Daikin Industries Ltd. Annual Report 2019

Plain-text annual report

Annual Report 2019 Fiscal Year Ended March 31, 2019 INTRODUCTION INTRODUCTION Daikin combines technical strengths with unique strategies to create new value and find solutions to social problems. Founded in 1924, Daikin has continued to expand with a focus on the Air-Conditioning and fluorochemicals businesses. We are the world’s only general air-conditioning equipment manufacturer with in-house divisions covering both air conditioning and refrigerants. Daikin has more than 100 production bases around the world, and conducts business in more than 150 countries and regions. Under its strategic management plan “FUSION 20,” Daikin achieved record high sales and operating income in fiscal 2019 for a sixth consecutive fiscal year. Looking ahead to the final year of this plan in fiscal 2021, we are expanding our business domains, strengthening existing businesses, and making proactive investments for the IoT and AI era, while also further accelerating measures to be an environmental leader and support the realization of a sustainable global society. By providing solutions to social problems and achieving business growth, Daikin is creating new value for the air and environmental fields, and enhancing its corporate value. CONTENTS CONTENTS Our Core Values/ Our Group Philosophy ............................... 1 A Path to Unique Solutions ....................... 2 Process of Value Creation .......................... 4 Financial Highlights .................................... 6 At a Glance ................................................. 7 Message from the CEO .............................. 8 Review of Operations Air Conditioning ...................................... 14 Chemicals ............................................... 18 Oil Hydraulics .......................................... 20 Defense ................................................... 21 Corporate Governance ............................. 22 Directors, Audit and Supervisory Board Members, and Executive Officers ............. 25 Interview with the CEO ............................ 10 CSR Management System ........................ 26 CSR (Corporate Social Responsibility) ..... 28 Financial Section Eleven-Year Financial Highlights ............... 36 Financial Review ...................................... 38 Consolidated Balance Sheet .................... 46 Consolidated Statement of Income .......... 48 Consolidated Statement of Comprehensive Income ......................... 49 Consolidated Statement of Changes in Equity ................................. 49 Consolidated Statement of Cash Flows .... 50 Notes to Consolidated Financial Statements .............................. 51 Independent Auditors’ Report ................. 75 Corporate Data ....................................... 76 Forward-Looking Statements This annual review contains statements regarding the future plans and strategies of Daikin Industries, Ltd. (the Company), as well as the Company’s future performance. These statements are not statements of past facts but are based on judgments made by the Company on the basis of information known at the time. Therefore, readers should refrain from drawing conclusions based only on these statements regarding the future performance of the Company. The actual future performance of the Company may be influenced by economic trends, strong competition in the industrial sectors where it conducts its operations, foreign currency exchange rates, and changes in taxation and other systems. For these reasons, these forward-looking statements are subject to latent risk and uncertainty. Our Core Values Absolute Credibility Enterprising Management Harmonious Personal Relations 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” Annual Report 2019 1 A Path to Unique Solutions A Path to Unique Solutions Founded in Osaka in 1924, Daikin operates in more than 150 countries worldwide, focusing on the Air- Conditioning business. By providing solutions to the problems society and communities are facing while achieving business growth, Daikin supports healthy and comfortable lifestyles. As a global corporation creating new value in the air and environmental fields, Daikin continually meets the expectations and trust of people throughout the world. Three Core Technologies Daikin has developed three advanced air-conditioning technologies that form the basis for next-generation technology. Heat Pump Absorbs and transfers heat from the air Inverter Contributes to greater energy saving and comfort Refrigerant Control Efficient heat transmission Business Scale (at March 31, 2019) Net Sales (Fiscal 2019) Employees (Consolidated) Group Companies Global Business Presence Worldwide Production Bases ¥2,481.1 billion 76,484 Consolidated Subsidiaries: 291 (Japan: 30, Non-Japan: 261) More than 150 Countries More than 100 Factories Business Results (at May 9, 2019) Net Sales Operating Income 538.8 42.0 FUSION 05 1925 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 1924 Founding of Osaka Kinzoku