2.5% Mainly 4.5% 2. Defined contribution plan The amounts of contribution required for the defined contribution plan paid by the Company and its subsidiaries were ¥4,832 million and ¥4,181 million for the years ended March 31, 2015 and 2014, respectively. 11. EQUITY 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 being 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 incorporation 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. 52 (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 within equity under certain conditions upon resolution of the shareholders. (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 a specific formula. Under the Companies Act, stock acquisition rights are presented as a separate component of equity. The Companies Act also provides that companies can purchase both treasury stock acquisition rights and treasury stock. Such treasury stock acquisition rights are presented as a separate component of equity or deducted directly from stock acquisition rights. 12. STOCK OPTIONS The stock options outstanding at March 31, 2015, were as follows: Number of Options Granted 308,000 shares Date of Grant Exercise Price Exercise Period 2008.7.14 ¥5,924 Stock Option 2008 Stock Option 2009 Stock Option 2010 Stock Option 2011 Stock Option 2012 Stock Option 2013 Stock Option 2014 Stock Option Persons Granted 8 directors 44 employees 8 directors 42 employees 8 directors 41 employees 10 directors 39 employees 10 directors 41 employees 10 directors 38 employees 9 directors 45 employees 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 ¥4,500 310,000 shares 2014.7.14 ¥6,715 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 From July 15, 2016 to July 14, 2020 53 DAIKIN INDUSTRIES, LTD. ANNUAL REPORT 2015Financial Highlights/At a GlanceA Message from the CEOInterview with the CEOReview of OperationsCorporate GovernanceFinancial Section The stock option activities were as follows: 2007 Stock Option 2008 Stock Option 2009 Stock Option 2010 Stock Option 2011 Stock Option 2012 Stock Option 2013 Stock Option 2014 Stock Option Shares Year Ended March 31, 2014 Vested April 1, 2013—Outstanding 202,000 220,000 212,000 251,000 296,000 300,000 Granted Exercised Canceled March 31, 2014—Outstanding Year Ended March 31, 2015 Vested (8,000) (40,000) (186,000) (219,000) (195,000) (194,000) (10,000) 170,000 26,000 32,000 101,000 300,000 286,000 286,000 April 1, 2014—Outstanding 170,000 26,000 32,000 101,000 300,000 286,000 Granted Exercised Canceled (49,000) (14,000) (16,000) (65,000) (213,000) (121,000) (4,000) 310,000 March 31, 2015—Outstanding Exercise price ¥4,640 Average stock price at exercise Fair value price at grant date ¥1,035 ¥5,924 ¥6,655 ¥ 803 8,000 ¥3,250 ¥7,452 ¥ 899 16,000 ¥3,050 ¥6,970 ¥1,113 36,000 ¥2,970 ¥7,149 ¥ 935 87,000 286,000 310,000 ¥2,186 ¥7,206 ¥ 676 ¥4,500 ¥6,715 ¥1,220 ¥1,697 The assumptions used to measure fair value of 2014 Stock Option Estimate method: Black-Scholes option pricing model Volatility of stock price: 34.0% Estimated remaining outstanding period: 4 years Estimated dividend: Risk-free interest rate: ¥50 per share 0.1% 54 13. INCOME TAXES The Company and its domestic subsidiaries are subject to Japanese national and local income taxes that, in the aggregate, resulted in a normal effective statutory tax rate of approximately 35.6% and 37.9% for the years ended March 31, 2015 and 2014, respectively. The tax effects of significant temporary differences and tax loss carryforwards that resulted in deferred tax assets and liabilities at March 31, 2015 and 2014 were as follows: Deferred tax assets: Inventories Provision for product warranties Tax loss carryforwards Investment securities 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 2015 2014 ¥ 16,862 16,276 ¥ 13,798 13,857 6,805 6,165 4,782 3,556 2,119 1,635 1,238 7,169 8,105 4,083 4,012 2,439 1,736 1,160 27,028 (21,141) 20,584 (20,056) ¥ 65,325 ¥ 56,887 ¥ 68,259 ¥ 58,123 30,455 24,817 6,070 1,729 10,091 21,084 13,561 3,586 1,906 9,149 ¥141,421 ¥ (76,096) ¥107,409 ¥ (50,522) 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 years ended March 31, 2015 and 2014. On March 31, 2015, the 2015 Tax Reform Act was enacted in Japan to reduce the normal effective statutory tax rate from 35.6% to 33.0% for the fiscal year beginning on or after April 1, 2015, and to 32.2% for fiscal years beginning on or after April 1, 2016. The effect of these changes was to decrease deferred tax liabilities, net of deferred tax assets, by ¥2,927 million, income taxes-deferred by ¥391 million, remeasurements of defined retirement benefit plans by ¥25 million, and to increase deferred loss on derivatives under hedge accounting and unrealized gain on available-for-sale securities by ¥16 million and ¥2,577 million, respectively. 55 DAIKIN INDUSTRIES, LTD. ANNUAL REPORT 2015Financial Highlights/At a GlanceA Message from the CEOInterview with the CEOReview of OperationsCorporate GovernanceFinancial Section  At March 31, 2015, the Company and certain consolidated subsidiaries had tax loss carryforwards aggregating ¥22,290 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 2016 2017 2018 2019 2020 2021 and thereafter Total Millions of yen ¥ 83 819 2,628 1,883 1,524 15,353 ¥22,290 14. RESEARCH AND DEVELOPMENT COSTS Research and development costs included in cost of sales and selling, general and administrative expenses were ¥42,892 million and ¥40,177 million for the years ended March 31, 2015 and 2014, respectively. 15. LEASES The Group leases certain computer equipment and other assets. Obligations under finance leases and future minimum payments under noncancelable operating leases at March 31, 2015 were as follows: Due within one year Due after one year Total Millions of yen Finance Leases ¥1,913 2,718 ¥4,631 Operating Leases ¥16,283 22,365 ¥38,648 Pro forma information for the years ended March 31, 2015 and 2014 As discussed in Note 2.j, 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 transactions. Pro forma information of such leases existing at the transition date, such as acquisition cost, accumulated depreciation, obligations under finance leases, and depreciation expense on an “as if capitalized” basis for the years ended March 31, 2015 and 2014, was as follows: Acquisition cost Accumulated depreciation Net leased property Millions of yen Furniture and Fixtures ¥36 33 ¥ 3 2015 Others ¥52 47 ¥ 5 Total ¥88 80 ¥ 8 Furniture and Fixtures ¥98 87 ¥11 2014 Others ¥95 81 ¥14 Total ¥193 168 ¥ 25 56  Obligations under finance leases were as follows: 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 were as follows: Lease payments Depreciation expense Millions of yen 2015 ¥7 1 ¥8 2014 ¥17 8 ¥25 Millions of yen 2015 ¥17 17 2014 ¥25 25 Depreciation expense, which is not reflected in the accompanying consolidated statement of income, was computed using the straight-line method. 16. 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 based on 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. 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 through adequate financial planning by the corporate finance department. In addition, the Group has short-term bank credit lines. Some long-term bank loans are exposed to market risks from change in interest rates, which are hedged by mainly using 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. 57 DAIKIN INDUSTRIES, LTD. ANNUAL REPORT 2015Financial Highlights/At a GlanceA Message from the CEOInterview with the CEOReview of OperationsCorporate GovernanceFinancial Section Fair values of financial instruments The carrying amounts, fair values and unrealized loss of significant financial instruments were as follows. Fair values of financial instruments 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 values 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, 2015 Carrying Amount Fair Value Unrealized Loss ¥286,950 ¥286,950 354,481 191,243 ¥832,674 ¥153,938 57,898 21,515 599,885 ¥833,236 354,481 191,243 ¥832,674 ¥153,938 57,898 21,515 