Daikin Industries Ltd.
Annual Report 2018

Plain-text annual report

A n n u a l R e p o r t 2 0 1 8 D A I K I N I N D U S T R I E S , L T D . Annual Report 2018 Fiscal Year Ended March 31, 2018 Toward a sustainable global society by creating new value in the air and environment fields and enhancing our corporate value The Daikin Group focuses on developing its air-conditioning business and fluorochemicals business in over 150 countries and is the world’s only company developing, producing, and selling both air-conditioning equipment and refrigerants. Begun in fiscal 2017, Daikin is promoting its strategic management plan “FUSION 20,” the latter half of which commenced in April 2018. In tandem with strengthening its main businesses, Daikin contributes to realizing a sustainable global society by responding to the changing times through such measures as expanding the air-conditioning solutions business that takes advantage of the opportunities presented by the advance and spread of IoT and AI technology and strengthening of environmental technologies. Daikin is creating new value in the air and environment fields through achieving its dual objectives of providing solutions to social issues and creating business growth and then links these efforts to the enhancement of corporate value. CONTENTS Our Group Philosophy/ Process of Value Creation ........................ 1 Financial Highlights ................................. 2 At a Glance .............................................. 3 Message from the CEO ........................... 4 Oil Hydraulics ....................................... 18 Financial Review ................................... 36 Defense ................................................ 19 Consolidated Balance Sheet ................. 44 Corporate Governance .......................... 20 Consolidated Statement of Income ....... 46 Directors, Audit and Supervisory Board Members, and Executive Officers .......... 23 Consolidated Statement of Comprehensive Income ... 47 Consolidated Statement of Changes in Equity ... 47 Consolidated Statement of Cash Flows .... 48 Notes to Consolidated Financial Statements .... 49 Independent Auditors’ Report .............. 72 Corporate Data .................................... 73 Interview with the CEO ........................... 6 ESG Summary ......................................... 24 Review of Operations CSR (Corporate Social Responsibility) .... 26 Air Conditioning ................................... 12 Financial Section Chemicals ............................................ 16 Eleven-Year Financial Highlights ............ 34 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 conclu- sions 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. Our Group Philosophy 1. Create New Value by Anticipating the Future Needs of Customers 2. Contribute to Society with World-Leading Technologies 3. Realize Future Dreams by Maximizing Corporate Value 4. Think and Act Globally 5. Be a Flexible and Dynamic Group 1. Flexible Group Harmony 2. Build Friendly yet Competitive Relations with Our Business Partners to Achieve Mutual Benefit 6. Be a Company that Leads in Applying Environmentally Friendly Practices 7. With Our Relationship with Society in Mind, Take Action and Earn Society’s Trust 1. Be Open, Fair, and Known to Society 2. Make Contributions that Are Unique to Daikin to Local Communities 8. The Pride and Enthusiasm of Each Employee Are the Driving Forces of Our Group 1. The Cumulative Growth of All Group Members Serves as the Foundation for the Group’s Development 2. Pride and Loyalty 3. Passion and Perseverance 9. Be Recognized Worldwide by Optimally Managing the Organization and Its Human Resources, under Our Fast & Flat Management System 1. Participate, Understand, and Act 2. Offer Increased Opportunities to Those who Take on Challenges 3. Demonstrate Our Strength as a Team Composed of Diverse Professionals 10. An Atmosphere of Freedom, Boldness, and “Best Practice, Our Way” Process of Value Creation Environmental Awareness Air conditioning as a part of society’s infrastructure enables the creation of comfortable lives. When our products are used, a large amount of electricity is consumed. Reducing the impact on climate change is a top- priority issue for us. Strategic Assumptions Strategy: “FUSION 20” FY2021 Goals SWOT 13 Group Strategies Direction for Group Development Strengths • Heat pump technology • Inverter technology • Refrigerant control technology • Sales and service network • Development and production closest to market Weaknesses • Sales skewed towards main products (air conditioners) Opportunities • Global cooperation on climate change (Paris Agreement) • Setting of sustainable development goals (UN SDGs) Threats • Changes in de facto standards for air conditioning Basic Approaches Targeting changes to the external environments 1. Acceleration of AC solutions business 2. Action to lead the environment New business domains/structure 3. Heating/Water Heaters, Commercial Refrigeration Existing business domains 4. AC in North America 6. Chemicals 5. AC in Asia 7. Filters Technologies and monozukuri 8. Differentiated technologies/products with the Technology and Innovation Center 9. Enhanced monozukuri in the AC business Corporate management 10. Lean and competitive fixed-cost structure 11. Optimal inventory aiming at cash flow maximization 12. Financial operation standardization and IT integration Unique corporate philosophy 13. Enhanced HR based on people-centered management Contribute to solving problems of customers and society while working to achieve sales of ¥2.9 trillion and an operating income margin of 12% Create new value and contribute to the sustainable development of society through our business An enterprise group that will "Co-Create New Value in the Air and Environment Fields" Corporate Governance, Environment, New Value Creation, Customer Satisfaction, Human Resources, Compliance Risk Management, Respect for Human Rights, Supply Chain Management, Stakeholder Engagement, Regional Society 1 ESGDaikin Industries, Ltd. Annual Report 2018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 attributable to owners of the parent Cash Flows (for the year): Net cash provided by operating activities Net cash used in investing activities Free cash flow (Note) 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 2017 2018 ¥2,043,969 ¥2,290,561 730,935 230,769 153,939 ¥267,663 (128,823) 138,840 (73,544) 798,829 253,740 189,052 ¥223,740 (127,459) 96,281 (93,955) ¥2,356,149 ¥2,489,954 1,111,636 1,296,553 ¥ 526.81 3,802.10 130.00 475 ¥ 646.53 4,433.62 140.00 329 35.76% 34.88% 11.29 14.48 47.18 11.08 15.70 52.07 Note: Free cash flow = Net cash provided by operating activities + net cash used in investing activities Net Sales, Gross Profit, and Gross Profit Margin Operating Income and Operating Income Margin (¥ billion) 2,500 2,000 1,500 1,000 500 0 (%) 50 40 30 20 10 0 (¥ billion) 250 200 150 100 50 0 ROE （%） 16 12 8 4 0 (%) 15 12 9 6 3 0 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 Net Sales Gross Profit Gross Profit Margin Operating Income Operating Income Margin 2 At a Glance Percentage of Net Sales E Air-Conditioning 89.8% Chemicals 8.0% Defense 0.6% Oil Hydraulics 1.6% Net Sales and Operating Income Major Products Description (¥ billion) (¥ billion) 2,500 2,000 1,500 1,000 500 0 223.5 2,052.9 250 200 150 100 50 0 2014 2015 2016 2017 2018 (¥ billion) 200 160 120 80 40 0 25.5 183.1 (¥ billion) 25 20 15 10 5 0 2014 2015 2016 2017 2018 (¥ billion) (¥ billion) 40 30 20 10 0 3.7 35.6 4 3 2 1 0 2014 2015 2016 2017 2018 (¥ billion) (¥ billion) 20 15 10 5 0 0.1 14.4 8 6 4 2 0 2014 2015 2016 2017 2018 • Room air-conditioning systems • Air purifiers • 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 • Absorption refrigerators • Freezers • Water chillers • Turbo refrigerator equipment • Air-handling units • Air filters • Industrial dust collectors • Marine-type container refrigeration • Fluorocarbons • Fluoroplastics • Fluoroelastomers • Fluoropaints • Fluoro coating agents • Semiconductor-etching products • Water and oil repellent agents • Pharmaceuticals and intermediates • Dry air suppliers Since becoming the first in Japan to manufacture packaged air-conditioning systems in 1951, Daikin has supported comfortable living based on the strengths of technologies that it has itself nurtured as the world’s sole manu- facturer to create a full line of products from refrigerants to air conditioners. In 1933, Daikin was the first in Japan to engage in research on fluorinated refrig- erants. Today, our activities range from research and development to commer- cialization, and we offer a lineup of 1,800 fluorine compounds including gas, resin and rubber. • Oil hydraulic pumps • Oil hydraulic valves • Cooling equipment and systems • Inverter controlled pump motors • 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 quality control technologies are used in the production of defense-related products and other industries where high levels of precision and performance are criti- cal. 3 Air-ConditioningChemicalsOil HydraulicsDefenseDaikin Industries, Ltd. Annual Report 2018Message from the CEO 4 We are seizing on the opportunities presented in this era of change, by growing investment to further strengthen competitiveness and expanding business. Our five-year strategic management plan “FUSION 20” entered its third year. In a period of rapid change, we expeditiously prepared an appropriate response and established our direction for the second half of the strategic management plan ending in March 31, 2021. We will balance business growth and solutions to social issues that envelope both local regions and global society to create corporate value. June 2018 Since its creation in 1924, the Daikin Group has been developing business for more than 90 years in more than 150 countries. We are determinedly working to improve and develop air conditioners and refrigerants, and constantly providing products and services with new value. In addition, we are aiming for sustainable devel- opment through our distinctive management that creates a balance between short-term profitability and medium- to long- term growth. In fiscal 2018, in tandem with securing short-term profits, we are aiming to reach our strategic management plan “FUSION 20,” which targets fiscal 2021 as the year of completion, and we will develop further in the medium-to-long term and proactively grow investment to transform our business structure. We are aggressively investing to acquire new technologies such as AI and IoT, strengthening production capacity in the United States and Asia, expanding our sales network and service system through acquisitions in each country, and enhancing the product development system beginning with the United States and then globally. At the same time, along with strengthening our sales force, service capabilities, technical strengths, and product devel- opment capabilities, we are working to further improve profitabili- ty by promoting comprehensive cost reductions. As a result, in fiscal 2018, despite the severe business environ- ment that included factors such as high raw material prices, we were able to achieve an eighth consecutive year of increases in net sales and income and a fifth consecutive year of record high consolidated business results. In “FUSION 20,” launched in fiscal 2017, we set sales of ¥3 trillion and an operating income margin of 12%, as our targeted position for fiscal 2021, and we worked to grow and develop further through the dual approach of strengthening our core businesses in air conditioning, chemistry, and filters and through changing our business structure and expanding into new business domains in challenging new fields, all of which are backed by Group strategy with 11 carefully defined themes. Masanori Togawa President and CEO In the first two years I believe we have established the founda- tions for development through steadily hammering out the mea- sures to achieve “FUSION 20,”strengthening the profitability of our main businesses, and investing aggressively for future growth. A feature of the Daikin Group’s “FUSION” is the thorough implementation of policies by following a meticulously prepared strategy, which, at the same time, adheres to quantitative targets. In the event of changes to the business environment or move- ments in market trends, we are able to anticipate these changes and, with an agile business approach, review strategy priorities in a timely manner. On this occasion, we modified the latter half of the three-year plan due to rapid changes in the business environment surrounding the Daikin Group beyond what we envisioned. New technologies such as IoT and AI have made rapid progress, and, with the practical uses of these technologies evolving, devel- opments in business are also accelerating and expanding. In addition, due to the Paris Agreement coming into force and revisions to the Montreal Protocol, environmental regulations have been further strengthened in such areas as reducing emissions of greenhouse gases and the phaseout of HFC production and consumption. We consider these changes to be opportunities. We take the dual approach of balancing solutions to social issues and achieving business growth. On the business side, this is achieved by accelerating the development of services and solutions business as well as energy-saving technologies in line with our long-term environmental vision for 2050 that outlines a reduction in emis- sions of CO2 to zero. Accordingly, we are con tributing to the realization of a low-carbon society through strengthening efforts to lead on environmental issues. Since the introduction of “FUSION” from 1996, we have been able to achieve our quantitative targets and expand our business performance in all years except for the global financial crisis of 2008. In the future, we will continue to respond to the trust of our many stakeholders by striving to improve corporate value. We look forward to your continuing support and understanding. 5 Daikin Industries, Ltd. Annual Report 2018 Interview with the CEO We are continuing investment growth and further strengthening profitability to achieve our strategic management plan “FUSION 20.” In fiscal 2018, we were able to achieve an eighth consecutive year of increases in net sales and income and a fifth consecutive year of record high consolidated business results. In an environment impacted by steeply rising raw material prices, we were able to overcome the negative factors, and, in tandem with firmly securing short-term profits, we actively grew investments for medium- to long-term business structure transformation and development. In the second phase of the strategic management plan “FUSION 20,” we are looking to achieve further future growth. Q1 Please outline the results and main contributing factors in fiscal 2018. Also, what is your assessment of the first half of “FUSION 20” (fiscal 2017 - fiscal 2018)? Eight consecutive years of increases in income and five consecutive years of record high consolidated business results In fiscal 2018, we made progress toward achieving “FUSION 20,” which targets fiscal 2021 as its final year. Consolidated net sales increased by 12.1% year on year, to ¥2,290,561 million, and operating income increased by 10.0% year on year, to ¥253,740 million. Sales grew in the air-conditioning business across all key regions, and, in the chemicals business, sales targeting semicon- ductor and automotive markets also grew. We were able to fur- ther boost our profitability by working to strengthen our sales force, service capabilities, technical strengths, and product devel- opment capabilities. The steeply rising prices of raw materials such as copper, aluminum, and steel significantly impacted the 6 estimates made at the beginning of the fiscal year. However, we overcame these headwinds through an agile response to the changing conditions, such as growing sales, introducing high-val- ue-added products, and promoting cost reductions. Also, focusing on North America and Asia, we are stealing a march on other companies by strengthening production capacity and introducing the latest production technology, conducting aggressive mergers and acquisitions centering our carefully defined priorities such as filters and the commercial refrigeration business, and extensively strengthening our technical and prod- uct capabilities to be the core of our Technology and Innovation Center. I believe that through these efforts we have built the foundation for achieving “FUSION 20.” Q 2 Please tell us about the environmental changes that occurred in the first two years after “FUSION 20” began and any issues that came up. New technologies and issues associated with environmental regulations The Daikin Group’s operating environment is changing faster than expected. One of the changes is the advance of a fourth industrial revolution through accelerated progress, practical appli- cation, and spread of new technologies such as IoT and AI. With the significant influence these technologies have on the econom- ic activities and lifestyles of people, the needs of both the market and customers have shifted from goods to services and from ownership to use. It is not only the products themselves that pro- vide outstanding added value but also the variety of services gen- erated from data. We regard these changes as an opportunity to accelerate the development of our services and solutions busi- ness, and to apply our special skills in energy-saving equipment. In another area, as the only manufacturer that has both air conditioners and refrigerants, I believe the Daikin Group can play an active role in responding further to strengthened environmen- tal regulations and heightened environmental needs, through activities such as suppressing greenhouse gas emissions and the phasing out of the production and consumption of HFCs. Endeavoring to balance social issues and business growth, we are continuing to contribute to achieving a low-carbon society by further improving energy-saving and refrigerant technologies, an area of significant strength for the Daikin Group. We view changes in our operating environment as opportuni- ties, and we respond to these changes by updating and promot- ing our carefully defined Group strategy. Strategic Management Plan “FUSION 20” “FUSION 20” Latter 3-Year Plan (¥ billion) Setting Goals for “FUSION 20” Quantitative Targets for FY2021 With two years of “FUSION 20” complete, we have clarified our Group Strategy, implementation themes and quantitative targets and now approach the final year of the plan with renewed outlook. Latter Three Years of “FUSION 20” Medium-Term Implementation Plan s t e g r a T e v i t a t i t n a u Q s r a e Y 3 r e t f A n o i t i s o P d e r i s e D r a e Y l a n i F s r a e Y 5 r e t f A r a e Y l a i t i n I FY2018 Result FY2019 Plan FY2021 Targets Net Sales Operating Income (Operating Income Margin) 2,290.6 253.7 (11.1%) 2,480.0 270.0 (10.9%) 2,900.0 348.0 (12.0%) (¥ billion) Growth Plan Investment for Growth FY2019-2021 (Total of 3 years) Investment Plan R&D investment 360.0 220.0 # A portion of M&A investment is not included in our investment plan The thinking behind investment in long-term future growth Strategic Group Themes and Responding to Generational Change • Accelerate the AC Solutions Business • Strengthen and advance environmental technology • Acquire and educate IT-related human resources • Build digital factories • Acquire technology through open innovation 7 Daikin Industries, Ltd. Annual Report 2018 Interview with the CEO Q3 Please outline plans for the second half of “FUSION 20” (fiscal 2019 – fiscal 2021) that were formulated in response to issues that arose. Two additional themes for our carefully defined Group Strategy In formulating the second half of the plan, our basic policy was to expand our business with the dual approach of strengthening our core businesses and changing business structure by expanding our business domains into new fields. Therefore, in tandem with con- tinuing to proactively implement the investments necessary for future growth and development, we will expand our business by promoting two new themes for our Group strategy. In this way, I believe we can maintain our lead in the industry. The first of the new themes is to “accelerate the air-conditioning solutions business by making use of IoT and AI technology.” In the air-conditioning business, we will make significant structural trans- formations to both sales of stand-alone energy saving equipment and to models that generate profits across the entire value chain. With the advance of IoT and AI technology, infrastructure for data storage and analysis is possible at low cost. Therefore, we will cre- ate new value for our customers by promoting the extensive sys- tematization and networking of air conditioning, and providing comprehensive services in energy saving proposals, design and engineering for entire buildings, as well as providing services from maintenance and repair to troubleshooting. The second of the new themes is to “incorporate initiatives to put us at the forefront of environmental issues”. In addition to promoting the adoption of R32 refrigerant that has a lower global warming impact, we will strengthen the development of new refrigerants and equipment with lower global warming potential (GWP) even further. Q4 Could you please describe investment strategies and targets for business results for the latter half of “FUSION 20”? Seeking to raise the bar for quantitative targets and not rest on our laurels For future growth investment, we will invest about ¥600 billion in capital investment and R&D over three years (¥360 billion for investment plans and ¥220 billion for R&D). Moreover, we will continue to implement an aggressive program of mergers and acquisitions as one part of this business strategy. However, since some of these mergers and acquisitions are currently still under consideration, they are not included in this investment amount. The focus of our investment is to increase production capacity, strengthen product development capabilities, enhance the sales and service system, expedite the evolution to an air-conditioning solutions business making use of IoT and AI technology, and build digital factories. This investment strengthens and enhances technologies to respond to the toughened environmental regula- tions, and allows us to acquire advanced technology through open innovation as well as secure and nurture information-relat- ed human resources, all of which will enhance the competitive- ness of our business. We set consolidated performance targets for fiscal 2021 at ¥2.9 trillion in net sales, operating income of ¥348 billion, and an operating income margin of 12%. Personally, I haven’t given up on reaching sales of ¥3 trillion, which was the favored position when we first established for “FUSION 20” in fiscal 2017. As well as clearly fixing the themes for our Group strategy, I would like to challenge the ¥3 trillion mark in net sales by preparing another theme on expanding business. Q5 You mentioned earlier in the second question that one change in the Daikin Group’s operat- ing environment was strengthened global environmental regulations. How do you think you should respond to these changes? Developing businesses that contribute to solving environmen- tal issues The world has made significant strides toward realizing a car- bon-free society through global cooperation on climate change that include the Paris Agreement, and the Kigali Amendment to the Montreal Protocol. In addition, strong investor-led demand has arisen for companies to be assessed on their progress in iden- tifying risks and opportunities from a long-term perspective, through the establishment of such organizations as Climate Action 100+ that call on companies to strengthen climate- change related financial disclosures. Air conditioners, our core product, are also a key part of the infrastructure that supports society in ways such as bringing innovation to work and life in hot regions and contributing to economic growth and improving livelihoods. On the other hand, 8 the increase in electricity consumption that follows the spread of air conditioners cannot be separated from environmental impacts such as climate change. Based on the concept that there is no business development without a contribution to solving environ- mental issues, we have always been committed to reducing the environmental impact caused by our products and businesses through our strategic management plan. We are promoting the development of businesses that take up the opportunities provid- ed by regulation and strengthening our efforts to deliver environ- mentally friendly products throughout the world that use energy-saving inverter technology and R32 refrigerant that has a lower global warming potential. Such businesses also include energy services solution business and the heating and water heater business. Group Strategy Themes for the Latter Three Years of “FUSION 20” Identify the significant changes impacting the world and set new Group Strategy themes. Basic approaches 13 Group strategies 1 2 3 4 5 6 7 8 9 10 11 12 13 New business domains/ structure Existing business domains Technologies and monozukuri Corporate management Unique corporate philosophy Acceleration of AC solutions business 1 Energy Service Solutions business 2 IAQ/Air Environment Engineering Action to lead the environment 1 Action for low GWP 2 Long-term environmental vision for 2050 o t s e g n a h c g n i t e g r a T s t n e m n o r i v n e l a n r e t x e New business domains 1 Heating/ Water Heater 2 Commercial Refrigeration AC in North America AC in Asia Chemicals Filter Differentiated technologies/products with the TIC Enhanced monozukuri in the AC business Lean and competitive fixed-cost structure Optimal inventory aiming at cash flow maximization Financial operations standardization and IT integration Enhanced HR based on people-centered management 9 Daikin Industries, Ltd. Annual Report 2018 Interview with the CEO Implementing the Group Strategy Themes Energy Service Solutions Business In this business Daikin is creating a cyclical business linked to equipment updates and the provision of services. Daikin provides a broad range of comprehensive services including energy-saving for an entire building and covering the entire air-conditioning value chain (including equipment design, instrumentation and engineering, construction and trial operations, operation management, maintenance and after sales services). IAQ/Air Environment Engineering Business Daikin launched innovative products differentiated from the products of our competitors in China and expanded the IAQ product business. We are building a new business model while executing trial business models such as improving office productivity through enhancing air circulation. Efforts to Lower GWP (Next-generation Refrigerant and Equipment Business) Daikin is promoting global mainstream use of R32 in general air conditioning and developing next-generation refrigerants and equipment. Long-Term Environmental Vision for 2050 In support of the Paris Agreement, the Daikin Group aims to achieve the 2050 goal of zero CO2 emissions while working to provide safe and healthy air environments. In the latter three “FUSION 20,” we set quantitative targets for CO2 reduction and will implement specific measures. Heating and Water Heater Business With Europe as the mother base, Daikin is strengthening the development of heating equipment that uses heat- pump technology. We are establishing robust sales and service networks and accelerating the creation of the heat pump and heating market. Commercial Refrigeration Business Daikin is providing one-stop proposals for European food retail chains and aided by the impetus provided by environmental regulation we are developing and selling CO2 heat recovery systems that use Daikin’s air-conditioner technology. Air Conditioner Business in North America Daikin will launch differentiated products and reinforce our sales and service networks as well as bolster earning power by improving factory productivity. We will further accelerate expansion of our solutions business to build a foundation toward becoming No. 1 in North America. Air Conditioner Business in Asia Daikin will work to further increase sales by developing differentiated products, expanding our sales networks, strengthening the commercial-use business, and establishing strong production and supply systems. Chemicals Business Daikin will prioritize and expand business in the automotive field in which there are dramatic environmental changes such as a shift to next-generation vehicles. We will also promote development of hybrid materials combining fluorinated materials and other materials and take proactive measures including alliances, partnerships, and M&A in this field. Filter Business Daikin will reinforce the organizational structure by establishing the Filter Division in 2018 and thereby target the development of future business in this area. We will leverage synergies with Air Conditioner Business and Chemicals Business to expand business into the IAQ/Air Environment Engineering Business. 