Kogyosho Limited Partnership Business and Technology Development 1935 Development of fluorocarbon refrigerant 1937 Development of Japan’s first Freon-type refrigerator 1942 Freon production begins 1951 Launch of Japan’s first packaged air conditioner 1958 Entry into the room air-conditioning business 1975 Launch of “Hikari Kurieru” air purifier 1982 1999 2002 Launch of Japan’s first multi-type air-conditioning system for buildings Launch of “Ururu Sarara” world’s first waterless humidifying room Nationwide expansion of the fluorocarbon recovery and destruction business 2002 Launch of “ECOCUTE” heat-pump water heater 2007 2008 Acquisition of OLY Group, a major global air- conditioning manufacturer Business alliance with Gree Electric Appliances, China’s top air-conditioning manufacturer Daikin’s Evolution and Strategies 2008 2011 2012 Acquisition of German heating manufacturer ROTEX Acquisition of Turkish air-conditioning manufacturer Airfel Acquisition of U.S. residential air-conditioning manufacturer Goodman 2 Daikin Industries, Ltd. FUSION 05 to 20 (Fiscal 2002 – Fiscal 2021) FUSION 05 FUSION 10 FUSION 15 FUSION 20 Be a Company that Attracts People, Capital, and Information Establish a position as the global No. 2 in mainstay businesses, and build a foundation for future growth, including reaching an aggregate market value of ¥1 trillion. Be the Global No.1 Air- conditioning Company (cid:129) Expand environment-related businesses (cid:129) Business alliances and tie-ups, M&A Be a Truly Global Excellent Company (cid:129) Full-fledged entry into emerging markets and volume zone products (cid:129) Solutions Business / Environment Innovation Business (cid:129) Accelerate growth through business alliances and tie-ups, M&A Strengthen Existing Businesses and Expand Business Domains 2,481.1 276.3 Operating Income (¥ billion) 300 2,290.6 253.7 Net Sales (¥ billion) 3,000 2,000 1,000 1,787.7 156.5 Acquisition of U.S. Acquisition of U.S. residential air-conditioning residential air-conditioning manufacturer Goodman manufacturer Goodman 1,291.1 128.1 Acquisition of Acquisition of OYL Group OYL Group Financial crisis Financial crisis 2014 – 2019 2014 – 2019 Achieved six consecutive years of record high sales Achieved six consecutive years of record high sales and operating income and operating income 14 consecutive years of 14 consecutive years of increased earnings starting in 1995 increased earnings starting in 1995 Achieved nine consecutive years of increases Achieved nine consecutive years of increases in net sales and operating income from 2011 in net sales and operating income from 2011 FUSION 10 FUSION 15 FUSION 20 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Plan 2004 2005 2006 2007 2009 World’s first successful application of streamer electric discharge technology Opening of China’s first dedicated showroom for large- scale air conditioners Launch in Europe of “Daikin Altherma” air-to-water heat pump system Launch of “DESICA” world’s first humidity control air conditioner without water drainage or supply pipes Establishment of the Daikin McQuay Applied Development Center in the U.S. 2010 Establishment of the Shanghai R&D Center 2011 Opening of the Solution Plaza Fuha Tokyo 2012 Launch of “Urusara 7” world’s first residential air conditioner using new R32 refrigerant 2013 Opening of the Solution Plaza Fuha Osaka 2014 Launch of cooling-only inverter air conditioners for developing countries 2015 Establishment of Technology Innovation Center 2015 Granting of worldwide free access to basic patents for using R32 refrigerant 2016 Acquisition of U.S. filter manufacturer Flanders 2016 Acquisition of Scandinavian filter manufacturer Dinair 2017 Establishment of Daikin Texas Technology Park, new Goodman factory in U.S. 2016 Acquisition of Italian refrigerator/freezer manufacturer Zanotti Annual Report 2019 3 250 200 150 100 50 0 (Years Ended March 31) Process of Value Creation Process of Value Creation Through efforts to find solutions to social problems through our business, Daikin provides new value, and aims for sustainable growth. Global society is continually changing, and directly faces many problems related to climate change and other issues. Through its business, Daikin Group provides society with new value, and by contributing to the realization of a sustainable society, seeks growth for itself as well. Social Problems Daikin Can Help Solve INPUT Daikin Group’s Business Activities Financial Capital (cid:129) Stable and sound financial structure (cid:129) Proactive R&D investment Manufactured Capital (cid:129) Optimal market-oriented production and development structure (cid:129) PDS manufacturing style for multiproduct mixed production (cid:129) Efficient production structure utilizing module manufacturing lines (cid:129) Building of digital factories (cid:129) Advancement in “small-scale monozukuri” Intellectual Capital (cid:129) Heat pump, inverter, refrigerant control technologies (cid:129) Development centers in 25 locations worldwide Human Capital (cid:129) Diverse workforce (cid:129) Local and integrated business operations (cid:129) Global human resource development (cid:129) Human asset diversity Social and Relationship Capital (cid:129) Sales and service network (cid:129) Proactive collaboration with industry, government and academia (cid:129) Trust and brand (cid:129) Well-established relationships with stakeholders Natural Capital (cid:129) Optimal energy utilization (cid:129) Environmental resources related to business activities (cid:129) Materials, water, energy, electricity Daikin aims to be a corporate group that creates new value in the air and environment fields. Air Condnditiiti oning CCheemicals Filters OtOtheher (Oil hhydrdraulics, Defennse, electrononics)s) After-sales Service, Recovery, Recycling Recovery and recycling of refrigerants Usage Reduce environmental loads Enhance quality of life Improve interior environments Strategy FUSION Sales, Transportation, Installation Address environmental issues such as refrigerant leakage Training for all employees and sales offices worldwide ES Intensification of climate change Expansion and concentration of energy and power demand Worsening of air pollution 4 Daikin Industries, Ltd. OUTPUT (Fiscal 2019) Daikin’s Aims for Value Creation (cid:2) Environmentally conscious products Procurement Mitigate procurement risks across the entire global supply chain (cid:2) Energy service solutions (cid:2) IAQ/Air Environment Engineering (cid:2) Expansion into next-generation automotive field (cid:2) Development of Development, Design Superior comfort and environmental performance Product development to meet local needs 20 composite materials (cid:2) Development of new refrigerants (cid:2) Air filter business (cid:2) Power and industrial (P&I) business (cid:2) IAQ products utilizing synergies from air- conditioning and chemicals Manufacturing Improve production efficiency and manufacturing quality Reduce environmental loads (cid:2) Range of energy- efficient oil hydraulic equipment (cid:2) New business in fields with private demand (cid:2) Visual R&D systems G (cid:2) Pursue CSR Management Net sales ¥2.48 trillion Operating income margin 11.1% Equity ratio 52.4% ROE 13.9% Free cash flow (FCF) ¥84.2 billion Environmentally conscious products as percentage of sales (residential air conditioners) 93% Ratio of highly skilled engineers 1 in 2.9 (Daikin Industries only) No. of patent applications More than 1,300 (Fiscal 2018, Daikin Industries only) No. of female managers 59 (Daikin Industries only) Ratio of non-Japanese subsidiaries with local nationals as president 46% Customer satisfaction (Base year = 1.00) Japan = 1.13 (Compared to Fiscal 2016) Reduction in greenhouse gas emissions due to adoption of environmentally conscious products 67 million tonnes of CO2 Reduction in greenhouse gas emissions from production/ development stage 75% reduction (compared to Fiscal 2006) Reduction in CO2 emissions due to forest conservation 7 million tonnes of CO2 Provide new value that makes peo- ple and space healthier and more comfortable while at the same time reducing environmental impact. Value Creation for the Earth Reduce environmental impact through all business activities and contribute alleviat- ing climate change Value Creation for Cities Contributing to solving energy-related issues arising from urbanization and con- tribute to the creation of sustainable cities Value Creation for People Pursue new possibilities for air and con- tribute to healthy, comfortable lifestyles Human Resource Development Supports Value Creation Foster human resources who spur innovation and who spread newly created value around the world. Contribute to the growth of employees and local citizens (cid:129) Training of highly skilled personnel (cid:129) Job creation (cid:129) Contribution to local economic development (cid:129) Creation of new products and services that help raise people’s lifestyles Sustainable Development Goals (SDGs) Daikin is Contributing to 6 of the 17 Sustainable Devel- opment Goals Daikin is Contrib- uting to through Its Business Ensure healthy lives and pro- mote well-being for all at all ages Prevention of heatstroke and infectious diseases, measures against air pollution, increase in productivity, etc. Ensure access to affordable, reliable, sustainable and modern energy for all Increase in energy efficiency, use and spread of renewable energy, etc. Build resilient infrastructure, promote sustainable industri- alization and foster innovation ZEB (net-zero energy buildings) initiatives, promotion of energy management and demand response, etc. Ensure sustainable consump- tion and production patterns Initiatives for energy efficiency during production, recycling, resource efficiency, etc. Take urgent action to combat climate change and its impacts Spread of inverter products, refrigerants with lower global warming potential, and heat pump products Annual Report 2019 5 Financial Highlights 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 1) Net cash used in financing activities Financial Position (at year-end): Total assets