608,496 ¥841,847 ¥ (787) ¥ (787) Millions of yen March 31, 2014 ¥8,611 ¥8,611 Carrying Amount Fair Value Unrealized Loss ¥257,295 ¥257,295 317,585 145,616 ¥720,496 ¥162,084 43,325 17,429 646,361 ¥869,199 ¥ 751 317,585 145,616 ¥720,496 ¥162,084 43,325 17,429 654,516 ¥877,354 ¥ 751 ¥8,155 ¥8,155 Assets Cash and cash equivalents The carrying values of cash and cash equivalents approximate fair values 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 prices of the stock exchange for the equity instruments, and the fair values of debt securities are measured at the amounts to be received through maturity discounted at the Group’s assumed corporate discount rate. Fair value information for investment securities by classification is included in Note 6. Liabilities Trade notes and accounts payable, short-term borrowings and income taxes payable The carrying values of trade notes and accounts payable, short-term borrowings and income taxes payable approximate fair values because of their short maturities. Long-term debt The fair values of bonds are determined at the quoted market prices 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 that qualify for hedge accounting and meet specific matching criteria, are determined by discounting the cash flows related to the loans and the interest rate swaps at the Group’s assumed corporate borrowing rate. 58 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 Forward exchange contracts: Selling: GBP EUR USD AUD NZD ZAR CZK HKD SGD MYR TRY CNY IDR INR Buying: CNY MYR THB Commodity future contracts: Buying: Metal Millions of yen March 31, 2015 Contract Amount Due after One Year Fair Value Unrealized Gain (Loss) ¥ (15) ¥ (15) (26) (119) 256 (25) 4 29 13 75 18 (57) (227) 4 (4) 128 (71) 92 (26) (119) 256 (25) 4 29 13 75 18 (57) (227) 4 (4) 128 (71) 92 Contract Amount ¥ 4,088 44,002 21,741 5,867 533 1,412 3,223 2,813 2,543 935 9,955 2,459 261 240 1,616 9,000 9,642 ¥ 1,893 ¥(160) ¥(160) 59 DAIKIN INDUSTRIES, LTD. ANNUAL REPORT 2015Financial 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 NOK HKD SGD MYR TRY BRL INR Buying: CNY Commodity future contracts: Buying: Metal Derivative transactions to which hedge accounting is applied Forward exchange contracts: Selling: GBP EUR USD ZAR CZK PLN TRY Buying: EUR CNY Interest rate swaps: Millions of yen March 31, 2014 Contract Amount Due after One Year Fair Value Unrealized Gain (Loss) ¥ (21) ¥ (21) (126) 147 (82) 42 (15) 29 1 (9) (10) (310) (3) (29) 2 (126) 147 (82) 42 (15) 29 1 (9) (10) (310) (3) (29) 2 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 ¥ (70) ¥ (70) Millions of yen March 31, 2015 Contract Amount Due after One Year Fair Value ¥ (330) 375 (89) (20) 667 (35) (13) (98) 127 Hedged Item Receivables Receivables Receivables Receivables Receivables Receivables Receivables Payables Payables Contract Amount ¥ 8,616 32,116 3,256 1,185 7,482 1,114 2,582 2,603 5,595 Fixed-rate payment, floating-rate receipt Long-term debt ¥193,542 ¥180,926 ¥(1,286) Fixed-rate payment, floating-rate receipt* Long-term debt 170,000 149,600 60 Forward exchange contracts: Selling: GBP EUR USD ZAR CZK PLN TRY Buying: CNY Commodity future contracts: Buying: Metal Interest rate swaps: Millions of yen March 31, 2014 Contract Amount Due after One Year Fair Value ¥ (70) (311) 3 3 17 (8) 15 (161) 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 ¥ 27 Fixed-rate payment, floating-rate receipt Long-term debt ¥188,024 ¥177,222 ¥1,690 Fixed-rate payment, floating-rate receipt* Long-term debt 215,000 165,000 * 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 values cannot be readily 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. Millions of yen Carrying Amount 2015 ¥8,265 943 ¥9,208 2014 ¥8,178 566 ¥8,744 61 DAIKIN INDUSTRIES, LTD. ANNUAL REPORT 2015Financial Highlights/At a GlanceA Message from the CEOInterview with the CEOReview of OperationsCorporate GovernanceFinancial Section Maturity analysis for financial assets and securities with contractual maturities Cash and