1- 1 1- 2 2- 1 2- 2 3- 1 3- 2 4 5 6 7 10 Q 6 What are your thoughts on returns to shareholders? Enhancing corporate value and providing returns to shareholders In “FUSION 20,” which targets further growth and devel- opment, we are enhancing corporate value further by growing our business while implementing strategic invest- ment, accelerating the construction of a durable corporate position by improving business performance, and conduct- ing reforms to our overall structure. In this way, we can expand further and provide even greater returns to shareholders. In view of our favorable business performance in fiscal 2018, Daikin paid an annual dividend of ¥140, which is ¥10 higher than in the previous fiscal year. We will contin- ue to maintain a consolidated dividend on equity (DOE) ratio of 3.0% based on stable and continuous dividend payments in the future and aim for an even higher consoli- dated dividend payout ratio. Q 7 In an environment where interest in ESG is rising, could you provide a message to stakeholders with your ideas for social issues? Taking the dual approach of balancing solutions to social issues and achieving the growth and development of business In line with the Paris Agreement and looking to 2050, we have formulated our long-term environmental vision that aims to reduce CO2 emissions to zero. We are promoting the cuts to CO2 emissions through the development and distribution of energy-efficient products and manufactur- ing activities with lower global warming potential. We are also providing air-conditioning solutions using IoT and AI technology, and, through such measures as enhancing the coordination between air conditioners and buildings, we can increase energy saving. Moreover, aiming at zero CO2 emissions, we are facilitating a market for the collection and reuse of refrigerants. Regarding human resources, the Group believes that “management based on people” is the source of its com- petitiveness, and, by promoting management that encom- passes diversity and enables the dynamic use of diverse human resources, we are creating an environment where employees can demonstrate their full potential. In addition, we support the United Nations Global Compact, which identifies 10 principles in four fields: human rights, labor, the environment, and anti-corruption. Across the entire value chain, we conduct our corporate activities with a comprehensive approach to transparency, integrity and ethics. We are aiming at achieving a sustainable society by setting of sustainable development goals (SDGs). As a corporate group that creates new values in the air and environment, we take the dual approach of balancing solutions to social issues and achieving business growth. We do this in response to the expectations of our various stakeholders including customers, shareholders, suppliers, and local communities. June 2018 Masanori Togawa President and CEO 11 Daikin Industries, Ltd. Annual Report 2018 Review of Operations Current Expanding sales across each region glob ally Business results achieve another record high; sales break through the ¥2 trillion mark for the first time The Air Conditioning business experienced sharply rising raw material prices, and in response, Daikin further strengthened profitability by promoting initiatives focusing on cost reductions and strengthening sales, services, technical, and product devel- opment capabilities. Japan Sales in Japan rose 104% year on year. In an operating environment where air conditioners for residential use are being replaced with energy-saving models, sales of air conditioners increased in line with strategies focusing on profitability, and on the flagship Urusara 7 equipped with its unique humidifier functions and mid-range models. For commercial units, Daikin aimed at capturing demand generated by model updates and sales of the mainstay product Eco-ZEAS along with a new lineup of Machi Multi, a multi-split type room air conditioner that features individual room control from the one unit and a slim design. In the market for large-scale commercial buildings that captures de- mand generated by redevelopment in the Tokyo metropolitan area, sales increased significantly. Expanded sales of the Urusara 7 products with excellent energy- saving and environmental performance to differentiate from competitors and provide high added value. Americas Sales in the Americas rose 111% year on year. With strong market conditions backed by robust consumer spending and capital investment, Daikin strengthened its production and development structure at the new Goodman Global Group production facilities in the United States and expanded our sales network. Despite the impact of a hurricane in August 2017, sales of mainstay unitary products grew due to strengthening the sales capabilities in priority regions. In the ductless market that is experiencing signifi- cant growth, Daikin expanded its market share in high-end residential-use markets by expanding the VRV product lineup and sales channels. In the market for large-scale commercial buildings (applied systems), Daikin expanded its after-sales service business and equipment sales, strengthened its marketing structure, and expanded sales by acquiring an air-conditioning engineering company in Latin America. 12 Began full-scale operations of production facilities in the U.S. and expanded business Air Conditioning Expanding sales across each region glob ally Business results achieve another record high; sales break through the ¥2 trillion mark for the first time The Air Conditioning business experienced sharply rising raw material prices, and in response, Daikin further strengthened profitability by promoting initiatives focusing on cost reductions and strengthening sales, services, technical, and product devel- opment capabilities. China Sales in China increased 115% year on year. Adapting to changes in growth markets, Daikin expanded its sales network to regional cities, captured vigorous individual consumption and private-sector demand, and thereby increased sales in all regions and for all products. In residential-use air conditioners, Daikin expanded sales in the mid- to high-end market by further strengthening proposal and installation capabilities focused on its proprietary store, PROSHOP, and creating the New Life Multi Series of residential multi-air units that facilitate the cre- ation of new lifestyles for customers. The PROSHOP offers a total service from design and installation to after-sales services In the commercial-use market, Daikin expanded sales by responding to diverse market needs and by focusing on the VRV model, which offers enhanced energy-saving performance and design flexibility and strengthened proposal-type sales activities. For applied units, Daikin delivered detailed sales activities, broadened its product lineup, and strengthened its service business. Europe Sales in Europe increased 120% year on year. In residential-use air conditioners, Daikin increased sales mainly in France and Spain by actively marketing eco-friendly products and broadening its lineup of R32 refrigerant air conditioners from high-end models to popular models. In the commercial-use market, we captured demand generated by renewal through the early introduction of the refrigerant R32. Sales in the heater business increased by enhancing sales and service systems, and strengthened environmental regulations in France and Italy meant demand for residential heat pump-type water heating units increased. Asia/Oceania Sales in Asia/Oceania increased 114% year on year. In residential-use air conditioners, Daikin increased sales mainly in India, Vietnam, and Indonesia and through strengthened dealer networks in regional cities, and its strengthened service structure, captured the de- mand of the growing middle-income groups. In India, sales increased dramatically through aggressive investments in areas such as increased production capacity, dealer network development, and the introduction of new products. Sales in the commercial-use market increased significantly in each country, especially in India, Vietnam, Thailand, and Australia, by strength- ening dealerships and process specification activities. In tandem with increasing sales in Asia, where demand is growing, we are strengthening our marketing system 13 Air ConditioningDaikin Industries, Ltd. Annual Report 2018 Review of Operations Future Targeting record highs for both sales and operating income once again Expanding business through proactive in vestment Despite the significant and ongoing impact of the sharp rise in raw material prices, Daikin will continue to aim for further growth by focusing on the key strategic areas of Asia and North America, expanding sales in the major regions of Japan, China, and Europe, and initiating comprehensive cost reductions and sales price strategy. Japan Daikin will establish a sales system that is closely tailored to its integrated marketing activities, expand sales of high-value-added products, and strive to increase earnings by implementing such measures as cost reductions and sales price strategy. In the residential-use market, Daikin will create a new market for differentiated products like Risora, which combines functionality and design. In the commercial-use market, we will strive to expand sales of high- value-added products such as slim-designed multi-split air conditioner Machi Multi and, in an industry first, we will launch the multi-split air conditioner GREEN Multi, which adopts the eco-friendly R32 refrigerant. In applied systems, Daikin aims to grow its market share through enhanced process specification activities, and capturing demand generat- ed by redevelopment in the greater Tokyo metropolitan area. Risora is a differentiated product that balances functionality and design. Americas With a firm economic outlook as the backdrop, Daikin will initiate measures to enhance productivity and strengthen product development capabilities at the new production facilities of the Goodman Global Group, which started full-scale operation in the previous fiscal year as well as expand its business by broadening its in-house sales net- work and strengthen its development and service businesses. In residential-use air conditioners, Daikin will broaden its product lineup by launching new products for inverter units, and, in the ductless market, Daikin is planning to increase sales of high-end products by strength- ening user direct sales activities. In applied systems, Daikin will accelerate the expansion of the direct sales network and its in- house service network to strengthen the service and solutions business as well as equipment sales. Daikin will establish a business base in Latin America and, focusing mainly on Mexico, expand its engineering business. 14 Strengthening cyclical business by offering services across the entire air-conditioning value chain Air Conditioning Targeting record highs for both sales and operating income once again Expanding business through proactive in vestment Despite the significant and ongoing impact of the sharp rise in raw material prices, Daikin will continue to aim for further growth by focusing on the key strategic areas of Asia and North America, expanding sales in the major regions of Japan, China, and Europe, and initiating comprehensive cost reductions and sales price strategy. China Daikin is developing a sales network that extends throughout China from the large metropolitan areas to regional cities. In addition to launching differentiated products that respond to market changes brought about by government measures to curb real estate speculation, Daikin will expand sales and earnings by initiating further cost reductions though moving to greater in-house and automated production. In residential-use air conditioners, Daikin, will expand its product lineup Accelerating our brand strategy through such activities as establishing interactive showrooms (China) in response to growing air quality needs with the New Life Multi Series residential multi-air units and develop integrated marketing activities focusing on PROSHOP. Moreover, Daikin will develop a new business model connecting customers’ searches to sales and solutions by linking web-based, interactive showrooms and customer centers. In the commercial-use market, Daikin will work to expand sales by strengthening its proposal-type capabilities and launching new products to meet the diversified needs of each market. In applied systems, Daikin will promote integrated proposal-type sales for small and medium-sized properties and will expand the services business and equipment sales. Europe Responding to strengthened environmental regulations, Daikin will grow sales and broaden its differentiated product line- up that utilizes R32 refrigerant, which has a lower impact on global warming, for both residential and commercial use. The applied business aims to increase orders for large properties focusing mainly on the Middle East, which is the largest market. To grow new business, the heater business will encourage the development of dealers in countries such as France and Germany and launch new products for residential use including energy-efficient, heat-pump-type water heating units. In the commercial freezer and refrigerator business, Daikin will seek to increase sales of new products for small stores via the synergistic benefits with Zanotti S.p.A. of Italy. Asia/Oceania With demand for air conditioning expected to rise along with the growth of the middle-income class, Daikin will strive to significantly increase sales and will bolster supply capabilities by commissioning new factories in Vietnam and Malaysia, expand its sales network in each country, actively launch inverter products, and expand service businesses such as maintenance services. In residential-use air conditioners, Daikin will strengthen the development of differentiated products such as multi air units and, focusing mainly on India, Vietnam, and Thailand, will increase sales of highly energy-efficient inverter air conditioners. In the commercial-use market, Daikin will continue to focus on developing dealerships, and will launch inverter air conditioners that adopt R32 for cooling. In applied systems Daikin will strengthen profitability by enhancing produc- tivity through the commissioning of a new factory in Malaysia and expanding the service business. Strengthening production capabilities in Asia where demand for air conditioners is expected increase dramatically 15 Air ConditioningDaikin Industries, Ltd. Annual Report 2018 Review of Operations Current Attracted strong demand in the semiconductor and automotive-related markets Achieved record highs for operating results for the second consecutive fiscal year The Chemicals business achieved substantial increases in revenue and profits in the year under review. The impact of soaring raw material prices was outweighed by an expansion in sales in well-performing sectors and initiatives focusing in areas such as cost reduction and pricing policy. Sales of fluorocarbon gas increased significantly year on year as a result of higher sales prices in Europe in response to rising raw material prices, a tight supply-demand balance, and growing sales in Japan. Net sales of fluoroplastic resin exceeded the previous fiscal year. The principal factor for this was robust demand for semiconductors, mainly in Japan, China, and the rest of Asia and was achieved despite a decline in the use of LAN cable applications in the U.S. market. Net sales of fluoroelastomer significantly exceeded those of the previous fiscal year due to increased sales for automotive applications in Japan and other parts of the world. In the chemical products business, overall, net sales exceeded the previous fiscal year. However, sales of the OPTOOL™ anti-smudge surface coating declined due to the impact of slow growth in demand in China and the rest of Asia. Sales for water and oil repellent agents increased due to initiatives to switch to new products in China and elsewhere in Asia. Sales of etchants for semiconductor cleaning applications increased in Asia, where demand was strong. Accelerating the development of applications in the automotive field 16 Chemicals Future Accelerating the development of applications in growing business fields and striving for sustainable growth Daikin is aiming for substantial increases in revenues and profits by accelerating the development of applications such as lithium-ion batteries for automobiles and capturing demand for semiconductors and automotive-related markets. Daikin will expand sales of fluorocarbon gas for air conditioners in Asia and will capture demand, mainly in Europe, generated by the renewal of freezers and refrigerators with high environmental performance and refrigerants with low global warming impact. Daikin will strengthen its fluoroplastic resin product-supply capabilities targeting the semiconductor market and capitalize on dynamic demand related to AI and IoT. In the United States, Daikin will increase market share in the LAN cable market, where demand is contracting, by launching new products and strengthening marketing capabilities. Daikin will expand its operations in Europe by entering the fluoropolymer compound business, and, to this end, in October 2017, the Company acquired Heroflon S.p.A. (Italy) in an effort to take advantage of synergistic effects. In the water and oil repellent agent sector, Daikin aims to expand sales of environmentally friendly products. Daikin will prioritize the development of applications for the automotive field where the business environment is changing dramatically due to the spread of electric vehicles (EVs). Daikin is focusing on polyphenylene sulfide (PPS) compounds in such products as lithium battery binders, gaskets, and other components to respond to the need to reduce the weight of EVs. Highly chemically resistant fluoroplastics products are essential for semiconductor manufacturing equipment 17 ChemicalsDaikin Industries, Ltd. Annual Report 2018 Review of Operations Current Increasing sales in Japan and the United States Business results at record highs The oil hydraulics business comprises a range of oil hydraulic equipment to facilitate the smooth movement of various types of machinery, contributing to energy efficiency and electrical power savings. In the year ended March 31, 2018, sales in the oil hydraulics business increased significantly compared with the previous fiscal year. Sales of oil hydraulic equipment for construction machinery also grew in Japan and the United States, and Daikin launched differentiated products for industrial machinery. In Japan, Daikin vigorously promoted business proposal-oriented sales by engineers and focused on maintenance, repair, and operation (MRO) and hydrostatic transmissions (HST) businesses in the United States. Oil hydraulic equipment for construction machinery and vehicles Future Raising competitiveness in Japan Accelerating global business expansion In Japan, Daikin will enhance competitiveness by further refining its strengths in the hydraulic equipment business for industrial machinery, strengthen proposal-oriented sales, develop new products, and update factory production technology. In the United States, Daikin will compete with leading manufacturers, initiate business expansion into new fields by leveraging MRO, and will establish a new local subsidiary in Mexico to ensure full-scale sales operations. In Europe, Daikin has been preparing for full-scale entry into the market through its marketing activities, and looking forward, is building a marketing structure that can generate orders. High function hydraulic unit contributes to ener- gy efficiency in factories 18 Oil Hydraulics Current Expansion of home-use oxygen therapy equipment in Japan and China Daikin designs and manufactures products for Japan’s Ministry of Defense based on the defense budget, including various types of artillery shells, warheads, and fuses, as well as aircraft parts. These precision processing technologies are also leveraged for private-sector purposes, including the manufacture and sale of home-use oxygen therapy equipment. Daikin provides respiration synchronizers and oxygen concentrators, products that require the highest levels of precision, performance, functionality, and quality. Net sales in this segment declined in fiscal 2018 compared to the previous fiscal year. Sales of home-use oxygen therapy equipment increased in China, but orders from Japan’s Ministry of Defense decreased. Future Private-sector expansion through the development of new business With orders from Japan’s Ministry of Defense expected to decline in fiscal 2019, Daikin will enhance profitability by focusing on the development of new private-sector business. With a social environment of heightened requirements for home medical and nursing care, Daikin will strengthen sales and marketing capabilities in the home-use oxygen therapy equipment market in Japan and China. In addition, Daikin will leverage the technology of the air-conditioning business to develop new products and will also enhance cost-competitiveness. Focusing on Japan, Daikin plans to expand its private-sector operations by establishing preven- tive medicine as a new business domain. 19 DefenseDaikin Industries, Ltd. Annual Report 2018Corporate Governance Basic Policy of Corporate Governance The role of corporate governance in the Daikin Group is to raise corporate value. This is achieved by continued vigilance on increasing the speed, transparency, and soundness of decision making and implementation in a manner that keeps a step ahead of both the Group’s management tasks and the changing operating environment. Aiming for management with even greater speed, soundness, and transparency, we will continue to boost corporate value by seeking and implementing new ways to achieve optimal corporate governance as we undertake best practices in all facets and at all levels of the Daikin Group. Regarding Japan’s Corporate Governance Code set by the Tokyo Stock Exchange, Daikin has already implemented all the principles contained in the revisions of June 1, 2018, including “enhancing information disclosure,” “maintaining the effectiveness of the Board of Directors and the Audit and Supervisory Board,” “defin- ing roles and responsibilities of independent external directors,” and “the policy of having constructive dialogue with sharehold- ers.” Going forward, Daikin will continue to enhance these initia- tives. Management and Operational Execution Systems Rather than adopting a U.S.