Total shareholders’ equity Per Share Data (yen): Net income (basic) Shareholders’ equity Cash dividends Cash flow per share Ratios (%): Gross profit margin Operating income margin Return on shareholders’ equity (ROE) Shareholders’ equity ratio Millions of Yen 2018 2019 ¥2,290,561 ¥2,481,109 798,829 253,740 189,052 ¥223,740 (127,459) 96,281 (93,955) 868,923 276,255 189,049 ¥250,009 (165,773) 84,236 (68,721) ¥2,475,708 ¥2,700,891 1,296,553 1,416,075 ¥ 646.53 ¥ 646.39 4,433.62 140.00 329 4,841.15 160.00 288 34.87% 35.02% 11.08 15.70 52.37 11.13 13.94 52.43 Notes: 1. Free cash flow = Net cash provided by operating activities + net cash used in investing activities 2. Effective from April 1, 2018, the consolidated financial statements for the fiscal year ended March 31, 2018 have been revised in accordance with a change in accounting policy. 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) 300 250 200 150 100 50 0 ROE (%) 16 12 8 4 0 (%) 18 15 12 9 6 3 0 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019 Net Sales Gross Profit Gross Profit Margin Operating Income Operating Income Margin 6 Daikin Industries, Ltd. At a Glance At a Glance Air Conditioning 89.6% Percentage of Net Sales Chemicals 8.1% Oil Hydraulics 1.7% Defense 0.6% Net Sales and Operating Income Major Products Description Air Conditioning (¥ billion) 2,500 237.6 2,222.2 2,222.2 (¥ billion) 250 2,000 1,500 1,000 500 0 200 150 100 50 0 2015 2016 2017 2018 2019 Chemicals (¥ billion) 200 32.532.5 200.8 200.8 (¥ billion) 35 160 120 80 40 0 2015 2016 2017 2018 2019 Oil Hydraulics (¥ billion) 40 4.5 39.639.6 30 20 10 0 28 21 14 7 0 (¥ billion) 4 3 2 1 0 2015 2016 2017 2018 2019 Defense (¥ billion) 20 15 10 5 0 0.30.3 13.6 (¥ billion) 0.8 0.6 0.4 0.2 0 2015 2016 2017 2018 2019 (cid:129) Room air-conditioning (cid:129) Absorption refrigerators systems (cid:129) Air purifiers (cid:129) Heat-pump hot-water- supply and room-heating systems (cid:129) Packaged air-conditioning systems (cid:129) Multiple air-conditioning systems for office buildings (cid:129) Air-conditioning systems for facilities and plants (cid:129) Freezers (cid:129) Water chillers (cid:129) Turbo refrigerator equipment (cid:129) Air-handling units (cid:129) Air filters (cid:129) Industrial dust collectors (cid:129) Marine-type container refrigeration 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 manufacturer to create a full line of products from refrigerants to air conditioners. (cid:129) Fluorocarbons (cid:129) Fluoroplastics (cid:129) Fluoroelastomers (cid:129) Fluoropaints (cid:129) Fluoro coating agents (cid:129) Semiconductor-etching products (cid:129) Oil hydraulic pumps (cid:129) Oil hydraulic valves (cid:129) Cooling equipment and systems (cid:129) Inverter controlled pump motors (cid:129) Water and oil repellent agents (cid:129) Pharmaceuticals and intermediates (cid:129) Dry air suppliers (cid:129) Hydrostatic transmissions (cid:129) Centralized lubrication units and systems In 1933, Daikin was the first in Japan to engage in research on fluorinated refrigerants. Today, our activities range from research and development to commercialization, and we offer a lineup of 1,800 fluorine compounds including gas, resin and rubber. 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. (cid:129) Warheads for Japan’s Ministry of Defense/ Warhead parts used in guided missiles for training purposes (cid:129) 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 critical. Annual Report 2019 7 Message from the CEO Masanori Togawa President and CEO We are steadily promoting measures including Group strategies, growth investments, and M&As under the strategic management plan, “FUSION 20,” while working to further boost its already high performance by responding flexibly to change and a business environment that is rapidly deteriorating. In fiscal 2019, the first year of the latter three-year half of Daikin’s strategic management plan “FUSION 20,” business conditions were extremely harsh. Taking steps to boldly confront change and this harsh operating environment, the Daikin Group achieved record high net sales and operating income. With the aim of becoming a corporate group that “co-creates new value in the air and environment fields,” we are committed to enhancing our corporate value by taking the dual approach of balancing solutions to social issues and achieving business growth. 