cash equivalents Trade notes and accounts receivable Investment securities: Due in One Year or Less ¥286,950 353,532 Available-for-sale securities with contractual maturities (corporate bonds) 25 Total Cash and cash equivalents Trade notes and accounts receivable Investment securities: ¥640,507 Due in One Year or Less ¥257,295 317,266 Available-for-sale securities with contractual maturities (corporate bonds) 25 Total ¥574,586 Please see Note 9 for annual maturities of long-term debt. Millions of yen March 31, 2015 Due after One Year through Five Years Due after Five Years through Ten Years Due after Ten Years ¥949 50 ¥999 Millions of yen March 31, 2014 Due after One Year through Five Years Due after Five Years through Ten Years Due after Ten Years ¥319 75 ¥394 17. COMMITMENTS AND CONTINGENT LIABILITIES Commitments for capital expenditures outstanding at March 31, 2015 totaled approximately ¥34,875 million. At March 31, 2015, contingent liabilities for trade notes endorsed and repurchase obligation for liquidation of notes receivables totaled ¥5,345 million and ¥1,198 million, respectively. 62 18. COMPREHENSIVE INCOME The components of other comprehensive income for the years ended March 31, 2015 and 2014 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 (losses) gains on derivatives under hedge accounting: (Losses) gains arising during the year Reclassification adjustments to profit or loss Amount before income tax effect Income tax effect Total Foreign currency translation adjustments: Adjustments arising during the year Reclassification adjustments to profit or loss Amount before income tax effect Income tax effect Total Remeasurements of defined benefit plans: 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 Millions of yen 2015 2014 ¥ 43,015 ¥25,373 (4,007) 39,008 (11,256) 1,474 26,847 (5,215) ¥ 27,752 ¥21,632 ¥ (1,024) ¥ 4,152 (479) (1,503) 432 (2,366) 1,786 (568) ¥ (1,071) ¥ 1,218 ¥ 93,374 ¥59,500 60 93,434 (1) 59,499 ¥ 93,434 ¥59,499 ¥ 2,804 739 3,543 (1,225) ¥ 2,318 ¥ 1,674 ¥ 2,823 ¥124,107 ¥85,172 63 DAIKIN INDUSTRIES, LTD. ANNUAL REPORT 2015Financial Highlights/At a GlanceA Message from the CEOInterview with the CEOReview of OperationsCorporate GovernanceFinancial Section 19. NET INCOME PER SHARE Reconciliation of the differences between basic and diluted net income per share (EPS) for the years ended March 31, 2015 and 2014 was as follows: Year Ended March 31, 2015 Basic EPS: Millions of yen Thousands of shares Net Income Weighted- Average Shares Yen EPS Net income available to common shareholders ¥119,675 291,756 ¥410.19 Effect of dilutive securities Stock options Diluted EPS: 309 Net income for computation ¥119,675 292,065 ¥409.75 Year Ended March 31, 2014 Basic EPS: Millions of yen Thousands of shares Net Income Weighted- Average Shares Yen EPS Net income available to common shareholders ¥92,787 291,485 ¥318.33 Effect of dilutive securities Stock options Diluted EPS: Net income for computation 353 ¥92,787 291,838 ¥317.94 As stated in Note 3.a, the change in accounting policy for revenue recognition has been retrospectively applied to the consolidated financial statements for the year ended March 31, 2014. As a result, basic and diluted EPS for the year ended March 31, 2014, increased by ¥3.12 and ¥3.11, respectively. As stated in Note 2.n, the Company applied the revised accounting standard and guidance for retirement benefits effective April 1, 2014, and changed the method of attributing the expected benefit to periods from a straight-line basis to a benefit formula basis, and the method of determining the discount rate from using the period which approximates the expected average remaining service period to using a single weighted-average discount rate reflecting the estimated timing and amount of benefit payment. However, the impact of these changes on basic and diluted EPS for the year ended March 31, 2015 was insignificant. 