-style “committee system” that com- pletely separates decision making from operational execution, the Daikin Group has adopted an “integrated management” system, in view of the special characteristics of the Group’s business, judging that this is a more-effective means of accelerating decision making and operational execution. This means that the directors jointly take charge of both manage- ment responsibilities and business execution responsibilities. Direc- tors also bear responsibility for the execution and completion of their decisions by carrying out their decision making, business execution, and supervision/guidance in an “integrated” manner. Daikin also appoints multiple external boards of directors who monitor the Group’s business execution status from an independent standpoint and gives appropriate guidance and advice on decision making and is responsible for supporting the “integrated manage- ment” system in terms of transparency and sound management. In addition, the Group has introduced an “executive officer system” to accelerate the speed of execution based on autonomous judgments and directions in units handling each region, division, and function. Appointments of executive officers are carried out by the Board of Directors. Appointment of Directors When appointing directors, the Daikin Group gives emphasis to factors ranging from the globalization of the Group’s businesses and the broadening of its business fields to a diverse range of background factors, such as nationality, gender, and career history. As of the end of June 2018, there were 10 directors (including one female and two non-Japanese directors), which was a reduc- tion in the total number of directors by one from the previous year, and this ensures expeditious and strategic decision making as well as sound oversight and guidance. Daikin’s Board of Directors includes three external directors (as of June 2018), conditional upon them not having a relationship of interest with the Company. Daikin seeks to recruit external direc- tors who can provide supervision and advice based on their 20 abundant experience and deep insight. The main factors in the nomination of external directors are experience on boards of directors for listed companies or similar experience. Currently, all of Daikin’s external directors have fewer than five concurrent posts. To ensure that the external directors can effectively contribute to Daikin’s corporate governance system, assistants to the external directors are assigned in the Company. They strive to provide the external directors with 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, when external directors are unable to attend a Board of Directors meeting, the assistants provide them with related materials and subsequent explanations of meeting proceedings. Audit System Daikin employs an Audit and Supervisory Board System and has established the Audit and Supervisory Board. Daikin endeavors to appoint two or more external directors to the Board, and, as of June 2018, Daikin’s four Audit and Supervisory Board members included two external Audit and Supervisory Board members. The principal nomination criteria for external Audit and Supervi- sory 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 Audit and Supervisory Board members attend meetings of the Board of Directors, as well as other important meetings, and receive reports. In addition, they can 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, and the staff perform their duties under the orders and direction of the Audit and Supervisory Board members. The opinions of the Audit and Supervisory Board are respected on matters related to personnel transfers, work evaluations, and other matters pertaining to Audit and Supervisory Board Member Office staff members. Accounting Auditor Board of Corporate Auditors Corporate Auditors Group Auditors Meeting Shareholders’ Meeting Audit Appointment, dismissal Board of Directors Internal Control Committee, Corporate Ethics and Risk Management Committee, Information Disclosure Committee, CSR Committee Appointment, supervision HRM Advisory Committee Compensation Advisory Committee Group Steering Meeting Group Management Meeting Executive Officers Meeting Executive Officers (positions below are omitted) Tatsuo Kawada Akiji Makino Ryu Yano Toru Nagashima Tatsuo Kawada Akiji Makino Ryu Yano Toru Nagashima External Director/Audit and Supervisory Board Members’ Principal Activities Name Position Principal Activities Chiyono Terada External Director Ms. Terada attended 15 of the 16 Board of Directors meetings held during fiscal 2018. Based on her abundant experience and deep insight as a corporate manager, she provides appropriate supervision of Company management from an independent perspective; provides management with the consumers’ point of view, including the importance of the Company’s corporate brand; and makes proactive proposals for measures to further promote achievements of female employees. Mr. Kawada attended 13 of the 16 Board of Directors meetings held during fiscal 2018. Based on his abundant experience in management and high-level insight, he can provide appropriate supervision of management from an independent perspective and actively provides suggestions, from his broad and sophisticated perspective regarding changes in business models, innovation, and other matters. Mr. Makino attended 12 of the 16 Board of Directors meetings held during fiscal 2018. Based on his abundant experience in management and high-level insight, he can provide appropriate supervision of the Company’s manage- ment from an independent perspective and actively provides suggestions from his broad and sophisticated perspec- tive regarding matters in the fields of energy, the natural environment, and service businesses. External Audit and Supervisory Board Member Mr. Yano attended 12 of the 16 Board of Directors meetings held during fiscal 2018 as well as 13 of the 16 Board of Auditors meetings held in fiscal 2018. Based on his abundant experience and deep insight as a corporate manager, he accurately audits the supervision of the conduct of management by the directors. From his broad and advanced perspective developed over many years of experience in business overseas, he provides the necessary input in a timely fashion. Mr. Nagashima attended 15 of the 16 Board of Directors meetings held and 16 of the 16 Board of Auditors meetings held during fiscal 2018. Based on his abundant experience in management and high-level insight, he provides the necessary input in a timely fashion based especially on his broad and sophisticated experience in the management of global companies and manufacturing enterprises. Reasons for Election as External Director/Audit and Supervisory Board Member Name Position Reasons for Election Chiyono Terada External Director Ms. Terada makes full use of her abundant experience and deep insight as a corporate manager, and she provides appropriate supervision from an independent perspective. With her broad and deep understanding, she provides management with the consumers’ perspective, including the importance of the corporate brand, and makes proac- tive proposals for measures to further promote achievements of female employees. Ms. Terada was elected as external director to continue to contribute to the Company’s corporate value looking forward. Mr. Kawada has served as representative director of SEIREN CO., LTD., and has abundant experience and deep insight as a corporate manager. His experience includes changing his company’s business model, innovation creation, and reforming corporate cultures. Mr. Kawada was elected as external director to make use of this experience and provide appropriate supervision of the conduct of management from an independent perspective, and, by offering proposals in relation to the overall management of the Company from his broad and high-level perspective, contribute to increasing Daikin’s corporate value. Mr. Makino has served as representative director of Iwatani Corporation and has abundant experience and deep insight as a corporate manager, especially in the fields of energy and the natural environment as well as the services business. Mr. Makino was elected as external director to draw on this background and experience to provide appropriate supervision of the conduct of management from an independent point of view, and, offering proposals regarding management from his broad and high-level perspective, contribute to increasing Daikin’s corporate value. External Audit and Supervisory Board Member Mr. Yano has served as representative director at Sumitomo Forestry Co., Ltd., and has abundant experience and deep insight as a corporate manager, particularly in the field of expanding business operations overseas. Mr. Yano was elected as external auditor to draw on his experience to supervise overall management at Daikin and to signifi- cantly upgrade the appropriateness of the audit function. Mr. Nagashima has served as representative director at TEIJIN LIMITED, and has abundant experience and deep insight as a corporate manager, particularly in the field of implementing paradigm shifts from manufacturing to services. Mr. Nagashima was elected as external auditor to draw on his experience to significantly upgrade the appropriateness of the audit function. Note: All of the Company’s external directors and external auditors meet the qualifications for independence established by the Tokyo Stock Exchange. Agile Management Support System Daikin’s three main management bodies are the Board of Direc- tors, the Group Steering Meeting, and the Executive Officers Meeting. The Board of Directors is the decision-making institution for all matters related to the Group as a whole, as stipulated by laws and regulations and by the articles of incorporation, and by minimizing the number of directors Daikin is ensuring expeditious decision making based on substantive discussion. It also performs supervi- sion and guidance to ensure sound and appropriate execution of the Company’s operations. In fiscal 2018, the Board of Directors met 16 times, and the average attendance rates of external directors and external Audit and Supervisory Board members at those meetings were 83% and 84%, respectively. The top deliberative unit in the Group’s management system is the Group Steering Meeting. This unit determines the direction for important management guidelines and management strategies in a rapid and timely manner. In fiscal 2018, it met eight times. The Executive Officers Meeting establishes a place where we can expedite thorough deliberations and prompt implementation of important management issues, and it met 13 times in fiscal 2018. 21 Daikin Industries, Ltd. Annual Report 2018Corporate Governance In addition, to respect and protect the interests of diverse stakeholders other than stockholders, Daikin has, based on the Board of Directors, established its Internal Control Committee, Corporate Ethics and Risk Management Committee, Information Disclosure Committee, and CSR Committee. Evaluation of the effectiveness of the Board of Directors Daikin analyzes and evaluates the effectiveness and appropriate- ness of the Board of Directors and the corporate governance system through interviews with the Directors and Corporate Auditors and deliberations by the Board of Directors. As a result, the Board of Directors of Daikin is assessed on its ability “to perform appropriate decision making through open and active discussions and play an effective role in improving corporate value over the medium-to-long term”. Going forward, we plan to further enhance the provision of information to external directors and raise the effectiveness of the Board of Directors even further. Corporate Officer Renumeration To ensure the transparent management of its corporate officer personnel and remuneration processes, Daikin has established the HRM Advisory Committee and the Compensation Advisory Com- mittee. These committees engage in discussions and deliberations regarding issues including nomination criteria for such positions as directors and executive officers, and for corporate officer, corpo- rate officer candidates, and for remuneration. As of the end of June 2018, both committees comprised five members, including three external directors, one in-house director, and one executive officer, with the committee chairman being chosen from the external directors. The remuneration of directors and Audit and Supervisory Board members is based on both the maximum limit of total remunera- tion and on the report of the “Compensation Advisory Commit- tee”. Based on a report from the Compensation Advisory Commit- tee, 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. In doing so, Daikin determines compensation levels based on the relative position of its performance and remuneration levels compared to other leading manufacturing companies in Japan after reviewing the data from a specialized institution on the remuneration of corporate officers active in Japanese companies listed on the First Section of the Tokyo Stock Exchange. In response to the expectations of shareholders, compensation for in-house directors is divided into fixed compensation to main- tain the motivation of in-house directors at a high level continu- ously over the medium-to-long term towards enhancing the Daikin Group’s performance and performance-linked remuneration to reflect short-term Group performance and performance of divi- sions in which a director is in charge and stock options to reflect medium- to long-term performance. External directors and corpo- rate auditors receive “fixed compensation” only. 22 8 2 5 Position Directors (excluding external directors) Audit and Supervisory Board Members (excluding external auditors) Total Compensation for Directors and Audit and Supervisory Board Members (Fiscal 2018) Total Compensation (Millions of yen) Total Compensation by Type (Millions of yen) Basic Stock Options Bonus Number of Individuals 1,250 746 133 370 64 64 76 — — — — External Directors 76 Corporate Officers Receiving Total Compensation and Other Exceeding ¥100 Million (Fiscal 2018) Total Consolidated Compensation (Millions of yen) 410 273 170 132 147 109 Position Company Name Director Director Director Chair- man Daikin Industries, Ltd. Daikin Industries, Ltd. Daikin Industries, Ltd. Consolidated Subsidiary, Daikin (China) Investment Co., Ltd. Director Daikin Industries, Ltd. Director Director Director Consolidated Subsidiary, Daikin Europe N.V. Daikin Industries, Ltd. Daikin Industries, Ltd. Total Consolidated Compensation by Type (Millions of yen) Basic Stock Options 263 166 99 11 8 72 92 66 29 29 14 — 14 — 14 11 Bonus 116 76 45 — 36 — 40 32 Name Noriyuki Inoue Masanori Togawa Ken Tayano Masatsugu Minaka Jiro Tomita Takashi Matsuzaki Total Compensation and Other for Independent Accounting Auditors (Fiscal 2018) Audit expense 243 (Millions of yen) Group Governance To meet governance needs on a Group-wide basis, including M&A-related companies, Daikin holds meetings of the Group Steering Meeting to ensure the thorough sharing of important management policies and basic strategies. Moreover, Daikin works to promote and strengthen support for the resolution of challeng- es of Group companies through activities based on unified objec- tives. In addition, to strengthen Group-based auditing and supervi- sory functions, Daikin is working to enhance its management at the Group Auditors meetings, which comprise audit managers from major Group companies. From the perspective of further strengthening corporate gover- nance and Group management as a multinational company, Daikin has appointed a Chief Global Group Officer, who works to further improve the Group’s cohesiveness. Directors, Audit and Supervisory Board Members, and Executive Officers (As of June 29, 2018) Position(s) Name Responsibilities & Principal Jobs Chairman of the Board and Chief Global Group Officer President and CEO, Member of the Board Noriyuki Inoue Masanori Togawa Chairman of Internal Control Committee Member of the Board (external) Chiyono Terada President of Art Corporation Member of the Board (external) Tatsuo Kawada Chairman and CEO of SEIREN CO., LTD. Member of the Board (external) Akiji Makino Chairman and CEO of Iwatani 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 (non-resident) Member of the Board (non-resident) Ken Tayano Responsible for Domestic Air-Conditioning Business, Representative of China Region, Chairman of Daikin (China) Investment Co., Ltd., Chairman of Daikin Fluorochemicals (China) Co., Ltd., and Member of Global Air-Conditioning Committee Masatsugu Minaka Representative of Air-Conditioning Operations in the Europe/Middle East/Africa Region (excluding East Africa), President of Daikin Europe N.V., and Member of Global Air-Conditioning Committee Jiro Tomita Responsible for Global Operations Division, Manufacturing Technology and Promoting PD Alliances Yuan Fang Regional General Manager of Air-Conditioning Business in emerging nations in the ASEAN/Oceania Region of Global Operations Division, Vice Chairman of Daikin (China) Investment Co., Ltd., Chairman of Daikin Airconditioning (Hong Kong) Limited Kanwal Jeet Jawa Regional General Manager of Air-Conditioning Business in India/East Africa, President of Daikin Airconditioning India Private Limited Audit and Supervisory Board Member (external) Audit and Supervisory Board Member (external) Ryu Yano Chairman of Sumitomo Forestry Co., Ltd. Toru Nagashima Honorary Advisor of TEIJIN Audit and Supervisory Board Member Kenji Fukunaga Audit and Supervisory Board Member Kosei Uematsu Senior Executive Officer Takashi Matsuzaki Responsible for Applied Solution Business, R&D in North America, Applied R&D Center, Silicon Valley Technology Office Senior Executive Officer Koichi Takahashi Responsible for Finance and Accounting/Budget Operations, IT Development, IoT/AI business promotion, General Manager of the Finance and Accounting Division Senior Executive Officer Yoshikazu Tayama General Manager of Budget and Administration Group in Finance and Accounting Division Senior Executive Officer Masayuki Moriyama Senior Executive Officer Yoshihiro Mineno Responsible for Applied Solution Business in China/ASEAN/Oceania Region, Refrigeration business, Director of Daikin (China) Investment Co., Ltd., COO of McQuay China Responsible for Filter business training, General Manager of Global Operations Division, Director (non-resident) of Goodman Global Group, Inc., Director (non-resident) of Daikin Holdings (Houston), Inc. Senior Executive Officer Satoshi Funada Responsible for Service Operations, General Manager of Air-Conditioning Sales Division Senior Executive Officer Naofumi Takenaka Responsible for SCM, Logistics, Deputy Manager of Air-Conditioning Sales Division (Responsible for Business Strategy), General Manager of Business Strategy Department in Air-Conditioning Sales Division, General manager of Tokyo Office. Senior Executive Officer Yasushi Yamada Responsible for Safety Executive Officer 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 Hitoshi Jinno General Manager of Filter Division Kota Miyazumi Responsible for Corporate Planning, General Manager of Marketing Research Division, Director of Planning Group in Marketing Research Division Tsutomu Morimoto Responsible for Goodman Group Business, Executive Secretarial Department Yuji Yoneda Responsible for Air-Conditioning Product Development (including Applied Solution Business and Refrigeration Business) and General Manager of Technology and Innovation Center Executive Officer Masaki Saji Executive Officer Masafumi Yamamoto Executive Officer Akira Murai Executive Officer Makio Takeuchi General Manager of Human Resources Division and Department Manager of Diversity Promotion Group in Human Resources Division Responsible for CSR, Global Environment Affairs, Corporate Ethics, Compliance, Legal Affairs, Information security, General Manager of the Legal Affairs, Compliance and Intellectual Property Center, Chairman of CSR Committee, Chairman of Corporate Ethics and Risk Management Committee and Chairman of Information Disclosure Committee Responsible for Oil Hydraulics business and Defense systems business, Co-Creation Projects member of Technology and Innovation Center, and General Manager of Yodogawa plant Responsible for Global Procurement, Deputy Manager of Air-Conditioning Manufacturing Division (Product Development), Product Development Promotion in Refrigeration Division, Co-Creation Projects member of Technology and Innovation Center Executive Officer Executive Officer Executive Officer Executive Officer Yoshiyuki Hiraga Responsible for Chemical Business and Chemical Environment/Safety Toshio Ashida Responsible for Strategy office of Technology and Innovation Center, General Manager of Corporate Planning Hideki Maruoka General Manager of Oil Hydraulics Division Shigeki Morita Responsible for PL/Quality (Air Conditioning/Applied/Refrigeration), Alliance Promotion with Gree Electric Appliances Inc., General Manager of Air-Conditioning Manufacturing Division, and General Manager of Sakai Plant 23 Daikin Industries, Ltd. Annual Report 2018ESG Summary The Daikin Group’s core business of air conditioning is essential for economic development and a comfortable lifestyle, and demand for air conditioning continues to expand in developing nations and around the world. The Daikin Group sets CSR priority themes for internal use and the sustainable development of society. By evaluating the overall impact on society, Daikin provides people around the world with comfortable and rich lifestyles, while working to limit environmental impact by leveraging its accumulated technologies. Materiality In fiscal 2016, along with the establishment of a strategic management plan known as “FUSION 20,” the Group’s relevance has been eval- uated. In the course of this evaluation, priority themes were selected according to two core topics: “The interests of stakeholders and what impacts on them,” which includes stakeholder engagement and global guidelines and requirements from the SRI research institution, and the “Importance of Daikin” based on management philosophy as well as mid-and-long-term management strategies. S t a k e h o d e r l I n t e r e s t a n d I n f l u e n c e Preservation of Biodiversity Atmospheric pollution Dealing with Climate Change Respect for Human Rights Efficient Use of Resources and Energy Stakeholder Engagement New Value Creation Regional Society Ensuring Product Quality and Safety Chemical Substance Control and Reduction Pursuit of Customer Satisfaction Most Important Prohibition of Bribery Free Competition and Fair Trade Industrial Safety and Health Human Resource Development Labor-Management Relations Ensuring Human Resource Diversity Supply Chain Management Corporate Governance Information Security Important Waste and Water Reduction Importance for Daikin Nine Priority Initiatives With the Group’s relevance established as the CSR priority for sustainable development of both the corporation and society, the Group has focused on four“Value Delivery” themes and five“Grounding” themes. Attention to these initiatives in management activities is incorporat- ed into our strategic management plan, “FUSION 20” and implemented across the entire Group. Daikin Group CSR CSR for Value Provision Fundamental CSR We aim to provide a healthy, comfortable air environment to all across the world, through efforts to minimize environ- mental impact. P Environment P New Value Creation P Customer Satisfaction P Human Resources We are responding to societal demands for greater transpar- ency and more open business practices. P Corporate Governance P Respect for Human Rights P Supply Chain Management P Stakeholder Engagement P Communities 24 CSR Activity Plan 2020 Priority Initiatives FY2021 Target FY2018 Result E Environmental Environment Introduce state-of-the-art technologies to the market to address environmental and energy issues. • Reduced emissions of global warming gas by 60 million tons of CO2 through the distribution of environmentally friendly products globally • Reduced emissions of global warming gas result- ing from the manufacturing process across the entire Group by 70% from fiscal 2006 levels • Implementing and expanding environmental activities in coordination with stakeholders We measure our contribution to reducing emissions of global warming gas based on the distribution of environmentally friendly products and our reduction in global warming gas resulting from the manufac- turing process. Daikin reduced global warming gas by 54 million tons of CO2, representing a reduction of global warming gas emissions of 74% from fiscal 2006 levels. S Social n o i s i v o r P e u l a V r o f R S C R S C l a t n e m a d n u F New Value Creation Sharing dreams and future with people inside and outside Daikin and creating a comfortable lifestyle with the power of air • Connecting society and customers via IoT and AI and creating new value through open innovation The amount of investment to create new value is measured based on the amount of new technology created. Research and Development expenses reached ¥62.1 billion and the number of patent applications, 780 (including overseas patent applica- tions of 352 in fiscal 2017 on a consolidated basis). Offering peace of mind and reliability focusing on customer-oriented approach, experience, business performance and superior technology • Build a service network encompassing the entire globe • Building product development capabilities that can satisfy the needs of customers worldwide • Maintaining optimum levels of quality We recognize that by respecting individual- ity and value systems and by drawing out the unlimited potential of individuals, we make both our organization and society stronger. • Achieve a ratio of experts and highly experi- enced personnel of four to one • Achieve a ratio of women in management posi- tions of 10% (unconsolidated) • Increase the ratio of local presidents • Reducing the frequency of industrial accidents to zero Committed to respecting human rights Customer Satisfaction Human Resources Respect for Human Rights We measure satisfaction through the after-sales ser- vice customer satisfaction rating. In fiscal 2006, the customer satisfaction rating was 1.11 for Japan, 1.03 for Singapore, 1.01 for China and 1.00 for Italy. As a means of fostering our human resources, we measure the number of personnel that are at a level to provide guidance in monozukuri (creating things), maintain diversity and move toward appointing more presidents at local overseas production facili- ties. In the area of occupational, health and safety, we measure the safety of operations at production facilities. We achieved a ratio of experts and highly experienced personnel of 3.4 to one (unconsolidat- ed), a ratio of women in management positions of 4.9%, a ratio of local presidents of 46% (overseas Group companies) and frequency rate of industrial accidents throughout the Group of 1.33. We measure how thoroughly respect for human rights has been adopted by our employees through the completion rate for the self-inspection. The com- pletion rate for the self-inspection was 99%. Supply Chain Management Implementation of CSR through the procurement process To measure the level of implementation of the CSR by suppliers, we created a questionnaire for suppli- ers. We began running this survey from fiscal 2019. Stakeholder Engagement Management that reflects a constructive dialogue with stakeholders Regional Society Activities contributing to society through the envi- ronment, education, and local regions G Governance Corporate Governance Thorough compliance Maintaining independence, diversity and transparency of the Board of Directors As an indication of our performance in the area of engagement, we track the number of events held by our Air Conditioner Forums (Konwakai), an event that comprehensively covers the industry and pro- vides an opportunity for dialogue between experts in air conditioning. The Air Conditioner Forum was held six times across five different regions worldwide. The amount of support in terms of donations both financial and material provides an indication of our contribution to regional society. This amount across the entire Group stands at ¥1.6 billion. We measure the status of our efforts in corporate governance compliance through the completion rate by employees of the self-inspection. The completion rate for the self-inspection was 99%. We also have a ten-member Board of Directors, including three external directors, one female member, and two non-Japanese members. 