8 Daikin Industries, Ltd. Latest Results In fiscal 2019, the first year of the latter three-year half of The Daikin Group’s five-year strategic management plan “FUSION 20,” formulated in fiscal 2017, business conditions were extremely harsh. In addition to the sharp rise in raw material prices and the negative impact of a depreciation in emerging country currencies, the operating environment was affected by such factors as the sudden slowdown in the rate of economic growth in China from the start of the second half. Despite these difficult conditions, we achieved a ninth consecutive year of increases in net sales and operating income and a sixth consecutive year of record high sales and operating income by flexibly carrying out a variety of measures in response to this changing environment. Among a host of endeavors, the Company took steps to strengthen its sales and marketing capabilities, introduce high-value-added products, and reduce total costs focusing on its mainstay Air Conditioning and Chemicals businesses. Looking at fiscal 2020, business conditions are expected to become increasingly uncertain. In addition to the growing impact of trade friction between the United States and China and a slowdown in Chinese demand, the operating environment is projected to suffer due to a slowdown in investment activities in the semiconductor market. Under these circumstances, and in connection with the Company’s business results forecasts for fiscal 2020, Daikin estimates that net sales will come in at ¥2,670 billion. On the earnings front, operating income is expected to total ¥285 billion. Building on this outlook, we will work diligently to further expand sales by flexibly addressing changes in our business environment and maintain the upward trajectory in net sales and operating income while accelerating the pace of strategic investments in a bid to secure high business results that surpass established plans. Taking Up the Challenge of “FUSION 20” Under “FUSION 20,” Daikin is looking to secure net sales of ¥2,900 billion and an operating income margin of 12% in fiscal 2021. Based on the assumptions that underpin our outlook for the macroeconomy and future operating conditions, including an economic slowdown in China, additional U.S. customs duties, and a downturn in foreign currency exchange rates, a gap is projected to emerge compared with numerical targets as actual results fall substantially short of forecasts set at the time the plan was initially formulated. Rather than review “FUSION 20” as it currently stands, we have decided to address the challenges that lie ahead by undertaking a raft of additional measures. Moving forward, we will take into consideration the need to secure a higher level of profitability that is appropriate for a global and excellent company. Within the Group-wide strategies identified under “FUSION 20,” two additional themes designed to address changes in the external environment are progressing steadily. First, we are converting our revenue structure in the Air Conditioning business to a configuration that not only achieves unit sales of energy- saving equipment, but also earns revenue throughout the entire value chain. On top of this, the advance of IoT and AI technologies is enabling the low-cost development of infrastructure that analyzes accumulated data. Leveraging these technologies, we are also promoting air-conditioning systematization and networking to create new customer value. Second, we are strengthening our environment-leading initiatives by utilizing our position as the only manufacturer providing both air-conditioning equipment and refrigerant to promote the conversion to R32 and the development of energy- saving equipment. By further refining our strengths in heat pump, inverter, and refrigerant technologies, we are contributing to the realization of a low-carbon society while both solving social issues and expanding business. Working Toward Sustainable Growth Through Three Structures of Collaborative Innovation With the growing trend toward digitalization, the structure of industry and society is changing. We are also seeing signs of a shift in consumption patterns from goods to services and from ownership to use. Recognizing this change as an opportunity for growth, we are positioning the three structures of customer, internal, and external collaborative innovation at the heart of its business reform activities. In a bid to promote collaborative innovation with customers, we will accelerate our transition to a business model that maintains direct points of contact. In addition to putting in place mechanisms that establish mutual lines of communication that allow us to accurately grasp customer needs, we will create products and services that make the most of customer feedback. From an internal collaborative innovation perspective, we will increase the pace of issue resolution. In specific terms, we will learn from areas of commonality throughout the Group by drawing on those strengths, know-how, and other attributes inherent in each region and market. We will also heighten the sense of unity and vigorously engage in Group-wide activities that leverage collective strengths. Turning to the third structure of external collaborative innovation, we acknowledge the critical need to accelerate the pace of technology and product development through open innovation in an era of digitalization, which continues to evolve rapidly. If the Company places too much emphasis on self- sufficiency, clearly it will fail in its efforts to adapt to changes in its business environment and technological advances. Guided by an awareness of current and potential issues, Daikin has dubbed open innovation activities as “external collaborative