20. SEGMENT INFORMATION Under ASBJ Statement No. 17, “Accounting Standard for Segment Information Disclosures” and ASBJ Guidance No. 20, “Guidance on Accounting Standard for Segment Information Disclosures,” an entity is required to report financial and descriptive information about its reportable segments. Reportable segments are operating segments or aggregations of operating segments that meet specified criteria. Operating segments are components of an entity about which separate financial information is available 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 evaluating 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. 64 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.” (Change in revenue recognition standard) As stated in Note 3.a, the Company and its domestic consolidated subsidiaries, from April 1, 2014, recognize revenues upon delivery under the terms and conditions of contracts, which were recognized upon shipment previously. The new accounting policy for revenue recognition is applied retrospectively to segment information for the year ended March 31, 2014. Consequently, as compared with the figures prior to the retrospective application, sales to external customers and segment profit of the Air Conditioning segment increased by ¥4,304 million and ¥1,371 million, respectively. Sales to external customers and segment profit of the Chemicals segment increased by ¥453 million and ¥129 million, respectively, while sales to external customers and segment profit of the Other segment decreased by ¥155 million and ¥38 million, respectively. (Change in the depreciation method of property, plant and equipment) As stated in Note 3.b, the Company and its domestic consolidated subsidiaries, from April 1, 2014, changed their method of depreciating property, plant and equipment from the declining-balance method to the straight-line method. As a result of this change, segment profit of the Air Conditioning segment, Chemicals segment, and Other segment for the fiscal year ended March 31, 2015 increased by ¥2,319 million, ¥1,419 million, and ¥275 million, respectively, as compared with the figures calculated using the previous method. 3. Information about sales, profit, assets and other items Millions of yen March 31, 2015 Reportable Segment Air Conditioning Chemicals Total Other Total Reconciliations Consolidated Sales: Sales to external customers ¥1,710,945 ¥149,559 ¥1,860,504 ¥54,510 ¥1,915,014 ¥1,915,014 Intersegment sales 875 8,051 8,926 476 9,402 ¥ (9,402) 1,711,820 157,610 1,869,430 54,986 1,924,416 (9,402) 1,915,014 170,484 16,550 187,034 3,584 190,618 (30) 190,588 1,847,343 190,047 2,037,390 34,225 2,071,615 ¥192,375 2,263,990 Total Segment profit Segment assets Other: Depreciation Amortization of goodwill 24,920 24,920 24,920 ¥ 41,235 ¥ 10,222 ¥ 51,457 ¥ 1,373 ¥ 52,830 ¥ 52,830 24,920 Investment balance in unconsolidated subsidiaries and associated companies accounted for using the equity method Investment in property, plant and equipment and intangible assets 12,243 7,555 19,798 19,798 19,798 57,914 17,508 75,422 2,937 78,359 78,359 65 DAIKIN INDUSTRIES, LTD. ANNUAL REPORT 2015Financial Highlights/At a GlanceA Message from the CEOInterview with the CEOReview of OperationsCorporate GovernanceFinancial Section Millions of yen March 31, 2014 Reportable Segment Air Conditioning Chemicals Total Other Total Reconciliations Consolidated Sales: Sales to external customers ¥1,597,188 ¥140,631 ¥1,737,819 ¥49,860 ¥1,787,679 ¥1,787,679 Intersegment sales 842 7,453 8,295 407 8,702 ¥ (8,702) 1,598,030 148,084 1,746,114 50,267 1,796,381 (8,702) 1,787,679 139,849 14,319 154,168 2,375 156,543 (6) 156,537 1,617,724 175,858 1,793,582 30,973 1,824,555 ¥187,315 2,011,870 Total Segment profit Segment assets Other: Depreciation Amortization of goodwill 23,767 17 23,784 23,784 ¥ 41,304 ¥ 12,111 ¥ 53,415 ¥ 1,671 ¥ 55,086 ¥ 55,086 23,784 Investment balance in unconsolidated subsidiaries and associated companies accounted for using the equity method Investment in property, plant and equipment and intangible assets 10,880 5,605 16,485 16,485 16,485 37,113 20,359 57,472 1,878 59,350 59,350 Notes: 1. The Other segment is the aggregation of other operating segments which are not included in the reportable segments and consists of the Oil Hydraulics segment, the Defense segment and the Electronics segment. 