25 Daikin Industries, Ltd. Annual Report 2018 CSR (Corporate Social Responsibility) Supporting the Rollout of R32 Refrigerant in Emerging Economies In 2011, the Daikin Group released 93 basic patents related to the manufacture and sale of air conditioners using R32 royalty-free for emerging countries allowing for the manufacturers in each country to introduce the lower global warming potential (GWP) R32 refrigerant. In 2015, this royalty-free use of R32 as a refrigerant was expanded worldwide. In addition, Daikin provides technical support in emerging countries by cooperating with governments and international organizations throughout the world and provides information and technical support through international conferences, academic conferences, and papers on the impact and countermeasures in relation to refrigerants and global warming. For example, in India, Thailand, and Malaysia, seminars were held for government officials and air-conditioning industry groups to promote understanding of R32, and we conducted training for local air-conditioning installation and service technicians on the appropriate handling of R32. In Mexico, Daikin was commissioned by the Japan International Cooperation Agency (JICA) to handle private-sector technology promotion projects in an expanded range of activities, including the distribution of air conditioners with R32 refrigerant and initiatives to create energy-efficient markets. As of December 2017, the Daikin Group had sold more than 12 million R32 air conditioners worldwide in 53 countries. We estimate that the global market for R32 air conditioners, when our competitors are included, exceeded 43 million units. Early Achievement of Reduction Targets by Fiscal 2026 Greenhouse gases emitted by the Daikin Group during the production process across the entire business are classified by energy use into two main categories: CO2 and fluorocarbons. From fiscal 2017, we reviewed estimate calculations and the management targets for companies in the Group that have been in place since 2010. We set targets to reduce greenhouse gas emissions from fiscal 2006 levels by 75% in fiscal 2026, and by 70% in fiscal 2021. However, in fiscal 2018, at Daikin America, Inc., replacement and recovery of fluorocarbons was under way resulting in emissions greenhouse gases of 1.35 million tons of CO2. This is a 74% reduction compared to fiscal 2006, putting us on track to reach the fiscal 2026 target early. Environment  Materiality of Environmental Measures While air conditioners, the main product of the Daikin Group, support the enhancement of economic growth and quality of life in hot regions, they consume a lot of electricity during use and also have an impact on climate change through the fluorocarbon used as a refrigerant. In recognition of this, the Daikin Group strives to contribute to the sustainable growth of global society as the only comprehensive air-conditioner manufacturer that develops and manufactures both air conditioners and refrigerants. The Daikin Group focuses on the spread of environmentally friendly products using inverter technology, low environmental impact refrigerants worldwide and its services solution business.  Daikin’s Initiatives Promotion of Eco-Friendly Technologies and Products The Daikin Group develops and distributes environmentally friendly products globally that satisfy either or both a reduction in power consumption by 30% or more compared to conventional models and use of refrigerants with a lower global warming potential of a third or less compared to conventional refrigerants. In fiscal 2018, the percentage of sales of environmentally friendly products related to residential air conditioners was 83%, representing a reduction in emissions of greenhouse gases* of 54 million tons of CO2. As a measure to reduce CO2 emissions resulting from the energy consumption of air conditioners, Daikin is working to broaden the global distribution of inverter units. For example, in Southeast Asia, Daikin has developed low-cost inverter units targeting regions requiring cooling-only air conditioners, and, due to a rising energy-conservation consciousness along with strengthened regulations and steeply rising electricity prices, these low-cost inverter units are flourishing. Also, in Latin America and the Middle East, Daikin is cooperating with government and industry bodies to support the establishment of energy efficiency assessment standards, through the introduction of indicators, standards, and an improved energy labelling system. * Difference between emissions from the total sales by Daikin of environmentally friendly products and a baseline of emissions from air conditioners using non-inverter units and conventional refrigerants, combustion-type heating, and hot water heaters. Spread of energy-saving air conditioners in Sri Lanka Support for measures to recover, recycle, and dispose of refrigerants The Daikin Group recognizes its responsibility as a comprehensive air-conditioning manufacturer with both air conditioners and refriger- ants. The Group is also engaged in activities to prevent refrigerants from being discharged into the atmosphere throughout the life cycle of air conditioners. Continuing from the previous year, in fiscal 2018, Daikin was entrust- ed by Japan’s Ministry of the Environment with a survey aimed at sup- porting developing countries. In collaboration with the United Nations Environment Programme, we worked in Sri Lanka to distribute ener- gy-efficient air-conditioning units and establish recovery, recycling, and disposal schemes for refrigerants. Based on the survey results obtained over two years, we prepared policy recommendations and presented our proposals to the government of Sri Lanka. In addition, we held a local seminar to report on the findings in the survey, and more than 70 participants from government, academia, and industry attended. 26  Environmental Vision for 2050 Taking a long-term perspective to addressing serious global environmental issues, the Daikin Group established its “Environmental Vision 2050.” With the aim of reducing to zero our emissions of CO2 that occur as part of our business activities, products and services, we established our goals and measures every five years in our strategic management plan FUSION. Daikin’s Direction and Views of Risk and Opportunity Environmental issues that involve Daikin’s business and the global environment contain both risk and opportunity. To resolve such issues, Daikin has embarked on a direction to promote the resolution of these issues using the resources it holds. Environmental issues, risk and opportunity Resources held by Daikin Climate Change • Demand from society for a reduction in emissions of CO2 resulting from product use • Strengthening of regulations for existing refrigerants and combustion heaters Increased Energy Demand • Expectations for strengthening energy regulations and energy efficient products. • As demand for electrical power experiences instability options are sought that support the stable supply of electrical power. Atmospheric Pollution • Expansion of needs in relation to air quality Technology Information Personnel Global Network Relationship with society Direction Daikin must take Create products and services with a high level of environmental performance Create environmental solutions Create value by improving air quality Environmental Vision for 2050 The directions Daikin must take as we look toward the strategies set in our Environmental Vision for 2050 are outlined above. Reduction in CO2 emissions from Daikin’s products across the entire lifecycle. Creating solutions linking society and customers and aiming for zero emissions of CO2 in collaboration with our stakeholders. Daikin is contributing to the resolution of global environmental issues through the use of IoT, AI and open innovation. While at the same time Daikin satisfies the demand related to air throughout the world and provides peace of mind and healthy air spaces. Considerations in relation to achieving zero CO2 emissions While reducing emissions of CO2 resulting from products and solutions, we are also targeting zero emission through the collection and reuse of refrigerant. • Energy-efficient products • Development and distribution of refrigerants with low global warming impact • Distribution of heat-pump type heaters • Through energy management, we provide energy efficiency and the effective recycling of energy throughout entire buildings. • We offer energy services across the entire value chain • Promoting the collection and reuse of refrigerant Open Innovation IoT/AI Via products Via solutions Daikin’s Environmental Vision for 2050 While providing peace of mind and healthy air spaces, we are targeting zero emissions of CO2 Open Innovation IoT/AI Open Innovation IoT/AI Via the power of air i a V s t c u d o r p a i V s n o i t u o s l 27 Daikin Industries, Ltd. Annual Report 2018 Creating Value from Data in Relation to Air and Space Daikin launched the collaborative creation platform CRESNECT to use data obtained from air conditioners and by cooperating with various partner companies has created new values and services related to air and space. Initially, CRESNECT’s main target is office space. With the air conditioner as the information terminal, we can acquire data such as temperature and humidity, brightness and sound, the number and position of people and how these people are moving. In collaboration with our partner companies, we are investigating how to use this data to create new value and services that enhance productivity and maintain health. Inauguration of the Mite Allergy Countermeasure Society In a consortium of four companies, Sangetsu Co., Ltd., Shionogi & Co., Ltd., and Teijin Frontier Co., Ltd., Daikin launched the Mite Allergy Countermeasure Society to raise awareness and provide education on measures to deal with these allergies. In 2004, as part of creating an indoor-air environment that is healthy and comfortable, we developed our own Streamer technology to decompose allergens such as mites, fungi, pollen and suppress bacteria and viruses. While looking into possible further uses of Streamer technology and leveraging the knowledge and know-how of companies across different industries, the Mite Allergy Countermeasure Society is endeavoring to provide society with a comfortable and healthy lifestyle through the joint creation of new value in air and space. Cooperative Creation That Makes Use of IoT in Skill Transfer Daikin and Hitachi, Ltd. embarked on a collaborative project to create the next-generation production model using IoT to support skills transfers from expert workers as of October 2017. More specifically, we are proceeding with a joint demonstration of the viability of a new production model. The system uses such technologies as advanced image analysis, which is the solution core of Hitachi's IoT platform, Lumada, and through digitalization, the system enables the comparison and analysis of the skills of expert workers and trainees. The current demonstration involves the brazing process, which forms part of the manufacturing process for air conditioners at Daikin's Shiga Plant (Shiga Prefecture). In the future, we will move to full-scale production using this system and with the objective of ensuring consistent quality and improved productivity and developing human resources, we aim to expand to other Japanese and overseas production locations. CSR (Corporate Social Responsibility) New Value Creation  Materiality of New Value Creation Daikin Group believes that to achieve sustainable growth in an environment where change and progress in both globalization and technology are accelerating remarkably, it is important to provide unparalleled new value. Making use of IoT and AI technology, we aim to integrate cutting-edge technologies from different fields through open innovation. We will pursue new value to make people and indoor spaces healthy and comfortable through technologies and products that contribute to the resolution of social issues such as energy, the environment, and health.  Daikin’s Initiative Creation of New Air and Space As a part of open innovation, the Daikin Group established the RIKEN-DAIKIN Wellness Life Collaboration Program with RIKEN, a comprehensive research institution dedicated to the natural sciences, in October 2016 to jointly research the creation of healthy and comfortable spaces. The Daikin Group’s air- conditioning control technology creates new values that contribute to society and we are bringing that together with RIKEN's knowledge on fatigue, health and life sciences, to verify the relationship between temperature, humidity and fatigue. In a trial where subjects were recruited and tested from December 2017, the Japanese Society of Fatigue Science announced their research results in May 2018 on the “Relationship between Temperature and Humidity by Gender and the Degree of Physiological Fatigue". During fiscal 2019, we plan to establish a fatigue index based on environmental heat and to develop scientifically based products that can realize "spaces that alleviate fatigue”. Creation of a Business for the Micro-Hydroelectric Power Generating System In June 2017, Daikin established subsidiary DK-Power Co., Ltd., which is a commercial electricity producer using a micro-hydro- electric power generation system. DK-Power develops its renew- able energy power-generation business by installing micro-hydropower generation systems in the water facilities owned by local governments. With power generation systems introduced to Kobe City and Nagaokakyo City in fiscal 2018, power plants now operate at six sites in Japan. DK-Power was a start-up company and is the first project to be commercialized from the research themes of the Technology and Innovation Center (TIC), a technology development base established in 2015. 28 Customer Satisfaction  Materiality of Customer Satisfaction Daikin is developing business in over 150 countries around the world. To provide maximum satisfaction to customers in each individual country, Daikin takes into consideration climate, culture, and regulations to provide products and services that meet local needs. At the same time, it is vital to maintain the highest standards of quality. To more precisely match customer needs, Daikin is focused on customer-oriented business activities and regularly addresses the frank opinions of customers worldwide, making use of their views in areas such as product development.  Daikin’s Initiatives Implementing Global Quality Guidelines In its Global Quality Guarantee Rules, the Daikin Group has prescribed its basic stance on quality standards across its Group companies and outlined the responsibility and authority structure to ensure the seamless implementation of measures for quality monitoring and correction. We have acquired ISO9001 certification at all production facilities, and, through our quality management system, we thoroughly implement quality maintenance and management in all development, procurement, and production divisions. Furthermore, we are also working to enhance quality with the cooperation of our outsourcing partners. To assess the operating status of the quality management system, the Daikin Group conducts evaluations through internal audits and maintains a continuous cycle of implementation, evaluation, and improvement. In addition, every year, we plan and implement a quality assurance program for the fiscal year that outlines quality priority measures and targets for each business division based on the Group’s annual policy guidelines. Launched SBM in the European Heater Business In Europe, the ratio of CO2 emissions due to heating is high, and currently there is a move away from heaters using fuels such as gas and kerosene for combustion heaters to lower environmental impact heat-pump room heaters that absorb heat energy from the air rather create heat via combustion. As a part of this move, the Daikin Group believes that it is vital to have a mechanism that can provide peace of mind for custom- ers and dealers to improve the level of recognition and encourage greater distribution of heat-pump heaters in Europe. To achieve this, in 2017, we developed a cloud-based platform providing a three-way linkup among customers, dealers, and Daikin. We called this system stand-by me (SBM) to emphasize that we are always by your side. The system demonstrates its true value for warranties, maintenance, and after-sales service. Developing Our Service Structure in Japan and Abroad The Daikin Contact Center is a general inquiry service that accepts inquiries regarding repair requests, technical consultations, and purchasing information 24 hours a day, 365 days a year, from customers in Japan. Overseas, we have put in place an after-sales service structure that is “fast, reliable, and friendly” to respond to the variety of requests specific to each country or region In fiscal 2018, Daikin opened a contact center specialized in B2C to strengthen the heating business in the U.K. In addition, to enhance training in relation to quality, in the future we will establish call centers and provide technical information online. Collecting and Reflecting the Views of Customers The Daikin Group measures customer satisfaction through its after-sales services and uses these results to enhance customer satisfaction. In Japan, we conduct our Relationship Survey, and, in fiscal 2018, the overall satisfaction score was 4.49 out of a total of 5.0 points, our highest rating to date. We believe this result reflects our education and training in such areas as “enhancing technical capabilities” and “improving our response to customers” as well as a focus on “speed from reception to completion” and “repairs completed in one visit”. Meanwhile, customers’ opinions collected at showrooms, shops, and websites are used for product development. Launched in March 2018, Risora, a wall-mounted air conditioner that combines design and the latest functions while seeking harmony with the décor, was developed in response to opinions demanding stylish air conditioning. Highly appraised for design and functionality in Japan and abroad, the Risora was awarded the Good Design Award in fiscal 2017 and an international award for design, the iF Design Award 2018. Protecting Customers’ Personal Information The Daikin Group created in-house rules to ensure customers’ personal information is appropriately handled through its Personal Information Protection Policy. For example, in Japan, information managers located in each division ensure appropriate management and strict use of personal information in accordance with in-house rules. To put this all together, we hold an information management conference to address risk reduction related to confidential and personal information. In May 2017, in response to the amendment to the Act on the Protection of Personal Information in Japan, we re-examined our in-house regulations and guidelines and conducted e-learning training programs for all employees. 29 Daikin Industries, Ltd. Annual Report 2018 Appointment of Local People in Executive Positions at Overseas Facilities In conjunction with the globalization of the Daikin Group’s business, we are also advancing with efforts to globalize our management team and are aggressively promoting local employees at overseas bases to executive and positions. At the end of fiscal 2018, 46% of the presidents at our overseas bases and 48% of the directors were local employees. Accelerating the Active Role of Women in Japan The Daikin Group is working to promote the active participation and success of women, aiming at an environment that can fully demonstrate each individual's ability regardless of gender. As a goal, by the end of fiscal 2021, we aim to have at least one female director of Daikin. Moreover, we aim to increase our percentage of female managers to 10% (approximately 100 people) from the current level of 4.9% (53 people) as of the end of fiscal 2018. We also have measures in place promoting the early development of female managers and reforming the awareness of managers and employees in relation to women’s issues. In addition, we are enhancing measures that support the early return from maternity leave. From fiscal 2017, we have been promoting active participation of talented women in technical and skills-based fields. We hold forums for female engineers jointly with other companies, and in collaboration with Osaka University and the National Institutes of Biomedical Innovation, Health and Nutrition. We have hosted joint research by leading female researchers, personnel exchanges, and events for girls' high school students in the sciences. Daikin’s stance on accelerating female success in this way has been highly acclaimed by society. Daikin was recognized with five stars in the First Nikkei Smart Work Management Survey (sponsored by Nihon Keizai Shimbun) and also received the Jury Special Award. This award selects advanced companies that challenge the productivity reforms through work style reforms Initiatives to Reduce Workplace Related Accidents to Zero To ensure operational and employee safety at its production facilities in each region worldwide, the Daikin Group has created occupational health and safety management systems (OHSAS) at 73 facilities and is acquiring certification for international standards, such as OHSAS18001. We hold Groupwide joint safety and security meetings twice a year to improve safety levels. With the aim of achieving zero workplace accidents, our efforts include education and safety patrols. In fiscal 2018, the frequency rate of industrial accidents throughout the Group was 1.33, an improvement of 0.17 from fiscal 2017. CSR (Corporate Social Responsibility) Human Resources  Importance of Initiatives Related to Human Resources In response to the expectations of our various stakeholders and for the Daikin Group to realize on a global level its strengths in the "environment", "new value creation" and "customer satisfaction", the personnel who can take on the responsibility to perform these activities are critical. Therefore, Daikin has positioned “People-Centered Management" as its foundation and to respect individuals and their values we are promoting the creation of an organization that can maximize the power that each individual possesses.  