innovation,” and is stepping up efforts to promote industrial collaboration including tie-ups with industry-academia, venture companies, and other entities. In short, these endeavors are expected to help capture differentiated technologies and hasten commercialization. Looking ahead, the Daikin Group will continue to resolve social issues through its business activities as an organization that “co-creates new value in the air and environment fields.” As we work toward achieving our goals, we will also endeavor to meet the expectations of stakeholders. On this note, we kindly request your continued support and understanding. June 2019 Masanori Togawa President and CEO Annual Report 2019 9 Interview with the CEO Interview with the CEO Strengthening profitability and building a resilient corporate structure through aggressive investment in future growth Daikin saw improved sales in the mainstay Air Conditioning and Chemicals businesses in fiscal 2019, resulting in net sales and operating income growth for a ninth consecutive year. Promoting its strategic management plan “FUSION 20,” Daikin is advancing management that continues to meet the expectations of stakeholders. Q1 Please tell us about earnings in fiscal 2019. Ninth consecutive year of sales and operating income growth; sixth consecutive year of record net sales and operating income Fiscal 2019 was characterized by negative factors such as currency depreciation in emerging countries, sharply higher raw material prices, and the adverse effects from growing trade friction between China and the United States. Despite these factors, consolidated sales for Daikin Group improved 8.3% year on year to ¥2,481,109 million, which was up 10% year on year when excluding forex factors. The expansion in sales was attributable to improved sales in all major operating regions in the Air Conditioning business and an increase in sales of high added value products to the semiconductor and automotive markets in the Chemicals business. Backed by our efforts to bolster profitability through total cost reductions, operating income in fiscal 2019 expanded 8.9% year on year to ¥276,255 million and 14% year on year when excluding forex factors. Net income attributable to owners of the parent was roughly flat year on year at ¥189,049 million, largely in a reaction to the positive effects in fiscal 2018 from lower corporate taxes in the United States. When excluding this factor, net income attributable to owners of the parent was up 12% year on year. Sales and income exceeded our targets and rose for the ninth consecutive year, with the Group booking record-high net sales and operating income for the sixth year in a row. By segment, sales and income rose in the Air Conditioning, Chemicals, and Other businesses. Despite the adverse impact from additional tariffs in the United States and a sharp spike in raw material prices, the Air Conditioning business saw improved sales in each of its operating regions, and with the company also working to reduce costs, sales and operating income in the business when excluding the impact for forex factors improved 10% and 12% year on year, respectively. Cost reductions and favorable sales growth on expanding demand in automotive and semiconductor products contributed to sales and income in the Chemicals business, excluding the impact for forex factors, respectively rising 10% and an impressive 28% year on year. In the Other business, sales were up 7% year on year while operating income improved 29%. Within the business, sales in the oil hydraulics business for industrial and construction equipment were firm in both Japan and the Americas. Q2 The first year in the three latter years of the strategic management plan “FUSION 20” has concluded. What is the current state of progress? Promoting proactive measures in line with the strategic themes for each field of business The basic policies for the latter three years of the “FUSION 20” Strategic Plan focus on: 1) strengthening the core businesses; 2) expanding business domains and reforming the business structure; and 3) investing for growth. We are making steady progress in implementing measures in line with these three themes. In terms of strengthening our core businesses, we have been able to secure strong sales in the North American and Asian Air Conditioning businesses, as well as a sharp improvement in the operating income margin for the Chemicals business. The North American Air Conditioning business saw sales in fiscal 2019 rise a strong 13% year on year, and the business is making favorable progress toward meeting its fiscal 2020 sales growth target of 10%. Amid ongoing strength in the market, we are bolstering our abilities in sales by enhancing our sales network and strengthening local product development through the establishment of R&D centers, allowing us to enhance our lineup of inverter-based products and promote the shift to inverters in the U.S. market, where the spread of energy-saving technologies appears to have been somewhat delayed. On the production front, U.S. subsidiary Goodman completed construction on Daikin Texas Technology Park, integrating four factories and two logistics sites for the company in the United States. The facility will not only increase production capacity, but also serve as a global production base as an enhanced digital factory that utilizes the latest production technologies. 