2. “Reconciliations” include unallocated items and intersegment eliminations. The unallocated corporate assets included in “Reconciliations” amounted to ¥202,383 million and ¥196,125 million at March 31, 2015 and 2014, 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 Japan USA China Millions of yen March 31, 2015 Asia and Oceania Europe Other Consolidated ¥498,683 ¥432,423 ¥353,377 ¥272,373 ¥243,566 ¥114,592 ¥1,915,014 Japan USA China Millions of yen March 31, 2014 Asia and Oceania Europe Other Consolidated ¥517,356 ¥359,122 ¥322,884 ¥239,633 ¥247,059 ¥101,625 ¥1,787,679 Note: Sales are classified by country or region based on the physical locations of customers. 66 (b) Property, plant and equipment Japan China USA Millions of yen March 31, 2015 Asia and Oceania Europe Other Consolidated ¥113,028 ¥91,106 ¥66,245 ¥37,209 ¥30,845 ¥9,323 ¥347,756 Japan China USA ¥95,318 ¥80,119 ¥52,375 Millions of yen March 31, 2014 Asia and Oceania ¥31,595 Europe ¥34,485 Other ¥5,825 Consolidated ¥299,717 (2) Significant impairment losses on long-lived assets by reportable segment Impairment losses on long-lived assets Millions of yen March 31, 2015 Air Conditioning Chemicals ¥4,159 Other ¥419 Eliminations and Corporate Consolidated ¥4,578 Note: The impairment losses reported in “Other” are related to the Oil Hydraulics segment. (3) Information about goodwill (a) Balance of goodwill by reportable segment Goodwill for each reportable segment at March 31, 2015 and 2014 was as follows: Goodwill Goodwill Millions of yen 2015 Chemicals Other Millions of yen 2014 Chemicals Other Eliminations and Corporate Eliminations and Corporate Air Conditioning ¥369,965 Air Conditioning ¥361,667 Consolidated ¥369,965 Consolidated ¥361,667 21. SUBSEQUENT EVENTS Resolutions approved by the Company’s Board of Directors’ at the meeting held on May 12, 2015 are subject to approval at the general shareholders’ meeting planned to be held on June 26, 2015. Appropriations of Retained Earnings Payment of year-end cash dividends of ¥60 per share to shareholders at March 31, 2015, totaling ¥17,510 million was approved. 67 DAIKIN INDUSTRIES, LTD. ANNUAL REPORT 2015Financial Highlights/At a GlanceA Message from the CEOInterview with the CEOReview of OperationsCorporate GovernanceFinancial SectionIndependent Auditors’ Report 68 Corporate Data (As of March 31, 2015) Head Office Tokyo 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/ JR Shinagawa East Bldg., 2-18-1, Konan, Minato-ku, Tokyo 108-0075, Japan Phone: 81-3-6716-0111 Fiscal Year-End Date March 31 on an annual basis Date of Founding October 25, 1924 Date of Establishment February 11, 1934 Paid-in Capital ¥85,032 million Number of Shares of Common Stock Issued 293,113 thousand Number of Shareholders 29,856 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. • The Bank of New York Mellon SA/NV 10 • 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) • BNP Paribas Securities (Japan) Limited Number of Subsidiaries and Affiliated Companies Subsidiaries: 210 Affiliates: 10 Number of Employees 59,179 (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 Administrator Mitsubishi UFJ Trust and Banking Corporation 3-6-3, Fushimicho, Chuo-ku, Osaka 541-8502, Japan Ordinary General Meeting of Shareholders June Auditor Deloitte Touche Tohmatsu LLC 69 DAIKIN INDUSTRIES, LTD. ANNUAL REPORT 2015Financial Highlights/At a GlanceA Message from the CEOInterview with the CEOReview of OperationsCorporate GovernanceFinancial SectionA n n u a l R e p o r t 2 0 1 5 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 interna- tional 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(15-09-003)IB 

Continue reading text version or see original annual report in PDF format above