Daikin’s Initiatives Enhancing Opportunities for Human Resource Development One of the corporate philosophies of the Daikin Group is the idea that “the cumulative growth of all Group members serves as the foundation for the Group’s development. In addition, based on the concept that “people grow through job experience,” we have positioned OJT as the basis of human resource development and, including off-the-job training (Off JT), are working to enhance growth opportunities. We are also focusing on nurturing the human resources for the next generation of skills that will become the basis of manufacturing. The goal is to have one in every four employees in our global production rated as "outstanding skilled workers and highly skilled workers". In fiscal 2018, the number of qualified personnel in Japan was one in 3.4 people. Meanwhile, in December 2017, we held the Daikin Information Technology University, an in-house lecture to train the personnel responsible for technological and business development in the AI field. The personnel were selected from a wide range of divisions within the company to take lectures by Osaka University faculty members in basic AI knowledge and training included data analysis exercises. This training aims to develop innovators with a strong command of AI technology Establishing the “Dojo” Training Center for US Production Division Beginning operations in May 2017, Daikin North America launched Texas Technology Park in which we established a train- ing center called “Dojo” in the manufacturing division to facili- tate the systematic acquisition of technical skills. The Center demonstrates the skills necessary for career advancement to all employees including temporary staff and conveys a future where there is equal opportunity to participate in the world. As a result, employees plan out a long-term career vision and gain a purpose and motivation to work. In fiscal 2018, prize winners at our Service Olympics (a global skills competition targeting production bases) showed a marked increase in skill level. In addition, the drop in the defect rate of products shows that the development of human resources is also linked to enhanced quality. 30 CSR Management/Compliance Risk Management  CSR Management The Daikin Group established the important themes of “value- providing CSR” and “fundamental CSR,” to enable it to realize sustainable development both as a corporation and a member of society. The CSR & Global Environment Center, a staff division, was established under the CSR Committee (chairman: director in charge of CSR), which sets the overall direction of activities and monitors the execution of those activities and promotes comprehensive and Groupwide CSR. In fiscal 2018, at the CSR Committee, we discussed the necessity and content of our long-term environmental vision encompassing the Paris Agreement’s aim to keep the rise in temperature below 2°C, and the sustainable development goals (SDGs) adopted by the United Nations and reported to the president.  Compliance Risk Management Taking an Integrated Approach to Promoting Compliance and Risk Management At the Daikin Group, the Internal Control Committee, chaired by the President, checks and confirms that internal controls, including risk management, are functioning properly Groupwide. Chaired by the officer in charge of corporate ethics and compliance, the Corporate Ethics and Risk Management Committee is held twice a year in Japan as a general rule and comprises each department head and the presidents of major Group companies to ensure the management of operational risk and thorough compliance. Overseas Group companies formulate and develop comprehensive common rules to tackle compliance and risk management. The issues faced by each company and the progress toward resolution are reported to the Corporate Ethics and Risk Management Committee. Self-Inspection of Code of Conduct Compliance The Daikin Group aims for thorough compliance and has estab- lished its own “self-inspection” system in which each employee annually carries out a selfcheck to ensure compliance with the Group Code of Conduct. Based on the results, organizational issues are identified and the necessary countermeasures are implemented. These issues and countermeasures are reported to and shared with the Corporate Ethics and Risk Management Committee. In addition to the self-inspection, compliance with the Group’s Code of Conduct and laws and ordinances is also confirmed in the Legal Department’s legality audit and the Audit Department’s operational audit. In April 2018, Compliance and Risk Management Leaders (CRL) from around the world participated in our Global Legal and Compliance Conference and shared the status on implemen- tation in each region and updates on the latest laws and regula- tions. The Thorough Implementation of Group Guidelines The Daikin Group established its Group Code of Conduct that clearly outlines required conduct for individual officers and employees and, to ensure thorough compliance, appointed a Compliance and Risk Management Leader (CRL) for each division and for each of the main Group companies in Japan and overseas. CRLs encourage adherence to the Group Code of Conduct, while regularly checking the status of compliance and risk management and sharing information, and they are focused on fostering a “culture free of compliance violations” and to elevating “mechanisms to ensure that there are no compliance violations.”  Identification of Most Important Risks and Planning and Implementing Countermeasures With the rapid expansion of Daikin’s business, the Daikin Group introduced its risk management system, to gain an overall picture of risks from a global perspective in an accurate and prompt manner and to reduce risk across the entire Group. Each division and main Group company overseas and in Japan identify and select critical risks through risk assessments, and each Group company works to reduce this risk. The status of risk reduction measures is shared with and reported to the Corporate Ethics and Risk Management Committee. For example, in fiscal 2018, Daikin Industries made efforts toward key themes such as “Earthquake Risk,” “PL Quality Risk,” “Intellectual Property Risk,” “Information Leakage Risk,” and “Overseas Crisis Management”. Corporate Ethics and Risk Management Board of Directors Corporate Ethics and Risk Management Committee Officer in Charge of Compliance and Corporate Ethics Officer in Change Divisions and Group Companies Legal Affairs, Compliance and Intellectual Property Center P r o m o t i o n E x e c u t i o n People in Charge of Corporate Ethics and Risk Management Compliance and Risk Management Leaders Meeting Compliance and Risk Management Leaders 31 Daikin Industries, Ltd. Annual Report 2018 CSR (Corporate Social Responsibility) Respect for Human Rights Based on the laws and ordinances of countries and regions around the world, the Daikin Group respects basic human rights in accordance with the various international norms. The Daikin Group participates in the United Nations Global Compact for supporting, and putting into practice, universally accepted principles relating to such matters as human rights and labor. We respect human rights, diverse values, and the individual’s sense of work, and have stipulated in our Group Code of Conduct policies against child labor and forced labor. Respect for Human Rights in the Self-Inspection The Daikin Group is committed to respecting the human rights of all its employees as stipulated in the Group Code of Conduct that clearly outlines the conduct to be adhered to by each and every officer and employee. We have identified the human rights issues of our business and have begun to appraise the risks that should be prioritized across the entire value chain. Also, to ensure compliance with the Group Code of Conduct, we established an item relating to respect for human rights in the annual self-inspection that checks to ensure there are no human rights violations and, where necessary, establishes measures to address any issues. An item was also included in the Supply Chain CSR Promotion Guidelines, formulated in 2017, and we are also asking for thorough compliance from our suppliers. Protection of Personal Privacy The Daikin Group has established guidelines for the protection of personal information, and based on these guidelines, each Group company develops its own systems to promote the guidelines and rules. We also established personal data handling rules to ensure compliance with the EU General Data Protection Regulations (GDPR) which came into effect from May 2018, and we are working to ensure thorough compliance at each Group company. Regular Human Rights Awareness and Education Daikin conducts human rights education and awareness activities each year for all of its directors, new employees, including those of affiliates, and newly appointed managers. In addition, we publish a series of human rights articles in the Company newsletter to raise awareness of human rights. In fiscal 2018, we conducted training to provide education on diversity management and deepened understanding in relation to diversity issues. Supply Chain Management In 1992, the Daikin Group established the Basic Procurement Guidelines and is working to ensure fair trade with its suppliers. In 2017, we established the Supply Chain CSR Promotion Guidelines and recognize that our social responsibility extends beyond the Group to the entire supply chain. In line with this, we are promoting CSR initiatives related to the environment, quality, occupational safety, and human rights. Implementation of the Supply Chain CSR Promotion Guidelines Supply Chain CSR Promotion Guidelines that the Daikin Group implemented in April 2017 are guidelines to promote CSR at suppliers also, and aim to achieve stable, sustained business growth. In addition to general requirements such as management and compliance with laws and regulations, suppliers are requested to work on CSR across the board, including environment, quality, occupational health and safety, human rights, and the prohibition of trade with conflict zones. For fiscal 2018, we explained the CSR Promotion Guidelines for 34 suppliers in Japan who participated in the Air- Conditioning Cooperation Meeting aimed at sharing information among suppliers and providing cross-industry exchange. Enhancing Quality from Suppliers and Supporting the Development of Human Resources For the Daikin Group to provide products that satisfy the trust of customers, cooperation from suppliers is vital. Therefore, while working hard within a strong relationship of trust with all suppliers, the Daikin Group endeavors to continue to meet its mutual expectations as well as to build relationships in which we can both grow and develop. Daikin Group companies both in Japan and abroad periodically conduct dialogue at the production sites of its suppliers on quality audits and quality improvements, collaborating with its suppliers on quality improvement efforts and providing support to enhance the required technological capabilities. In addition, we hold regular safety meetings to help prevent work-related injuries. For example, at Daikin Industries (Thailand) Limited, a training workshop is offered to provide knowledge and skills in relation to quality improvement. In fiscal 2018, 170 companies attended the training workshop. In addition, top management visits suppliers and conducts its Quality Patrol to review the status of quality improvement efforts. 32 Stakeholder Engagement  Stakeholder Engagement The Daikin Group’s main stakeholders are the customers to whom we provide products and services, the shareholders and investors who have a direct impact on our business, our suppliers, our employees, and everyone in the regional societies that our business evolution affects. In addition, the spread of air-conditioning technologies and the enhancement of the environmental friendliness of our products and services involve national and local governments and industry associations. The Daikin Group believes that it is important to understand the concerns and expectations of these stakeholders through proactive dialogue, so management can use this information in our business. Continuing Exchange of Opinions with Experts Since 1995, the Daikin Group has held the Air Conditioner Forum (Konwakai) in Japan where it can exchange opinions relating to the “future of air conditioning” with experts in the field. In addition, in light of the rapid global development of our business, since fiscal 2008, we have expanded the extent of these events to five regions and held forums in Europe, China, the United States, Asia/Oceania, and Central America/South America. Exchanging opinions with experts from each region about environmental and energy issues, we use that information in our technology as well as product and business development. In fiscal 2018, we held a total of six events in five areas. In addition, in March 2018, management staff had discussion about initiatives aimed at environmental policy in the United States with such organizations as the Natural Resources Defense Council (NRDC) and Alliance to Save Energy (ASE), both NGOs in the United States concerned with issues such as climate change and energy conservation. Events were also held on technology exchange. Responsibility to Shareholders and Investors To live up to the expectations of shareholders and investors, the Daikin Group believes that it must increase its corporate value. It therefore, emphasizes free cash flow as a source of corporate value and focuses on augmenting its profitability while lowering the levels of its trade receivables and inventories. Furthermore, Daikin works to stably maintain its consolidated ratio of dividends on equity (DOE) at 3.0%. In addition, to increase its management transparency, Daikin is executing diverse kinds of IR activities. Furthermore, to enable shareholders to exercise voting rights easily at general shareholders’ meetings, Daikin sends out convocation notices early and produces Japanese- and English- language versions on the web pages of both the Tokyo Stock Exchange and Daikin. We also enable shareholders to exercise their voting rights via personal computers, smartphones, and mobile phones. Regional Society The Daikin Group is made up of 245 consolidated subsidiaries worldwide and is expanding business in over 150 countries. The expansion of this global business is accelerating in line with the growth in demand for air conditioners, particularly in emerging countries and regions such as China, India, and Latin America. The basic policy for overseas operations is to develop a strong bond with regions through respect for their local cultural and historical backgrounds and is premised on increasing employment in the local region and cooperation with local companies. With our employees taking the initiative, we carry out social activities mainly in the areas of “environmental protection,” “education support,” and “living symbiotically with the local region” and are contributing to the resolution of social issues from a global perspective based on sustainable development goals (SDGs). Forest and Biodiversity Preservation To protect the environment in the vicinity of our facilities throughout the world, the Daikin Group is working to preserve biodiversity through its efforts to conserve forests and other natural assets such as the oceans and rivers. For example, Daikin Industries participates in the Osaka Prefectural Government’s Adopt a Forest System and has been conducting activities to improve the prefecture’s ecosystems by re-establishing satoyama (a forested natural area forming the border between the mountains and the habited regions). In fiscal 2018, a total of 150 people participated in the activity. Daikin Compressor Industries, Ltd. (Thailand) also conducts conservation activities for mangrove forests. This contributes to conservation of biodiversity and protects the lives of people engaged in traditional fishing. Supporting the Regional Revitalization of Okinawa Since 1988, Daikin Industries has held the “Daikin Orchid Ladies Golf Tournament,” and, through promoting sports, we are helping to revitalize Okinawa and encourage economic exchange with the local area. In conjunction with this tournament, we solicit donations that we then present as an “Orchid Bounty” on an ongoing basis to individuals and organizations that promote such areas as the arts, culture, education, and sports in Okinawa. Holding “Bon Festival” in Japan and Abroad Daikin has deepened exchanges with local residents through regional festivals and sports, building relationships of trust. As part of those efforts, the Bon Festival, which is planned and operated by Daikin employees, is a large event that attracts attention by numerous local residents. In addition to manufacturing plants in Japan, festivals are also held at our main production bases in China, the United States, and other areas. 33 Daikin Industries, Ltd. Annual Report 2018 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 attributable to owners of the parent 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 Free cash flow Cash dividends Ratios (%): Gross profit margin Operating income margin EBITDA margin Return on shareholders’ equity (ROE) Shareholders’ equity ratio 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Millions of Yen ¥1,291,081 441,549 313,451 32,075 128,098 179,469 74,822 ¥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 ¥103,329 (76,428) 26,902 ¥62,238 (99,302) (37,065) ¥129,227 (39,848) 89,379 ¥78,411 (23,306) 55,105 3,367 48,382 (34,942) (37,623) (1,113) 143,520 (38,249) (83,073) (85,422) (73,544) (93,955) ¥1,210,094 356,928 545,641 ¥1,117,418 417,919 471,686 ¥1,139,656 399,313 496,179 ¥1,132,507 372,481 487,876 ¥ 262.24 1,867.79 94 38.00 ¥ 74.51 1,615.98 (127) 38.00 ¥ 66.44 1,701.29 306 32.00 ¥ 68.14 1,672.74 189 36.00 34.20% 9.92 13.90 15.87 45.09 30.24% 5.11 9.84 4.28 42.21 31.19% 4.30 9.42 4.01 43.54 31.17% 6.50 10.96 4.04 43.08 ¥1,218,701 ¥1,290,903 ¥1,787,679 ¥1,915,014 ¥2,043,691 ¥2,043,969 ¥2,290,561 371,902 290,709 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 42,892 190,588 268,354 119,675 711,576 493,704 46,138 217,872 302,075 136,987 730,935 500,166 53,870 230,769 315,798 153,939 798,829 545,089 62,051 253,740 348,574 189,052 ¥103,161 (218,386) (115,225) ¥179,713 ¥160,423 (80,835) 98,878 (77,331) 83,092 ¥226,186 (105,493) 120,693 ¥267,663 (128,823) 138,840 ¥223,740 (127,459) 96,281 ¥1,160,564 ¥1,735,836 ¥2,011,870 ¥2,263,990 ¥2,191,105 ¥2,356,149 ¥2,489,954 389,891 502,309 705,871 618,118 693,944 801,854 662,413 1,024,725 608,981 1,014,409 609,430 1,111,636 554,371 1,296,553 ¥ 141.37 1,725.64 (62) 36.00 ¥ 149.73 2,123.10 (396) 36.00 ¥ 318.33 2,748.08 339 50.00 ¥ 410.19 3,511.34 285 100.00 ¥ 469.23 3,473.54 413 120.00 ¥ 526.81 3,802.10 475 130.00 ¥ 646.53 4,433.62 329 140.00 30.52% 30.06% 31.79% 33.94% 34.82% 35.76% 34.88% 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 10.66 14.78 13.44 46.30 11.29 15.45 14.48 47.18 11.08 15.22 15.70 52.07 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. Operating Income Net Income Attributable to Owners of the Parent (¥ billion) 250 200 150 100 50 0 (¥ billion) 200 150 100 50 0 08 09 10 11 12 13 14 15 16 17 18 08 09 10 11 12 13 14 15 16 17 18 08 09 10 11 12 13 14 15 16 17 18 Net Sales (¥ billion) 2,400 1,800 1,200 600 0 34 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 attributable to owners of the parent 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 Free cash flow Cash dividends Ratios (%): Gross profit margin Operating income margin EBITDA margin Return on shareholders’ equity (ROE) Shareholders’ equity ratio ¥1,291,081 ¥1,202,420 ¥1,023,964 ¥1,160,331 441,549 313,451 32,075 128,098 179,469 74,822 ¥103,329 (76,428) 26,902 363,660 302,266 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 ¥1,210,094 ¥1,117,418 ¥1,139,656 ¥1,132,507 356,928 545,641 417,919 471,686 399,313 496,179 372,481 487,876 ¥ 262.24 1,867.79 94 38.00 ¥ 74.51 1,615.98 (127) 38.00 ¥ 66.44 1,701.29 306 32.00 ¥ 68.14 1,672.74 189 36.00 34.20% 30.24% 31.19% 31.17% 9.92 13.90 15.87 45.09 5.11 9.84 4.28 42.21 4.30 9.42 4.01 43.54 6.50 10.96 4.04 43.08 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. 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Millions of Yen ¥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 ¥2,043,691 711,576 493,704 46,138 217,872 302,075 136,987 ¥2,043,969 730,935 500,166 53,870 230,769 315,798 153,939 ¥2,290,561 798,829 545,089 62,051 253,740 348,574 189,052 ¥44,967 (62,955) (17,988) ¥103,161 (218,386) (115,225) ¥179,713 (80,835) 98,878 ¥160,423 (77,331) 83,092 ¥226,186 (105,493) 120,693 ¥267,663 (128,823) 138,840 ¥223,740 (127,459) 96,281 3,367 48,382 (34,942) (37,623) (1,113) 143,520 (38,249) (83,073) (85,422) (73,544) (93,955) ¥1,160,564 389,891 502,309 ¥1,735,836 705,871 618,118 ¥2,011,870 693,944 801,854 ¥2,263,990 662,413 1,024,725 ¥2,191,105 608,981 1,014,409 ¥2,356,149 609,430 1,111,636 ¥2,489,954 554,371 1,296,553 ¥ 141.37 1,725.64 (62) 36.00 ¥ 149.73 2,123.10 (396) 36.00 ¥ 318.33 2,748.08 339 50.00 ¥ 410.19 3,511.34 285 100.00 ¥ 469.23 3,473.54 413 120.00 ¥ 526.81 3,802.10 475 130.00 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 34.82% 10.66 14.78 13.44 46.30 35.76% 11.29 15.45 14.48 47.18 ¥ 646.53 4,433.62 329 140.00 34.88% 11.08 15.22 15.70 52.07 Research and Development Expenses Shareholders’ Equity Total Assets (¥ billion) 64 48 32 16 0 (¥ billion) 1,500 1,200 900 600 300 0 (¥ billion) 2,500 2,000 1,500 1,000 500 0 08 09 10 11 12 13 14 15 16 17 18 08 09 10 11 12 13 14 15 16 17 18 08 09 10 11 12 13 14 15 16 17 18 35 Daikin Industries, Ltd. Annual Report 2018 Financial Review Summary of the Period keting products in its SKY AIR Series, including its principal “Eco-ZEAS” units During the fiscal year ended March 31, 2018, the global economy continued and its newly added lineup of the “machi multi” multi-air-conditioner series to show robust expansion, despite some turmoil in financial and currency featuring sub-units that can function individually and have a slim, space-sav- markets at the end of the fiscal year. In the United States, economic condi- ing design. In addition, in the market for multi-air conditioners for commer- tions held firm owing to expansion in personal consumption and private cap- cial buildings, Daikin expanded sales of units in its “VRV” series against a ital investment. In Europe, recovery in consumption supported improvement background of favorable demand from the office, factory, and other markets, in the region, and, in Asia and the emerging countries, exports recovered and net sales increased year on year. along with expansion in the industrialized countries, thus leading to general In the Japanese residential air-conditioning equipment, industry demand economic stability. In China also, personal consumption and private capital was strong as a result of the heat wave in the first half of the fiscal year, and investment continued on a recovery trend. sales continued to be robust in the second half of the fiscal year. The Daikin Amid this environment, the Daikin Group’s consolidated net sales rose to Group expanded sales of its top-of-the-line Urusara 7 air conditioners that ¥2,290.6 billion (a year-on-year rise of 12.1%). As for profits, consolidated incorporate its original humidifier function as well as sales of mid-market operating income rose to ¥253.7 billion (a gain of 10.0% from the previous units, and net sales exceeded those of the previous fiscal year. fiscal year). In part because of corporate income tax law revisions in the United States that led to a decline in income taxes paid in that country, net Americas Region income attributable to the owners of the parent company increased to In the Americas, net sales increased year on year in the region as a whole ¥189.1 billion (a year-on-year rise of 22.8%). because of strong demand and the success of Daikin’s sales strategy. In the residential air-conditioning systems market, Daikin expanded and strength- Performance by Business Segment ened its sales network, and, as a result of these initiatives and in part • Air-Conditioning and Refrigeration Equipment because of the positive impact of hurricanes on sales, sales increased over Total sales of the Air-Conditioning and Refrigeration Equipment segment the level of the previous fiscal year. For light commercial equipment (com- increased 11.9% from the previous year, to ¥2,052.9 billion. Operating mercial air-conditioning equipment for medium-sized buildings), Daikin has income rose 7.0%, to ¥223.5 billion. Japan advanced with sales policies for its building-use multi-air conditioners and for specific routes, and sales were above the previous fiscal year. In the Applied Systems field, in the large-scale building (applied) air-conditioning In the Japanese commercial air-conditioning equipment market, industry system area, despite difficulties presented by deterioration in the raw materi- demand exceeded the level of the previous fiscal year because of strong cap- als market, Daikin strengthened its sales network and expanded its lineup of ital investment and new construction starts. The Daikin Group expanded products and was to expand sales of Applied Systems and expand after-sales sales in the store and office market to capture market demand through mar- service revenues. In addition, as a result of the acquisition of an air-condi- Domestic and Overseas Sales Operating Income and Operating Income Margin Net Income Attributable to Owners of the Parent (¥ billion) 2,400 1,800 1,200 600 0 (¥ billion) 280 210 140 70 0 (%) 12 9 6 3 0 (¥ billion) 200 150 100 50 0 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 Domestic Overseas sales Operating income Operating income margin 36 tioning engineering company in Latin America, Daikin expanded its sales in Asia/Oceania Region the region, and total sales exceeded the previous year. Overall sales in the Asia/Oceanian region rose over the level of the previous China fiscal year. Sales of residential air conditioners in the region in the first quar- ter decreased because of unseasonable weather conditions, but, from the In China, consumer spending and private-sector demand remain strong, and second quarter onward, they increased year on year, and sales for the full growth is spreading to the regional cities. Along with changes in the market, year were at approximately the same level as in the previous year. Sales of the Daikin Group is working to capture consumption and is expanding its commercial air-conditioning equipment in Southeast Asia exceeded the pre- sales network into the regional cities. As a result of these initiatives, sales vious year because of expansion in Daikin’s sales network. In India also, sales expanded in all regions and for all products, and increased over the level of of both residential and commercial