10 Daikin Industries, Ltd. Against a backdrop of an expanding middle class in the region, we expect the Asian Air Conditioning business to see an ongoing increase in air-conditioning demand. Sales in the business in fiscal 2019 rose 11% year on year, and are expected to rise 12% year on year in fiscal 2020. Given the strength of demand, the business is investing to rapidly increase production capacity, with investment being used to build a new plant in Vietnam for the production of room air conditioners. the Daikin Group is also moving forward on the development of a line-up of differentiated products based on the needs of each region, including sales of inverter units for an expanding middle class and growing its sales network in each of the countries in the region in which it operates, including both large and less-populated outlying cities. Growth is particularly strong in India, and the Group is expanding its market share in the country as it develops products specifically tailored to the market. We are also accelerating the establishment of a sales network focused on small to medium-sized regions and cities, and aim to further expand our business by bolstering development of commercial products to satisfy growing condominium demand. While we expect overall demand for fluorochemical products to remain essentially flat year on year in fiscal 2020, we target improved sales in the Chemicals business on the back of an expansion in sales of high added value products, and improved sales in the field of batteries and in the field of information and communication, which are currently performing well. We also target improved income in the business for the year on the back of cost reductions and the implementation of sales price strategies. For the filters business, we target an expansion in sales in the automotive market and in high-end markets such as biopharma and pharmaceuticals markets, which are expected to show favorable growth in Japan, Europe and Asia. In regard to expanding our business domains and reforming our business structure, we have established three key goals: 1) accelerating growth in operations utilizing IoT and AI technologies in the Energy Service Solutions and IAQ/Air Environment Engineering businesses; 2) becoming a leading environmental company by working to reduce global warming potential (GWP) and promoting our long-term environmental vision for 2050; and 3) expanding the commercial refrigeration and heating/water heater businesses in the new business domains category. In terms of specific initiatives, for the first goal we launched sales in November 2018 of “Assisnet Service,” which provides comprehensive inspection and maintenance support for commercial air conditioners subject to the Law Concerning the Discharge and Control of Fluorocarbons. In China, we are expanding through close contact with customers sales of “Intelligent VRV” systems, which through centralized monitoring allows the management of maintenance, repairs and replacements and offers the potential for a variety of value propositions. In North America, we are working to expand the market for services and solutions as we bolster our in-house sales and service networks through the acquisition of contractors and service companies. We are focused on using IoT and AI technologies to advance to systemization and networking of air conditioners, and target the creation of new value and a complete line of services, from energy saving proposals for entire buildings, to design and engineering, as well as repair, maintenance, and troubleshooting services. In regard to the second goal, we are expanding sales of air conditioners using HFC refrigerant gas R32, which does not contribute to ozone depletion. We also aim to reduce CO2 emissions by reducing power consumption when an air conditioner is used by advancing the spread of highly efficient inverter units on a global basis and promoting the use of room air conditioners that adopt R32 in emerging markets, where air-conditioning demand appears likely to expand sharply moving forward. Lastly, in line Annual Report 2019 11 Interview with the CEO Interview with the CEO with our responsibility as a manufacturer of both air conditioners and refrigerants, we are taking steps to prevent the release of refrigerants into the atmosphere over the life cycle of our products. In terms of the third goal, the Paris Agreement has increased environmental awareness in Europe and the accelerated development of heat pump products with minimal CO2 emissions from combustion heating has contributed to a sharp expansion in related sales at Daikin. We launched a new model in 2018 that uses R32 and boasts even stronger environmental performance. Turning to