use air conditioners expanded as a result the previous year. To deal with the recent rise in raw material prices, Daikin of expansion in the sales network and other factors. has begun to produce parts in house and is pursuing other cost reduction measures, and, as a result, operating income increased year on year. In the Europe residential-use market, the Group has focused on its own specialty In Europe, sales in the region as a whole expanded over the previous year “PROSHOPS” and strengthened its proposal and installation capabilities to against a background of solid economic performance. Sales of residen- expand sales mainly in the mid-range and high-end residential market with tial-use air conditioners were robust in the principal countries of the region, the “New Life Multi Series,” residential multi-split type room air conditioners including France and Spain. In Italy also, the largest market in the region, that propose a variety of lifestyles for customers. In the commercial-use mar- business conditions, including a return to appropriate inventory levels in the ket, the Group expanded sales by focusing on marketing the commercial-use distribution chain, took a turn for the better, and, as a consequence of mea- multi-air conditioner “VRV-X” series. The Group has strengthened its propos- sures to strengthen sales of residential-use multi products, sales recovered, al sales capabilities to meet a diverse range of customer needs and is direct- but, because sales in the first quarter were below the same period of the ing its sales drive at wide segments of the market, from buildings to general previous year, sales for the full year were at about the same level as in the retail stores and from newly built structures to upgrades of existing buildings. prior year. On the other hand, in the commercial air-conditioner business, Moreover, the Group is strengthening its capabilities for providing units to Daikin focused on sales of new construction and replacement demand, and, design offices and developers according to their built-in specifications because of the positive effect of the introduction of new air-conditioner (“spec-in” activities) and approaching major users directly. As a result of products for store use, sales were favorable and exceeded the previous year. these activities, Daikin received a larger number of inquiries than in the pre- In addition, in the heat pump type hot water heater business, Daikin vious year. In the Applied Systems air-conditioner market, the Group expand- strengthened its exclusive sales system and introduced new products. As a ed its sales by broadening its product lineup to compete with U.S. result, sales expanded in the principal countries of Europe, including France, air-conditioner manufacturers and reinforced its after-sales service business. and sales were above the previous year. Selling, General and Administrative Expenses Sales by Segment Segment Profit (¥ billion) 600 400 200 0 (¥ billion) 2,400 1,800 1,200 600 0 (¥ billion) 280 210 140 70 0 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 Air conditioning Chemicals Other Air conditioning Chemicals Other 37 Daikin Industries, Ltd. Annual Report 2018Financial Review In the Middle East and Africa, despite geopolitical instabilities, the decline tially year on year, as demand conditions for related products in Asia were in crude oil prices, and the shrinkage in orders from the public sector favorable. As a result of these various developments, sales of chemical prod- because of the impact of fiscal stringency, Daikin stepped up its marketing ucts as a whole rose over the previous year. In the fluorocarbon gas business, activities to obtain orders from Saudi Arabia and other countries in the Daikin responded to the rise in raw material costs and tight supply/demand region for smaller projects in the private sector and equipment renewal and conditions by revising its prices, mainly in Europe, and sales of gas as a replacement. As a result, sales rose above the previous year. In Turkey, fol- whole were significantly above the previous year. lowing the failed coup de’tat attempt in 2016, political instability has subsid- ed, and, as a result of strong personal consumption and accelerated • Other Operations marketing activities for air conditioners and heating systems for residential Overall sales of the “Others” segment rose 5.2%, to ¥54.5 billion. Operating use, sales expanded substantially over the previous year. In the equipment income increased 26.9%, to ¥4.8 billion. for shipping business, the number of freezer systems sold for use on ocean- Sales of hydraulic equipment for industrial machinery rose over the prior going containers increased and sales expanded over the prior year. year as demand continued to be strong in Japan and in the U.S. market. • Chemicals Hydraulic equipment for construction machinery and vehicles exceed the pre- vious year as sales to customers in Japan and major U.S. customers contin- Overall sales of the Chemicals segment increased 16.8%, to ¥183.1 billion, ued to be strong. and operating income rose 39.4%, to ¥25.5 billion. In the specialized machinery business, sales of ammunition to Japan’s In the fluoropolymers business, overall sales of fluoropolymers rose year Ministry of Defense decreased, and sales of medical equipment for home use on year. Although demand for these products decreased for use in LAN cable were at about the same level as in the prior year. applications in the United States, demand conditions for use in semiconduc- In the electronics systems business, sales remained at about the same tor-related uses were favorable in Japan, China, and the rest of Asia, and level as in the prior year. In its data base systems business, which endeavors total sales were above the previous year. In addition, in the fluoroelastomer to design and develop mainstay products, Daikin continues to work to main- business, demand in the automotive-related businesses was firm throughout tain global quality standards and shorten product development times as it the world, and sales were substantially above the prior year. works to create products matched to customer needs. In the specialty chemicals business, net sales of oil and water repellents increased year on year as the switchover to new products proceeded in Currency Exchange Rates China and the rest of Asia. Sales of anti-fouling surface coating agents fell In foreign currency markets, the yen grew weaker against the U.S. dollar and below the previous year because of weakness in demand in China and the the euro. The average rates for the fiscal year were US$1=¥111 and rest of Asia. Sales of etchant for cleaning semiconductors increased substan- 1=130. Fluctuations in currency exchange rates resulted in an increase of Cash Dividends per Share Total Assets Working Capital and Current Ratio (¥ billion) 2,500 2,000 1,500 1,000 500 0 (¥ billion) 600 400 200 0 (%) 240 160 80 0 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 Working capital Current ratio (¥) 150 100 50 0 38 ¥67.0 billion in sales and ¥3.0 billion in operating income above what they Cash Flows would have been in the absence of fluctuations. During the fiscal year under review, net cash provided by operating activities Yen-U.S. dollar rate Yen-euro rate Fiscal 2017 Fiscal 2018 ¥108 ¥119 ¥111 ¥130 SG&A Expenses and Operating Income As a result of increases in personnel costs and other factors, SG&A expenses rose 9.0% over the previous year, to ¥545.1 billion. Consolidated operating income expanded 10.0%, to ¥253.7 billion, and the operating income ratio decreased 0.2 percentage point, to 11.1%. Assets, Liabilities, and Total Equity • Assets At the end of fiscal 2018, consolidated total assets amounted to ¥2,490.0 billion, up ¥133.9 billion from the previous fiscal year-end. Current assets were up ¥77.9 billion from the previous year-end, to ¥1,237.8 billion, because of an increase in notes and accounts receivable, trade and other fac- tors. Noncurrent assets increased by ¥55.9 billion, to ¥1,252.1 billion, due to an increase in the market value of securities investments and other factors. • Liabilities and Net Assets Consolidated total liabilities decreased ¥55.0 billion, to ¥1,165.6 billion, as a result of reductions in long-term borrowings and other factors. Net assets increased by ¥188.7 billion, to ¥1,324.3 billion, because of the recording of net income attributable to owners of the parent company and other factors. As a result, the shareholders’ equity ratio increased to 52.1%, from 47.2% at the end of the previous fiscal year, and net assets per share increased to ¥4,433.62 from ¥3,802.10 for the previous year. was ¥223.7 billion, a decrease of ¥43.9 billion from the previous fiscal year, due to an increase in income taxes paid and other factors. Net cash used in investing activities was ¥127.5 billion, ¥1.4 billion lower than in the previous year, primarily due to a decrease in expenditures for the acquisition of con- solidated subsidiaries. Net cash used in financing activities was ¥94.0 billion, an increase of ¥20.4 billion from the previous year, due a reduction in short- term borrowings and other factors. As a result of these various factors, and after including the effect of foreign exchange rate changes, cash and cash equivalents in the fiscal year under review increased ¥12.9 billion from the beginning of the year. This represented a decline of ¥40.0 billion for the net increase in cash and cash equivalents compared to the previous fiscal year. Capital Investment Concentrating management assets in business fields that offer high profit- ability is the Daikin Group’s fundamental strategy. In fiscal 2018, the Group made total capital investments of ¥97.0 billion, largely in the air-condition- ing/refrigeration equipment and chemicals business fields. In the air-conditioning and refrigeration equipment field, Daikin invested ¥22.0 billion, centered on research and development and rationalization of room air conditioners and package air conditioners. At Goodman Global Group, Inc., investments of ¥11.7 billion were made primarily to increase capacity and to attain rationalization objectives. In the chemicals field, the Daikin Group invested ¥7.2 billion, mainly to increase capacity and meet rationalization objectives. In addition, Daikin Fluorochemicals (China) Co., Ltd. made investments of ¥2.3 billion for increasing capacity. Total Share holders’ Equity and Shareholders’ Equity Ratio Free Cash Flow Capital Investment and Depreciation and Amortization (¥ billion) 1,500 1,000 500 0 (%) 60 40 20 0 (¥ billion) 150 100 50 0 (¥ billion) 120 90 60 30 0 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 Shareholders’ equity Shareholders’ equity ratio Capital investment Depreciation and amortization (excluding amortization of goodwill) 39 Daikin Industries, Ltd. Annual Report 2018 Financial Review The main sources of funds for these investments were bank borrowings • Air-Conditioning and Refrigeration Equipment and retained earnings. Note that the Daikin Group did not make any major R&D expenses for air-conditioning and refrigeration equipment operations disacquisitions of equipment or facilities during the fiscal year under review. totaled ¥54.1 billion. R&D Expenses Daikin’s wall-mounted-type Urusara 7, which is for residential use, fea- tures a pleasant airflow control system and has been well received by cus- In view of the rising concern about global warming on a worldwide scale tomers. Urusara 7 limits direct airflows to the people in the room when the and issues related to energy, the Daikin Group engages in leading-edge unit is set on cooling and provides circulating airflows instead, but when the research and development programs designed to proactively contribute to unit is in heating mode, it allows direct airflows. Also, in cooling mode, the resolution of global environmental issues, while also expanding the Urusara 7’s “premium air conditioning” provides for control of both tem- Group’s business operations. In 2015, the Group established its Technology perature and humidity. To realize the Urusara 7 pleasant ambient space as and Innovation Center (TIC), which is the core facility for the technology and quickly as possible after the unit is turned on, Daikin has further perfected its product development of the Group. This center has the role of conducting system for regulating the compressor and the airflow, and, when in cooling research and development on cutting-edge technologies as well as basic mode, the time required to reach the pleasant space is reduced by 40%. technologies. Through its activities, the TIC works to develop and provide In addition, along with the trends toward more diverse and individualistic customers with new value-added and differentiated products by combining interiors as well as the installation of larger indoor air-conditioner units and now only expertise within the Group but also the world’s wisdom, including use of front-cover plastics that are difficult to harmonize with interiors, that of industries, academia, and the government. Furthermore, the Group is Daikin launched its “Risora” air conditioner in March 2018. This new model working to strengthen the development functions of Daikin’s global loca- is only 185mm thick and is the thinnest of the indoor units available on the tions, including Europe and China, and using new technologies created by market, while also satisfying energy conservation standards and being in R&D departments in Japan, and seeks to develop products that suit local keeping with interior decorating requirements. The “Risora” also incorporates needs around the world. Also, in 2016, Daikin established a technology the Urusara 7 comfortable ambience features previously mentioned. office in Silicon Valley, where the latest technologies are concentrated. In the field of equipment for residential use, accompanying the trends Through these various activities, Daikin is working to substantially increase toward demographic aging of the population and wider usage of air-condi- the efficiency and speed of research and development to produce differenti- tioning units in the home, attention has focused on the wide difference ated products around the world. between temperatures in living quarters and other parts of the house, such In fiscal 2018, R&D expenses included in the cost of goods sold and as washstands and corridors. This increased attention has been due to the SG&A expenses amounted to ¥62.1 billion. possibility of “heat shock” that may result when home residents move from one household area to another and encounter wide differences in tempera- tures. To respond to this emerging need, Daikin introduced its “Cocotas” ROE （%） 16 12 8 4 0 ROA （%） 8 6 4 2 0 Research and Development Expenses (¥ billion) 80 60 40 20 0 40 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 units in February 2018. These units are the smallest multi-cassette type air for use in the Middle East in May 2017. Also, in January 2018, Daikin devel- conditioner and can be installed in relatively small spaces. Compared with oped and introduced optional equipment (for marine and recovery applica- previous cassette types that are installed in the ceiling, the front panel has tions) for the high-efficiency inverter screw chillers it launched in 2017 and been reduced in size by about 68% to create a compact unit. Moreover, in equipment for use in the rapidly expanding HFO coolant applications. response to increasing diversity in lifestyles, spaces in the home that were Besides these launches, to respond to the issuance of more-stringent regula- not really comfortable before become more livable through the installation tions (for eco-design), in 2018, Daikin worked to develop more-efficient of “Cocotas” units, and these units enable residents to create more individu- mini-chiller scroll chillers and chillers that remove cold and warm water to alistic living spaces based on their own original ideas. meet heat recovery demands. In China, new GB restrictions were issued for In the commercial-use air-conditioner business, to meet the need for shop chiller performance, and along with the change in standards, Daikin intro- and office multi-air conditioners that can be installed in more-crowded sites duced model changes to improve performance of existing single stage com- built on small plots of land, Daikin introduced new units meeting these pressors (WSC). needs in April 2017. These units are lighter and more compact, making them easier to bring to the site and install, and they adopt lateral blowoff for • Chemicals improved ventilation in close quarters. As result of these features, these units R&D expenses for Chemicals operations totaled ¥6.2 billion. can reduce the space needed for installation by up to 58%. These units are Daikin conducts R&D for new products and new applications based on its available in a wide range of sizes, ranging from 4 to 12 horsepower, and can rich experience in fluorine products and fluorochemical technology. In the be used in a wide range of building types, with all units in one building con- fluoropolymer resin and fluororubber fields, fluorochemicals exhibit good nected to a single multi-air conditioner and each unit operated separately. In heat resistance, low drug reactivity, and dielectric properties. Using these addition, Daikin newly introduced the “FIVE STAR ZEAS” air conditioner that properties Daikin is developing new differentiated products for automotive, can be used simultaneously in shops and office locations. Also, to increase semiconductor, wire and cable (IT field), and other applications. In coating convenience for all participants in the supply/usage chain, from users to materials development, Daikin makes use of the non-adhesive and chemical installation personnel, Daikin has introduced an “intuitive remote control resistant properties of fluoride-based substances and develops water and oil unit.” Along with the development of air conditioners that create more-com- repellent textile treatment materials, non-adhesive materials for use in keep- fortable spaces, are more energy conserving, and are more convenient to ing touch screens clean, as well as carpet treatment materials. In addition, use, remote control units have become more complex. Daikin has reviewed Daikin engages in a wide range of fluoride-related R&D and has, for exam- its remote control units and made them easier to use for seniors and for for- ple, received an order for a project to develop intermediate materials for eign visitors to Japan. In the field of multi-air conditioner units used indoors, medical use and is continuing the development of next-generation coolants Daikin has also begun to offer “multi-cube” air-conditioners units for use in to meet environmental restrictions. providing comfortable workspaces for personnel in factories and other work- In addition to these developments, as part of R&D in peripheral areas places. By installing large propeller fans in cube-type compact indoor units, aimed at developing new techniques and applications, Daikin is working on Daikin makes it possible to control airflow output temperatures when the the development of film process products and multilayered materials and units are operated in air-conditioning mode. This makes it possible to control conducts advanced materials research related to the medical, optical, envi- air-conditioning effectiveness for individuals on a spot basis. With this sys- ronmental, electric power battery, and energy areas. Through these initia- tem, it is also possible to turn individual units on and off, thus eliminating tives, Daikin is endeavoring to further develop its position as the No. 1 wasted operation time and restraining electric power losses. Also, with the fluorochemical solutions provider. Especially, in the next-generation power use of long piping, it has become possible to re-layout large spaces as semiconductor field, using its original fluoropolymer resins, Daikin has devel- desired. The “multi-cube” system makes it possible to eliminate the installa- oped new materials that find application in the film condenser field that tion of ducts that were previously used for air-conditioning purposes on fac- have five times the conductivity ratios of polypropylene-based materials. By tory work lines. This makes it possible to make changes in production line furthering and accelerating its R&D, the TIC, which has the mission of new configurations more flexibly. product development in Daikin’s Chemicals business, is seeking to develop Recent developments in the applied equipment have included the follow- technologies that will lead on next-generation themes. Also, in Southeast ing. In North America, in June 2017, Daikin launched its air-handling units Asia, where markets are expanding, Daikin has established Daikin Chemical for use in small spaces. In addition, in October 2017, Daikin introduced a Southeast Asia to provide marketing and technology support. This company high volume fan coil unit. Moreover, to respond to customer needs, Daikin is working to develop products that meet customer needs and accelerate the launched high-efficiency water cooled screw chillers in April 2017. In Europe, development of the customer base as well as work toward further expansion Daikin developed an inverter screw chiller for handling external atmosphere of Daikin’s fluorochemicals business. 41 Daikin Industries, Ltd. Annual Report 2018 Financial Review • Other Operations annual dividend of ¥140 per share (comprising an interim dividend of ¥70 R&D expenses for the Other operations totaled ¥1.8 billion. per share and a year-end dividend of ¥70 per share). In oil hydraulics, Daikin is drawing on the special features of its hybrid oil hydraulic systems technology, which combines oil hydraulic technology and Outlook for Fiscal 2019 inverter technology to realize energy conservation and high functionality that During fiscal 2019, ending March 31, 2019, our outlook is for continued could not be realized with previously existing hydraulic systems. In addition, economic expansion, centered around moderate growth in the United States. in Japan and overseas, besides the medium- to low- and small-volume mar- On the other hand, there is a possibility that rising geopolitical risk and kets, where usage is expanding, Daikin is also developing units for high-pres- growing protectionism will have an impact on the world economy and for- sure, high-volume applications. In the industrial press and other industrial eign currency markets. Therefore, we believe that uncertainty will continue machinery applications, Daikin’s “Super Unit” has won high acclaim for its going forward. Amid this economic environment, we will pass an interim low electric power consumption. It also contributes to improvement in the milestone in our medium- to long-term growth strategy under our FUSION workplace environment and reduction in the load on the environment 20 management plan. We will continue to aim to attain our quantitative because of its lower noise, reduced heat emission, and smaller tank size. goals for fiscal 2019, and, as we advance toward fiscal 2020 and draw on Moreover, Daikin has launched a large-scale extruder system that equals the results and positive impact of investment that have resulted from our ini- electric power as a motive force for its responsiveness and energy conserva- tiatives thus far. By taking the initiatives to overcome our rivals, we will con- tion. By expanding the lineup of units in this series to meet the special needs tinue to move ahead of the game and tackle new themes as we accelerate of countries in Asia and other regions for handling multiple voltages and our drive to implement structural reforms and improve profitability. other features, Daikin will promote the adoption of this system for presses In terms of specific policies, we will make strategic investments aimed at and other machines and move forward with sales expansion globally. reforming our business structure, and, in parallel with this, we will expand Also, Daikin is proceeding with the development of an energy conserva- sales in all regions globally and pursue total cost reduction. To overcome ris- tion system for use on special vehicles. One of these units, a hydraulic hybrid ing material costs and the negative impact of foreign currency fluctuations system for use on vehicles, has already been adopted. In addition to conven- we will maintain the upward trends in sales and income as we set a course tional hydraulic systems, Daikin is proceeding with the development of for further growth and development in the medium-to-long term. advanced environmentally responsive products that go beyond existing For the fiscal year ending March 31, 2019, we are forecasting an 8.3% frameworks and will find applications globally. increase in consolidated net sales, to ¥2,480.0 billion, with operating income In defense systems, Daikin conducts R&D related to artillery shell and rising 6.4%, to ¥270.0 billion, and net income attributable to owners of the guided missiles components, mainly for Japan’s Ministry of Defense. parent company decreasing 4.8%, to ¥180.0 billion. The estimated exchange rates for the fiscal year are ¥105 to US$1 and ¥130 to 1. Dividend Policy and Dividends Applicable to the Fiscal Year Daikin will continue to make strategic investments and expand its business, Principal Risks Associated while also proceeding with such structural reforms as those to promote com- with the Daikin Group’s Operations prehensive cost reductions and strengthen its financial position. The aim of Sharp changes in politico-economic conditions these initiatives is to become a truly global excellent company and, at the or supply-demand relationships in principal markets same time, substantially increase its corporate value. The Group develops, manufactures, sells, and procures goods and services Specifically, in accordance with its fundamental goal of providing a stable throughout the world, and there is a possibility that Group performance and continuous return to shareholders, Daikin is striving to keep its consoli- could be impacted due to changes in the business environment in the mar- dated ratio of dividends on equity (DOE) at levels of 3% or higher while also kets or regions in which the Group operates, such as political or economic seeking to increase its consolidated dividend payout ratio and thereby fur- trends, the introduction of more-stringent environmental regulations, ther expand shareholder returns. increased competition from competitors, or sudden rises in the cost of raw Internal reserves will be applied to strengthen the Daikin Group’s business materials. In addition, Daikin is attempting to further expand its manufactur- and financial position to accelerate the development of global business, fur- ing and sales network and enhance Groupwide profitability through invest- ther the development of environmentally friendly products, make strategic ment such as the acquiring of air-conditioning equipment dealers or investments to expand business activities, and strengthen competitiveness. companies, such as the Goodman Global Group, Inc. (completed in 2012), For the fiscal year ended March 31, 2018, Daikin increased its total cash div- and the establishment of manufacturing facilities. However, there is a possi- idend by ¥10 per share, to ¥140 per share (comprising an interim dividend bility that the Group’s performance could be impacted, depending on the of ¥65 per share and a year-end dividend of ¥75 per share). For the current state of progress of such activities. fiscal year, ending March 31, 2019, the Company plans to distribute a total 42 Cold summer weather and other unusual weather patterns Major problems in manufacturing accompanied by changes in demand for air conditioners The Group strives to implement thorough preventative maintenance mea- Air-conditioning and refrigeration operations accounted for 89.6% of the sures at all its production facilities, regardless of whether they are in Japan Daikin Group’s consolidated net sales in fiscal 2018. Therefore, the Group or overseas. In addition, particularly with respect to the Chemicals business, strives to accurately monitor weather information and weather-related the Group is working to strengthen its facility safety audits, security manage- demand trends in the world’s principal markets. It also employs flexible man- ment systems, and other related systems. Moreover, with respect to manufac- ufacturing methods and marketing policies designed to minimize the impact turing problems, the Group has purchased insurance to cover facility damage of those demand trends on its performance. However, depending on the and foregone earnings, but, in the case that a major problem were to occur magnitude of demand changes resulting from cold summer weather or other in manufacturing operations, there is a possibility that it could have an unusual weather patterns, there is a possibility that the Group’s performance impact on the Group’s performance. could be impacted. Major changes in the market prices of securities Large fluctuations in currency exchange rates and other assets Overseas sales accounted for 76.3% of the Daikin Group’s consolidated net The Group’s holdings of securities are primarily holdings designed to sales in fiscal 2018. The acceleration of global business development going strengthen collaborative business expansion measures in cooperation with forward is expected to further elevate this overseas sales ratio. Consolidated business partners and to strengthen relationships with business partners. financial statements are prepared by translating local currency-denominated However, in the case of large fluctuations in securities markets, bankruptcies items for Group operations in each global region, including sales, expenses, of business partners, and similar situations, there is a possibility that it could and assets. Accordingly, depending on currency exchange rates at the time of have an impact on the Group’s performance. the currency translation, there may be an impact on yen translation values even when there has been no change in local currency-denominated figures. Impairment of long-lived assets In addition, because the Group engages in foreign currency-denominated In connection with its business assets, goodwill generated on the occasion transactions in raw materials and component procurement and in the sale of of corporate acquisitions, and similar items, the Group records various types goods and services, there is a possibility that changes in currency exchange of tangible and intangible long-lived assets. With respect to these assets, in rates could impact manufacturing costs and sales performance. To avoid such cases going forward when such factors as performance trends and market currency exchange rate-related risks, the Group undertakes short-term risk price drops prevent the generation of expected cash flows, there may be hedging via forward exchange contracts and similar instruments. Daikin cases in which the assets in question may require impairment treatment. also undertakes medium- to long-term measures to continuously adjust In the case of such impairment of long-lived assets, there is a possibility procurement and manufacturing operations and optimize them for changing that it could have an impact on the Group’s performance. currency exchange-rate trends, and to balance imports and exports in each currency. Through this, the Group works to realize a business structure that Natural disasters is not greatly impacted by changes in currency exchange rates. However, In the case that such natural disasters as major earthquakes and typhoons currency exchange rate-related risks cannot be completely avoided. 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 Major product quality claims Group’s performance. The Group strives to ensure thorough quality management for all its prod- ucts, regardless of whether they are manufactured in Japan or overseas. With respect to new product development, all four related elements—design, production technology, and purchasing units and suppliers—work in an integrated manner to concurrently move ahead with the collaborative development of process innovation measures, aiming to implement innovations related to quality, costs, and product development speed. The Group also has purchased liability insurance to cover unexpected quality- related claims, but, in the case that a major quality claim situation were to occur, there is a possibility that it could have an impact on the Group’s performance. 43 Daikin Industries, Ltd. Annual Report 2018Consolidated Balance Sheet Daikin Industries, Ltd. and Consolidated Subsidiaries March 31, 2018 ASSETS Current assets: Cash and cash equivalents (Notes 7 and 15) Trade receivables (Notes 6, 7 and 15): Notes Accounts Allowance for doubtful receivables Inventories (Note 3) Deferred tax assets (Note 11) 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 14) Construction in progress Total Accumulated depreciation Net property, plant and equipment Investments and other assets: Investment securities (Notes 4, 7 and 15) Investments in and advances to unconsolidated subsidiaries and associated companies Goodwill (Note 5) Customer relationships Other intangible assets Deferred tax assets (Note 11) Assets for retirement benefits (Note 8) Other assets Total investments and other assets Total See notes to consolidated financial statements. 44 Millions of Yen 2018 2017 ¥ 357,027 ¥ 344,094 62,764 338,401 (8,834) 387,226 32,518 68,710 51,154 317,907 (8,216) 358,303 35,786 60,857 1,237,812 1,159,885 42,997 346,768 555,628 183,591 4,063 34,014 37,589 335,654 515,027 167,119 4,610 29,592 1,167,061 1,089,591 (712,227) 454,834 (665,064) 424,527 221,251 24,184 309,282 130,851 75,926 2,941 14,735 18,138 179,206 20,260 330,876 135,774 70,314 5,048 13,034 17,225 797,308 771,737 ¥2,489,954 ¥2,356,149 LIABILITIES AND EQUITY Current liabilities: Short-term borrowings (Notes 7 and 15) Current portion of long-term debt (Notes 7 and 15) Current portion of long-term lease obligations (Note 14) Trade payables (Note 15): Notes Accounts Income taxes payable (Note 15) Deferred tax liabilities (Note 11) Provision for product warranties Accrued expenses (Note 6) Other current liabilities (Note 6) Total current liabilities Long-term liabilities: Long-term debt (Notes 7 and 15) Long-term lease obligations (Note 14) Liabilities for retirement benefits (Note 8) Deferred tax liabilities (Note 11) Other long-term liabilities Total long-term liabilities Commitments and contingent liabilities (Notes 14 and 16) Equity (Notes 9, 10 and 20): Common stock—authorized, 500,000,000 shares; issued 293,113,973 shares Capital surplus Stock acquisition rights Retained earnings Treasury stock, at cost: 677,039 shares in 2018 and 739,660 shares in 2017 Accumulated other comprehensive income (loss): Unrealized gains on available-for-sale securities Deferred gains (losses) on derivatives under hedge accounting Foreign currency translation adjustments Remeasurements of defined benefit plans Subtotal Noncontrolling interests Total equity Total Millions of Yen 2018 2017 ¥ 45,530 ¥ 57,699 76,989 1,499 13,890 170,101 21,496 27,399 48,009 122,057 103,760 630,730 77,178 1,798 8,971 164,176 27,770 23,769 49,751 108,279 107,286 626,677 421,051 463,292 9,302 10,551 70,108 23,890 9,463 11,940 87,994 21,174 534,902 593,863 85,032 84,389 1,511 987,547 (2,894) 74,586 728 72,834 (5,669) 85,032 84,545 1,080 837,968 (3,160) 53,042 (120) 61,037 (6,708) 1,298,064 1,112,716 26,258 22,893 1,324,322 1,135,609 ¥2,489,954 ¥2,356,149 45 Daikin Industries, Ltd. Annual Report 2018 Consolidated Statement of Income Daikin Industries, Ltd. and Consolidated Subsidiaries Year Ended March 31, 2018 Net sales (Note 6) Cost of sales (Note 13) Gross profit Selling, general and administrative expenses (Notes 5, 6 and 13) Operating income Other (expenses) income: Interest and dividend income Interest expense Equity in earnings of associated companies Exchange (losses) gains Gains on sales of land Losses on disposals of property, plant and equipment and other intangible assets Gains on sales of investment securities (Note 4) Impairment losses on investment securities (Notes 4 and 15) Loss on restructuring of a subsidiary Other—net Other expenses—net Income before income taxes Income taxes (Note 11): Current Deferred Total income taxes Net income Net income attributable to noncontrolling interests Net income attributable to owners of the parent Amounts per common share (Note 18): Basic net income Diluted net income Cash dividends applicable to the year See notes to consolidated financial statements. Millions of Yen 2018 2017 ¥2,290,561 ¥2,043,969 1,491,732 1,313,034 798,829 545,089 253,740 11,284 (10,656) 2,547 (1,675) 33 (496) 223 (1) (2,919) (223) (1,883) 730,935 500,166 230,769 10,431 (9,910) 920 330 452 (927) 25 (1,481) (160) 251,857 230,609 77,158 (20,250) 56,908 194,949 (5,897) 70,217 471 70,688 159,921 (5,982) ¥ 189,052 ¥ 153,939 Yen ¥646.53 646.08 140.00 ¥526.81 526.43 130.00 46 Consolidated Statement of Comprehensive Income Daikin Industries, Ltd. and Consolidated Subsidiaries Year Ended March 31, 2018 Net income Other comprehensive income (loss) (Note 17): Unrealized gains on available-for-sale securities Deferred gains on derivatives under hedge accounting Foreign currency translation adjustments Remeasurements of defined benefit plans Share of other comprehensive income (loss) in affiliates accounted for using the equity method Total other comprehensive income (loss) Millions of Yen 2018 2017 ¥194,949 ¥159,921 21,543 848 11,673 1,043 560 35,667 6,721 2,004 (32,609) 1,448 (1,142) (23,578) Comprehensive income ¥230,616 ¥136,343 Total comprehensive income attributable to: Owners of the parent Noncontrolling interests See notes to consolidated financial statements. ¥224,280 ¥131,348 6,336 4,995 Consolidated Statement of Changes in Equity Daikin Industries, Ltd. and Consolidated Subsidiaries Year Ended March 31, 2018 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 Gains on Available- for-Sale Securities Deferred Gains (Losses) on Derivatives under Hedge Accounting Foreign Currency Translation Adjustments Remeasure- ments of Defined Benefit Plans Total Noncontrol ling Interests Total Equity Balance, April 1, 2016 292,038,617 ¥85,032 ¥83,585 ¥1,119 ¥720,548 ¥(4,598) ¥46,320 ¥(2,124) ¥93,798 ¥(8,152) ¥1,015,528 ¥21,942 ¥1,037,470 Net income Cash dividends, ¥130 per share Repurchase of treasury stock Disposal of treasury stock Net change in the year 153,939 (36,519) (304) 336,000 960 (3) 1,441 153,939 (36,519) (3) 2,401 153,939 (36,519) (3) 2,401 (39) 6,722 2,004 (32,761) 1,444 (22,630) 951 (21,679) Balance, March 31, 2017 292,374,313 85,032 84,545 1,080 837,968 (3,160) 53,042 (120) 61,037 (6,708) 1,112,716 22,893 1,135,609 Net income Cash dividends, ¥140 per share Repurchase of treasury stock Disposal of treasury stock Change in parent’s ownership interest due to transactions with noncontrolling interests Net change in the year (379) 63,000 174 (330) 189,052 (39,473) (4) 270 189,052 (39,473) (4) 444 (330) 189,052 (39,473) (4) 444 (330) 431 21,544 848 11,797 1,039 35,659 3,365 39,024 Balance, March 31, 2018 292,436,934 ¥85,032 ¥84,389 ¥1,511 ¥987,547 ¥(2,894) ¥74,586 ¥ 728 ¥72,834 ¥(5,669) ¥1,298,064 ¥26,258 ¥1,324,322 See notes to consolidated financial statements. 47 Daikin Industries, Ltd. Annual Report 2018 Consolidated Statement of Cash Flows Daikin Industries, Ltd. and Consolidated Subsidiaries Year Ended March 31, 2018 Operating activities: Income before income taxes Adjustments for: Income taxes—paid Depreciation and amortization 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 associated companies Changes in assets and liabilities, net of effects of the purchase of subsidiaries: Trade notes and accounts receivable Inventories Other current assets Assets for retirement benefits Trade notes and accounts payable Accrued expenses Other current liabilities Liabilities for retirement benefits Other—net Total adjustments Net cash provided by operating activities Investing activities: Payments for purchases of property, plant and equipment Proceeds from sales of property, plant and equipment Payments for acquisition of newly consolidated subsidiaries, net of cash and cash equivalents acquired (Note 12) Proceed from sales of shares of subsidiary resulting in change in the scope of consolidation Increase in investments in and advances to an unconsolidated subsidiary and associated companies Decrease in investment in and advances to an associated company Payments for transfer of business Proceed from transfer of business Payments for acquisition of investment securities Proceeds from sales of investment securities (Note 4) Other—net Net cash used in investing activities Financing activities: Net decrease in short-term borrowings Proceeds from long-term debt Repayments of long-term debt (Note 12) Cash dividends paid to owners of the parent Cash dividends paid to noncontrolling interests Proceeds from issuance of shares to noncontrolling 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 Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year See notes to consolidated financial statements. 48 Millions of Yen 2018 2017 ¥251,857 ¥230,609 (83,239) 94,834 (223) 1 496 (2,547) (23,214) (26,537) (9,250) (1,907) 4,399 11,787 (6,170) (1,964) 15,417 (28,117) 223,740 (85,680) 2,393 (25,332) (2,980) 1,517 369 (12,481) 1,094 (6,359) (127,459) (14,337) 45,181 (77,180) (39,473) (5,413) (2,733) (93,955) 10,607 12,933 344,094 ¥357,027 (55,253) 85,029 (25) 927 (920) (13,440) (23,384) 364 (1,333) 14,406 8,940 16,432 1,289 4,022 37,054 267,663 (88,335) 2,253 (32,998) 705 (1,508) (1,870) (165) 46 (6,951) (128,823) (1,243) 60,295 (91,263) (36,519) (4,265) 233 (782) (73,544) (12,408) 52,888 291,206 ¥344,094 Notes to Consolidated Financial Statements Daikin Industries, Ltd. and Consolidated Subsidiaries Year Ended March 31, 2018 1. BASIS OF PRESENTATION OF 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 2017 consolidated financial statements to conform to the classification used in 2018. 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. 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 (“PITF”) 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 (Financial Accounting Standards Board Accounting Standards Codification) 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; and (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. 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 to be made to conform the associate’s accounting policies for similar transactions and events under similar circumstances to those of the parent company when the associate’s financial statements are used in applying the equity method unless it is impracticable to determine such adjustments. In addition, financial statements prepared by foreign associated companies in accordance with either IFRSs or generally accepted accounting principles in the United States of America (“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 equity through other comprehensive income; (c) expensing capitalized development costs of research and development; and (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. 49 Daikin Industries, Ltd. Annual Report 2018 d. Business Combinations - Business combinations are accounted for using the purchase method. Acquisition-related costs, such as advisory fees or professional fees, are accounted for as expenses in the periods in which the costs are incurred. 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. 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. 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 noncontrolling 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. Any difference between the fair value of the consideration received or paid and the amount by which the noncontrolling interest is adjusted is accounted for as capital surplus as long as the parent retains control over its subsidiary. e. Cash Equivalents - Cash equivalents are short-term investments that are readily convertible into cash and 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, 2018 and 2017. f. 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. g. 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. h. 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 5 to 15 years for machinery and equipment. The useful lives for lease assets are the terms of the respective leases. i. Asset Retirement Obligations - An asset retirement obligation is recorded for 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 the 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. j. 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. k. Leases - Finance lease transactions are capitalized by recognizing lease assets and lease obligations in the balance sheet. All other leases are accounted for as operating leases. 50 Notes to Consolidated Financial Statementsl. 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. m. 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 6 to 20 years. Intangible assets primarily include customer relationships. Customer relationships are amortized using the straight-line method over the estimated useful lives (mainly 30 years). n. 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. o. Employees’ Retirement Benefits - The Company and its consolidated domestic subsidiaries have non-contributory funded pension plans covering substantially all of their employees. Certain consolidated foreign subsidiaries have pension plans. The Company accounts for the liability for retirement benefits based on the projected benefit obligations and plan assets at the balance sheet date. The projected benefit obligations are attributed to periods on a benefit formula basis. 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 are recognized in profit or loss over certain periods (mainly 10 years) no longer than the expected average remaining service period of the employees. The discount rate is determined using a single weighted-average discount rate reflecting the estimated timing and amount of benefit payment. p. Stock Options - The cost of employee stock options is measured based on the fair value at the date of grant and recognized as 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 options of the goods or services received. In the consolidated balance sheet, the stock options are presented as a stock acquisition right as a separate component of equity until exercised. q. 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. r. 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. s. 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. t. Income Taxes - The provision for current income taxes is computed based on income before income taxes 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. 51 Daikin Industries, Ltd. Annual Report 2018u. 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 futures 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. v. Amounts Per Common Share - Basic net income per common share is computed by dividing net income attributable 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 fiscal years including dividends to be paid after the end of year. w. New Accounting Pronouncements Revenue Recognition - On March 30, 2018, the ASBJ issued ASBJ Statement No. 29, “Accounting Standard for Revenue Recognition,” and ASBJ Guidance No. 30, “Implementation Guidance on Accounting Standard for Revenue Recognition.” The core principle of the standard and guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. An entity should recognize revenue in accordance with that core principle by applying the following steps: Step 1: Identify the contract(s) with a customer Step 2: Identify the performance obligations in the contract Step 3: Determine the transaction price Step 4: Allocate the transaction price to the performance obligations in the contract Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation The Group expects to apply the accounting standard and guidance for annual periods beginning on April 1, 2021, and is in the process of measuring the effects of applying the accounting standard and guidance in future applicable periods. Leases - On January 13, 2016, the International Accounting Standards Board issued IFRS 16 Leases. On February 25, 2016, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) 2016-02 Leases (Topic 842). These standards require lessees to recognize most leases on the balance sheet thereby resulting in the recognition of lease assets and liabilities. The consolidated foreign subsidiaries expect to apply IFRS 16 for annual periods beginning on or after January 1, 2019. The consolidated foreign subsidiaries expect to apply ASU 2016-02 for annual periods beginning after December 15, 2019 and for the first quarter within annual periods beginning after December 15, 2020. The Group is in the process of measuring the effects of applying the accounting standards in future applicable periods. 52 Notes to Consolidated Financial Statements3. INVENTORIES Inventories at March 31, 2018 and 2017 consisted of the following: Finished products and merchandise Semifinished products and work in process Raw materials and supplies Total Millions of Yen 2018 2017 ¥264,867 ¥249,487 45,199 77,160 42,250 66,566 ¥387,226 ¥358,303 4. MARKETABLE AND INVESTMENT SECURITIES The acquisition costs and aggregate fair values of marketable available-for-sale securities included in investment securities at March 31, 2018 and 2017 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 2018 Cost Unrealized Gains Unrealized Losses Fair Value ¥110,840 ¥101,665 ¥(1,346) ¥211,159 300 300 ¥111,140 ¥101,665 ¥(1,346) ¥211,459 Millions of Yen 2017 Cost Unrealized Gains Unrealized Losses Fair Value ¥99,121 ¥71,961 ¥(2,300) ¥168,782 325 1 326 ¥99,446 ¥71,962 ¥(2,300) ¥169,108 Available-for-sale securities that were sold during the years ended March 31, 2018 and 2017 were as follows: March 31, 2018 Available-for-sale: Equity securities March 31, 2017 Available-for-sale: Equity securities Millions of Yen Proceeds Realized Gains Realized Losses ¥938 ¥223 Millions of Yen Proceeds Realized Gains Realized Losses ¥40 ¥25 The impairment losses on marketable available-for-sale securities for the year ended March 31, 2018 were ¥1 million. No impairment loss was recognized for the year ended March 31, 2017. 5. GOODWILL Amortization expenses for goodwill were ¥28,180 million and ¥25,735 million for the years ended March 31, 2018 and 2017, respectively, which were included in selling, general and administrative expenses. 53 Daikin Industries, Ltd. Annual Report 2018 6. RELATED PARTY TRANSACTIONS Material transactions and balances with related parties for the years ended March 31, 2018 and 2017 were as follows: (1) 2018 (a) The Company Name Description of Post Chiyono Terada External Director/Chief Executive Officer (CEO) and President of Art Corporation (b) The Company’s consolidated subsidiaries Name Description of Post Ownership of the Company (%) 0.00 Ownership of the Company (%) Chiyono Terada External Director/CEO 0.00 and President of Art Corporation Millions of Yen Transactions Resulting Account Balances Description of Transaction Commissions for moving business and delivery business 2018 ¥470 Account Accrued expenses and other current liabilities 2018 ¥43 Millions of Yen Transactions Resulting Account Balances Description of Transaction Commissions for moving business and delivery business 2018 ¥ 60 Account Accrued expenses and other current liabilities 2018 ¥ 4 Sales of products 176 Accounts receivable 23 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) 2017 (a) The Company Name Description of Post Chiyono Terada External Director/Chief Executive Officer (CEO) and President of Art Corporation (b) The Company’s consolidated subsidiaries Name Description of Post Ownership of the Company (%) 0.00 Ownership of the Company (%) Chiyono Terada External Director/CEO 0.00 and President of Art Corporation Millions of Yen Transactions Resulting Account Balances Description of Transaction 2017 Account Commissions for moving business and delivery business ¥488 Accrued expenses and other current liabilities 2017 ¥47 Millions of Yen Transactions Resulting Account Balances Description of Transaction 2017 Account Commissions for moving business and delivery business ¥ 56 Accrued expenses and other current liabilities 2017 ¥ 5 Sales of products 143 Accounts receivable 22 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. 54 Notes to Consolidated Financial Statements7. SHORT-TERM BORROWINGS AND LONG-TERM DEBT Short-term borrowings of the Group at March 31, 2018 and 2017 consisted of the following: Bank overdrafts and notes to banks Millions of Yen 2018 2017 ¥45,530 ¥57,699 Unused short-term bank credit lines were ¥195,152 million at March 31, 2018. The weighted-average interest rates of bank overdrafts and notes to banks at March 31, 2018 and 2017 were 1.39% and 2.51%, respectively. Long-term debt at March 31, 2018 and 2017 consisted of the following: 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 0.21% unsecured bonds, due 2026 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 0.00% to 4.00% (2018) and from 0.00% to 4.00% (2017), due through 2026 Unsecured loans from banks and others with interest ranging from 0.12% to 3.74% (2018) and from 0.11% to 3.60% (2017), due through 2023 Total Less current portion Long-term debt, less current portion Annual maturities of long-term debt outstanding at March 31, 2018 were as follows: Year Ending March 31 2019 2020 2021 2022 2023 2024 and thereafter Total Millions of Yen 2018 ¥ 40,000 10,000 10,000 30,000 10,000 10,000 13,200 2017 ¥ 10,000 40,000 10,000 10,000 30,000 10,000 10,000 20,000 184,833 171,256 190,007 498,040 (76,989) 229,214 540,470 (77,178) ¥421,051 ¥463,292 Millions of Yen ¥ 76,989 91,510 93,296 62,203 138,311 35,731 ¥498,040 At March 31, 2018, time deposits with book values of ¥525 million were pledged as collateral without corresponding borrowings. Note receivables with book values of ¥3,066 million were pledged as collateral for note payables of ¥3,987 million. In addition, investment securities with book values of ¥800 million were pledged as collateral for the investee’s borrowings from financial institutions. As is customary in Japan, additional securities must be provided if requested by a lending bank. Certain banks have the right to offset cash deposited 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. 55 Daikin Industries, Ltd. Annual Report 20188. 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. 1. Defined benefit plans (1) The changes in defined benefit obligations for the years ended March 31, 2018 and 2017 were as follows (excluding the benefit plans for which the simplified method was applied): Balance at beginning of year Service cost Interest cost Net actuarial losses Past service cost Benefits paid Effect of changes in the scope of consolidation Foreign currency translation adjustments Others Balance at end of year Millions of Yen 2018 ¥ 99,159 4,965 1,127 7,451 (3) (5,177) 74 226 (36) 2017 ¥95,395 4,751 1,164 4,647 (3,752) 165 (3,205) (6) ¥107,786 ¥99,159 (2) The changes in plan assets for the years ended March 31, 2018 and 2017 were as follows (excluding the benefit plan for which the simplified method was applied): Balance at beginning of year Expected return on plan assets Net actuarial gains Contributions from the employer Benefits paid Effect of changes in the scope of consolidation Foreign currency translation adjustments Others Balance at end of year Millions of Yen 2018 2017 ¥102,957 ¥ 98,679 3,609 7,560 4,910 (4,569) 23 (14) 3,269 4,257 3,068 (3,342) (231) (2,726) (17) ¥114,476 ¥102,957 (3) The changes in defined benefit obligation for the years ended March 31, 2018 and 2017 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 2018 ¥2,703 901 (1,098) ¥2,506 2017 ¥2,726 1,196 (1,219) ¥2,703 56 Notes to Consolidated Financial Statements (4) Reconciliations between the liabilities recorded in the consolidated balance sheet and the balances of defined benefit obligation and plan assets at March 31, 2018 and 2017 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 2018 ¥(104,213) 114,476 10,263 (6,079) 2017 ¥ (95,868) 102,957 7,089 (5,995) Net amount of liabilities and assets recorded in the consolidated balance sheet ¥ 4,184 ¥ 1,094 Liabilities for retirement benefits Assets for retirement benefits Net amount of liabilities and assets recorded in the consolidated balance sheet ¥ (10,551) 14,735 ¥ 4,184 ¥ (11,940) 13,034 ¥ 1,094 (5) The components of net periodic benefit costs for the years ended March 31, 2018 and 2017 were as follows: Service cost Interest cost Expected return on plan assets Recognized net actuarial losses Amortization of past service cost Periodic benefit cost calculated by the simplified method Others Subtotal (net periodic benefit costs) Total Millions of Yen 2018 ¥4,965 1,127 (3,609) 2,061 (183) 901 4 5,266 ¥5,266 2017 ¥4,751 1,163 (3,269) 2,039 (144) 1,196 (4) 5,732 ¥5,732 (6) Amounts recognized in other comprehensive income (before income tax effect) in respect of defined benefit plans for the years ended March 31, 2018 and 2017 were as follows: Past service cost Net actuarial gains Total Millions of Yen 2018 ¥ 131 (1,723) ¥(1,592) 2017 ¥ 432 (2,826) ¥(2,394) (7) Amounts recognized in accumulated other comprehensive income (before income tax effect) in respect of defined benefit plans for the years ended March 31, 2018 and 2017 were as follows: Unrecognized past service cost Unrecognized net actuarial gains Total Millions of Yen 2018 ¥ (549) 7,894 ¥7,345 2017 ¥ (680) 9,617 ¥8,937 57 Daikin Industries, Ltd. Annual Report 2018(8) Plan assets (a) Components of plan assets Plan assets at March 31, 2018 and 2017, consisted of the following: Domestic debt securities Domestic equity securities Foreign debt securities Foreign equity securities Insurance assets (general account) Cash and deposits Alternative investments Total 2018 3% 9 29 17 18 1 23 2017 6% 8 22 20 17 1 26 100% 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, 2018 and 2017 were as follows: Discount rate Expected rate of return on plan assets Expected rate of future salary increases 2018 Mainly 0.3% Mainly 2.5% Mainly 3.5% 2017 Mainly 0.3% Mainly 2.5% Mainly 3.5% 2. Defined contribution plan The amounts of contribution required for the defined contribution plan paid by the Group was ¥5,855 million and ¥4,965 million for the years ended March 31, 2018 and 2017, respectively. 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 the normal two-year 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. (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. 9. EQUITY 58 Notes to Consolidated Financial Statements(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. 10. STOCK OPTIONS The stock options outstanding at March 31, 2018, were as follows: Number of Options Granted 300,000 shares Date of Grant Exercise Price Exercise Period 2012.7.13 ¥2,186 Stock Option 2012 Stock Option 2013 Stock Option 2014 Stock Option 2015 Stock Option 2016 Stock Option 2017 Stock Option Persons Granted 10 directors 41 employees 10 directors 38 employees 9 directors 45 employees 9 directors 46 employees 8 directors 53 employees 8 directors 53 employees 286,000 shares 2013.7.12 ¥4,500 310,000 shares 2014.7.14 ¥6,715 53,200 shares 2015.7.13 ¥ 1 58,100 shares 2016.7.14 ¥ 1 48,800 shares 2017.7.14 ¥ 1 From July 14, 2014 to July 13, 2018 From July 13, 2015 to July 12, 2019 From July 15, 2016 to July 14, 2020 From July 14, 2018 to July 13, 2030 From July 15, 2019 to July 14, 2031 From July 15, 2020 to July 14, 2032 59 Daikin Industries, Ltd. Annual Report 2018 The stock option activity was as follows: 2010 Stock Option 2011 Stock Option 2012 Stock Option 2013 Stock Option 2014 Stock Option 2015 Stock Option 2016 Stock Option 2017 Stock Option Shares Year Ended March 31, 2017 Vested April 1, 2016—Outstanding 6,000 20,000 36,000 108,000 310,000 53,200 Granted Exercised Canceled March 31, 2017—Outstanding Year Ended March 31, 2018 Vested April 1, 2017—Outstanding Granted Exercised Canceled (6,000) (20,000) (19,000) (76,000) (215,000) 58,100 17,000 32,000 95,000 53,200 58,100 17,000 32,000 95,000 53,200 58,100 48,800 (13,000) (5,000) (45,000) March 31, 2018—Outstanding 4,000 27,000 50,000 Exercise price ¥3,050 ¥ 2,970 ¥ 2,186 ¥ 4,500 ¥ 6,715 Average stock price at exercise ¥8,817 ¥10,512 ¥13,192 ¥11,564 ¥11,704 53,200 ¥ 1 58,100 ¥ 1 48,800 ¥ 1 Fair value price at grant date ¥1,113 ¥ 935 ¥ 676 ¥ 1,220 ¥ 1,697 ¥7,726 ¥7,859 ¥10,711 The assumptions used to measure the fair value of 2017 Stock Option Estimate method: Black-Scholes option-pricing model Volatility of stock price: 37.8% Estimated remaining outstanding period: 9 years Estimated dividend: Risk-free interest rate: ¥130 per share 0.1% 60 Notes to Consolidated Financial Statements11. 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 30.8% for the years ended March 31, 2018 and 2017. The tax effects of significant temporary differences and tax loss carryforwards that resulted in deferred tax assets and liabilities at March 31, 2018 and 2017 were as follows: Deferred tax assets: Inventories Provision for product warranties Tax loss carryforwards Software and other intangible assets Investment securities Accrued bonus Deferred revenue Liabilities for retirement benefits Allowance for doubtful receivables Foreign income tax credit Other Less valuation allowance Total deferred tax assets Deferred tax liabilities: Intangible assets Undistributed earnings of consolidated subsidiaries Unrealized gains 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 2018 2017 ¥ 13,833 11,832 ¥ 14,552 14,696 9,027 7,108 6,769 4,094 3,075 2,291 1,768 68 9,908 6,012 6,911 3,973 6,485 2,487 1,747 184 20,442 (14,537) 20,614 (16,728) ¥ 65,770 ¥ 70,841 ¥ 44,858 ¥ 69,574 37,534 25,943 4,721 1,742 13,020 33,483 16,727 4,216 1,375 16,395 ¥127,818 ¥ (62,048) ¥141,770 ¥ (70,929) A reconciliation between the normal effective statutory tax rate and the actual effective tax rate reflected in the accompanying consolidated statement of income for the year ended March 31, 2018 was as follows: Normal effective statutory income tax rate Impact from tax reform in the United States Differences in foreign subsidiaries’ tax rates Taxes and tax effects on dividends from foreign subsidiaries Amortization of goodwill Tax credit for research and development Valuation allowance Permanently non-taxable income, such as dividend income Permanently non-deductible expenses, such as entertainment expenses Other - net Actual effective income tax rate 2018 30.8% (7.7) (4.9) 4.6 3.2 (2.0) (0.9) (0.5) 0.5 (0.5) 22.6% 61 Daikin Industries, Ltd. Annual Report 2018  A reconciliation of the difference between the normal effective statutory tax rate and the actual effective tax rate is not disclosed since the difference is less than 5% of the normal effective statutory income tax rate for the year ended March 31, 2017. The Tax Cuts and Jobs Act was enacted in the United States on December 22, 2017 (local time), which mainly featured the reduction of federal income tax rates. In accordance with this change, deferred tax assets and deferred tax liabilities have been calculated using the legal effective tax rate based on the revised tax rates. As a result, deferred tax liabilities (net of deferred tax assets) and income taxes - deferred recorded in the year ended March 31, 2018 under review decreased by ¥18,660 million and ¥19,470 million, respectively. At March 31, 2018, the Company and certain consolidated subsidiaries had tax loss carryforwards aggregating ¥31,251 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 2019 2020 2021 2022 2023 2024 and thereafter Total Millions of Yen ¥ 357 787 476 697 706 28,228 ¥31,251 12. SUPPLEMENTAL CASH FLOW INFORMATION The Group acquired Flanders Holdings LLC and its subsidiaries during the year ended March 31, 2017. Reconciliation between cash paid for the equity interest of Flanders Holdings LLC and payment for the acquisition of these newly consolidated subsidiaries, net of cash and cash equivalents acquired, was as follows: Current assets Fixed assets Goodwill Current liabilities Long-term liabilities Cash paid for the equity interest Cash and cash equivalents of consolidated subsidiaries Payment for acquisition of equity interest of newly consolidated subsidiaries, net of cash and cash equivalents acquired Millions of Yen 2017 ¥11,880 27,501 18,991 (24,703) (10,382) 23,287 (834) ¥22,453 Repayments of long-term debt included ¥18,336 million for repayments of long-term debt by Flanders Holdings LLC and the other companies which the Group acquired for the year ended March 31, 2017. 13. RESEARCH AND DEVELOPMENT COSTS Research and development costs included in cost of sales and selling, general and administrative expenses were ¥62,051 million and ¥53,870 million for the years ended March 31, 2018 and 2017, respectively. 62 Notes to Consolidated Financial Statements14. 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, 2018 were as follows: Due within one year Due after one year Total 15. FINANCIAL INSTRUMENTS AND RELATED DISCLOSURES Millions of Yen Finance Leases ¥ 1,499 9,302 ¥10,801 Operating Leases ¥19,925 46,237 ¥66,162 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 not used 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 terms 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 papers 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 changes in interest rates, which are hedged by mainly using interest rate swaps. Derivatives mainly include forward foreign currency contracts, interest rate swaps and commodity futures contracts, which are used to manage exposure to market risks from changes in foreign currency exchange rates of receivables and payables, interest rates of bank loans, and 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. 63 Daikin Industries, Ltd. Annual Report 2018 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, 2018 Carrying Amount Fair Value Unrealized Loss ¥357,027 ¥357,027 401,165 211,459 ¥969,651 ¥183,991 45,530 21,496 498,040 ¥749,057 401,165 211,459 ¥969,651 ¥183,991 45,530 21,496 502,054 ¥753,071 ¥ (1,263) ¥ (1,263) Millions of Yen March 31, 2017 ¥4,014 ¥4,014 Carrying Amount Fair Value Unrealized Loss ¥344,094 ¥344,094 369,061 169,108 ¥882,263 ¥173,147 57,699 27,770 540,470 ¥799,086 ¥ (1,363) 369,061 169,108 ¥882,263 ¥173,147 57,699 27,770 546,631 ¥805,247 ¥ (1,363) ¥6,161 ¥6,161 Assets Cash and cash equivalents The carrying values of cash and cash equivalents approximate fair value because of their short maturities. Trade notes and accounts receivable The carrying values of trade notes and accounts receivable approximate fair value 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 4. 64 Notes to Consolidated Financial StatementsLiabilities Trade notes and accounts payable, short-term borrowings and income taxes payable The carrying values of trade notes and accounts payable, short-term borrowings and income taxes payable approximate fair value because of their short maturities. Long-term debt The fair values of bonds are determined at the quoted market 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. 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 ZAR CZK PLN HKD SGD MYR TRY BRL IDR PHP THB Buying: CNY Commodity futures contracts: Buying: Metal Millions of Yen March 31, 2018 Contract Amount Due after One Year Fair Value Unrealized Gain (Loss) ¥ (74) ¥ (74) (44) 573 245 (0) 0 (0) 42 19 (1) 61 1 59 6 0 15 (44) 573 245 (0) 0 (0) 42 19 (1) 61 1 59 6 0 15 Contract Amount ¥ 7,686 52,559 38,210 7,712 536 2,572 341 1,462 2,455 721 11,682 53 3,843 250 28 2,200 ¥12,067 ¥(383) ¥(383) 65 Daikin Industries, Ltd. Annual Report 2018 Forward exchange contracts: Selling: GBP EUR USD AUD ZAR CZK HKD SGD MYR TRY IDR INR Buying: CNY Commodity futures contracts: Buying: Metal Derivative transactions to which hedge accounting is applied Forward exchange contracts: Selling: GBP EUR USD ZAR CZK TRY Buying: CNY Interest rate swaps: Millions of Yen March 31, 2017 Contract Amount Due after One Year Fair Value Unrealized Gain (Loss) ¥ (31) ¥ (31) 158 431 21 6 27 24 16 (3) 2 (8) (37) 16 158 431 21 6 27 24 16 (3) 2 (8) (37) 16 Contract Amount ¥ 4,777 32,805 39,742 7,263 731 2,769 1,041 1,445 744 1,757 3,163 1,458 1,140 ¥ 2,699 ¥ 2 ¥ 2 Millions of Yen March 31, 2018 Contract Amount Due after One Year Fair Value ¥ (26) (15) 12 (32) (16) 38 35 Hedged Item Receivables Receivables Receivables Receivables Receivables Receivables Payables Contract Amount ¥ 4,540 38,638 3,910 536 5,221 1,781 8,122 Fixed-rate payment, floating-rate receipt Fixed-rate payment, floating-rate receipt* Long-term debt ¥196,864 ¥179,739 ¥(1,777) Long-term debt 98,000 63,000 66 Notes to Consolidated Financial Statements Forward exchange contracts: Selling: GBP EUR USD ZAR CZK PLN TRY Buying: CNY Interest rate swaps: Millions of Yen March 31, 2017 Contract Amount Due after One Year Fair Value ¥ (5) (276) 20 (10) 53 (30) 24 9 Hedged Item Receivables Receivables Receivables Receivables Receivables Receivables Receivables Payables Contract Amount ¥ 5,701 37,769 6,340 1,138 6,743 1,220 2,310 5,702 Fixed-rate payment, floating-rate receipt Fixed-rate payment, floating-rate receipt* Long-term debt ¥184,898 ¥171,996 ¥(1,773) Long-term debt 129,200 98,000 * 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 determinable Nonlisted equity securities Investments in limited partnerships and other investments Total Maturity analysis for financial assets and securities with contractual maturities Millions of Yen Carrying Amount 2018 ¥9,263 529 ¥9,792 2017 ¥ 9,413 685 ¥10,098 Cash and cash equivalents Trade notes and accounts receivable Investment securities: Available-for-sale securities with contractual maturities (corporate bonds) Total Cash and cash equivalents Trade notes and accounts receivable Investment securities: Millions of Yen March 31, 2018 Due after One Year through Five Years Due after Five Years through Ten Years Due after Ten Years ¥300 ¥300 Due in One Year or Less ¥357,027 401,166 ¥758,193 Millions of Yen March 31, 2017 Due in One Year or Less ¥344,094 369,032 Due after One Year through Five Years ¥29 Due after Five Years through Ten Years Due after Ten Years Available-for-sale securities with contractual maturities (corporate bonds) 25 Total ¥713,151 ¥29 Please see Note 7 for annual maturities of long-term debt. ¥300 ¥300 67 Daikin Industries, Ltd. Annual Report 2018 16. COMMITMENTS AND CONTINGENT LIABILITIES Commitments for capital expenditures outstanding at March 31, 2018 totaled approximately ¥5,786 million. At March 31, 2018, contingent liabilities for trade notes endorsed totaled ¥2,154 million. 17. COMPREHENSIVE INCOME The components of other comprehensive income (loss) for the years ended March 31, 2018 and 2017 were as follows: Unrealized gains on available-for-sale securities: Gains arising during the year Reclassification adjustments to profit or loss Amount before income tax effect Income tax effect Total Deferred gains on derivatives under hedge accounting: 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 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: Gains (losses) arising during the year Total other comprehensive income (loss) Millions of Yen 2018 2017 ¥30,981 ¥ 8,780 (223) 30,758 (9,215) (25) 8,755 (2,034) ¥21,543 ¥ 6,721 ¥ 1,850 ¥ 3,487 (598) 1,252 (404) (395) 3,092 (1,088) ¥ 848 ¥ 2,004 ¥11,612 ¥(32,921) 61 11,673 ¥11,673 312 (32,609) ¥(32,609) ¥ (286) ¥ 502 1,878 1,592 (549) 1,892 2,394 (946) ¥ 1,043 ¥ 1,448 ¥ 560 ¥ (1,142) ¥35,667 ¥(23,578) 68 Notes to Consolidated Financial Statements 18. NET INCOME PER SHARE Reconciliations of the differences between basic and diluted net income per share (EPS) for the years ended March 31, 2018 and 2017 were as follows: Year Ended March 31, 2018 Basic EPS: Millions of Yen Net Income Thousands of Shares Weighted- Average Shares Yen EPS Net income available to common shareholders ¥189,052 292,409 ¥646.53 Effect of dilutive securities: Stock options Diluted EPS: Net income for computation Year Ended March 31, 2017 Basic EPS: 204 ¥189,052 292,613 ¥646.08 Millions of Yen Net Income Thousands of Shares Weighted- Average Shares Yen EPS Net income available to common shareholders ¥153,939 292,208 ¥526.81 Effect of dilutive securities: Stock options Diluted EPS: Net income for computation 19. SEGMENT INFORMATION 214 ¥153,939 292,422 ¥526.43 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. 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.” 69 Daikin Industries, Ltd. Annual Report 2018 Total Segment profit Segment assets Other: Depreciation 3. Information about sales, profit, assets and other items Millions of Yen March 31, 2018 Reportable Segment Air Conditioning Chemicals Total Other Total Reconciliations Consolidated Sales: Sales to external customers ¥2,052,884 ¥183,147 ¥2,236,031 ¥54,530 ¥2,290,561 ¥2,290,561 Intersegment sales 586 15,388 15,974 428 16,402 ¥ (16,402) 2,053,470 198,535 2,252,005 54,958 2,306,963 (16,402) 2,290,561 223,463 25,511 248,974 4,757 253,731 9 253,740 1,995,203 216,884 2,212,087 37,625 2,249,712 240,242 2,489,954 Amortization of goodwill 28,148 32 28,180 28,180 ¥ 52,054 ¥ 12,988 ¥ 65,042 ¥ 1,605 ¥ 66,647 ¥ 66,647 28,180 Investment balance in unconsolidated subsidiaries and associated companies accounted for using the equity method Investment in property, plant and equipment and intangible assets 13,791 9,463 23,254 23,254 23,254 82,751 11,873 94,624 1,966 96,590 96,590 Millions of Yen March 31, 2017 Reportable Segment Air Conditioning Chemicals Total Other Total Reconciliations Consolidated Sales: Sales to external customers ¥1,835,377 ¥156,754 ¥1,992,131 ¥51,838 ¥2,043,969 ¥2,043,969 Intersegment sales 389 12,265 12,654 520 13,174 ¥ (13,174) 1,835,766 169,019 2,004,785 52,358 2,057,143 (13,174) 2,043,969 208,750 18,302 227,052 3,750 230,802 (33) 230,769 1,943,887 191,049 2,134,936 34,641 2,169,577 186,572 2,356,149 Total Segment profit Segment assets Other: Depreciation Amortization of goodwill 25,735 25,735 25,735 ¥ 46,057 ¥ 11,600 ¥ 57,657 ¥ 1,621 ¥ 59,278 ¥ 59,278 25,735 Investment balance in unconsolidated subsidiaries and associated companies accounted for using the equity method Investment in property, plant and equipment and intangible assets 11,596 6,709 18,305 18,305 18,305 76,389 12,552 88,941 1,404 90,345 90,345 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 ¥244,909 million and ¥190,001 million at March 31, 2018 and 2017, 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. . 70 Notes to Consolidated Financial Statements 4. Supplemental information (1) Information about geographical areas (a) Sales Japan USA China Millions of Yen March 31, 2018 Asia and Oceania Europe Other Consolidated ¥542,726 ¥551,819 ¥381,666 ¥349,190 ¥332,956 ¥132,204 ¥2,290,561 Japan USA China Millions of Yen March 31, 2017 Asia and Oceania Europe Other Consolidated ¥518,453 ¥503,489 ¥329,247 ¥303,417 ¥274,055 ¥115,308 ¥2,043,969 Note: Sales are classified by country or region based on the physical locations of customers. (b) Property, plant and equipment Japan USA China Millions of Yen March 31, 2018 Asia and Oceania Europe Other Consolidated ¥154,690 ¥123,080 ¥70,958 ¥57,418 ¥39,801 ¥8,887 ¥454,834 Japan USA China Millions of Yen March 31, 2017 Asia and Oceania Europe Other Consolidated ¥140,563 ¥128,484 ¥70,230 ¥43,093 ¥33,093 ¥9,064 ¥424,527 (2) Information about goodwill (a) Balance of goodwill by reportable segment Goodwill for each reportable segment at March 31, 2018 and 2017 was as follows: Goodwill Goodwill Millions of Yen 2018 Air Conditioning Chemicals Other ¥307,868 ¥1,414 Millions of Yen 2017 Air Conditioning ¥330,876 Chemicals Other Eliminations and Corporate Eliminations and Corporate Consolidated ¥309,282 Consolidated ¥330,876 22. SUBSEQUENT EVENTS Resolutions approved by the Company’s Board of Directors’ at the meeting held on May 9, 2018 are subject to approval at the general shareholders’ meeting planned to be held on June 28, 2018. Appropriations of Retained Earnings Payment of year-end cash dividends of ¥75 per share to shareholders at March 31, 2018, totaling ¥21,933 million is to be resolved. 71 Daikin Industries, Ltd. Annual Report 2018Independent Auditors’ Report 72 Corporate Data (As of March 31, 2018) Company Name Head Office Tokyo Office Daikin Industries, Ltd. 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 Number of Shares of Common Stock Issued ¥85,032 million 293,113 thousand Number of Shareholders 26,635 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. (Trust Account 5) • Japan Trustee Services Bank, Ltd. Retirement Benefit Trust Account for The Norinchukin Bank • The Bank of Tokyo-Mitsubishi UFJ, Ltd. • Japan Trustee Services Bank, Ltd. (Trust Account 4) • Government of Norway • State Street Bank West Client Treaty 505234 • State Street Bank and Trust Company Number of Subsidiaries and Affiliated Companies Subsidiaries: 269 Affiliates: 18 Number of Employees 70,263 (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 circum- stances, 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 Trends in Daikin’s Stock Price Daikin (¥) 16,000 16,000 12,000 12,000 8,000 8,000 4,000 4,000 0 0 TOPIX 4,000 4,000 3,000 3,000 2,000 2,000 1,000 1,000 0 0 Trading Volume (Thousands of shares) 80,000 80,000 4 4 7 7 10 10 1 1 4 4 7 7 10 10 1 1 4 4 7 7 10 10 1 1 4 4 7 7 10 10 1 1 4 4 7 7 10 10 1 1 4 4 7 7 10 10 2012 2012 2013 2013 2014 2014 2015 2015 2016 2016 2017 2017 60,000 60,000 40,000 40,000 20,000 20,000 0 0 1 1 3 3 2018 2018 73 Daikin Industries, Ltd. Annual Report 2018 A n n u a l R e p o r t 2 0 1 8 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.com 

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