investment for growth, the Daikin Group acquired AHT Cooling Systems GmbH, an Austrian refrigerating and freezing showcase manufacturer for 881 million (about ¥114.5 billion). The acquisition itself was in line with the “FUSION 20” goal of bolstering the Group’s commercial refrigeration business. Adding AHT showcases to its own wide range of products enables the Group to become a one-stop provider offering a complete line-up of air-conditioning and refrigeration products. The acquisition also contributes to an expansion in integrated services that handle everything from equipment installation to commissioning and maintenance. Daikin aims to expand through the acquisition its solutions business, which offers store-wide design and remote monitoring, control functions, troubleshooting, and proposals for optimum control in multi- store management. Q3 Cooperative creation has become a buzzword as rapid progress in digitalization contributes to the transformation of industry and company structures. Please tell us about Daikin’s cooperative creation efforts and goals for the future. Establishing global leadership in technology with development centered on cooperative creation In order to quickly adapt to changes in the business environment brought on by the advance of digitalization, we are reforming our business structure, with a focus not only on self-sufficiency, but also on cooperative creation. Our cooperative creation efforts involve collaboration with a number of different organizations, including other companies, as well as universities and research institutes. More specifically, we are working with companies such as NEC Corporation (NEC), Hitachi, Ltd., NIPPON TELEGRAPH AND TELEPHONE WEST CORPORATION, Mitsui & Co., Ltd. and venture firm ABEJA, as well as educational institutions such as The University of Tokyo, Kyoto University, Osaka University, Kansai University, and Tsinghua University in China. We are also working with research institute RIKEN. As an example of cooperative creation, Daikin launched the collaborative creation platform “CRESNECT,” which uses data obtained from air conditioners and through cooperation with various partner companies has created new value and services related to air and space. As we cooperate with our partner companies to secure a wide variety of air-conditioning data, we are working to create new value and services by using this data to improve productivity and maintain health within the offices in which the equipment is used. As an example of our collaboration with universities, we signed Japan’s largest industry-academia agreement, with The University of Tokyo, in December 2018. The agreement involves the promotion of three collaborative programs1 focused on innovation and a “value of air” theme, and will include the exchange of human resources between the 12 Daikin Industries, Ltd. two organizations. The effort focuses on envisioning society in the future and estimating the needs of that society based on the “value of air, ” while simultaneously targeting solutions to a variety of issues using Daikin’s strengths in mechatronics technology and knowhow alongside the technologies and specialized knowledge of researchers at The University of Tokyo. In another collaboration, our comprehensive agreement with Osaka University includes professors at the University providing education to our employees and holding an in-house “Daikin Information and Communications Technology College” lecture to train human resources in the utilization of AI. Course participants are selected from internal departments throughout the Company to attend the nine-month program. Through this program, we expect to lift the number of employees working in AI from about 100 in 2017 to about 700 by 2020. 1 The three collaboration programs are: 1) Cooperative creation of future vision; 2) Co-creation of future technologies that are centered on the “value of air”; and 3) Implementing new value in society through collaboration with venture companies. Q4 A company’s stance on ESG has become an important issue in regard to achieving sustainable growth. Could you please tell us about Daikin’s priorities in this respect? Targeting zero greenhouse gas emissions in real terms by 2050 as part of our long-term environmental vision The increased use of air conditioners, our leading product, has transformed both labor and lifestyles in particularly hot regions, bringing with it economic growth and an improved way of life. Air conditioners can indeed be said to be one form of infrastructure supporting modern society. On the other hand, increased air conditioner utilization has also brought an increase in the use of electricity and a growing impact on the environment. In addition to focusing on reducing the environmental impact from our air conditioners, we recognize current conditions as an opportunity to develop our business and are committed to popularizing environmentally conscious products that use energy-saving inverter technology and R32 refrigerant that has a lower global warming potential. The Daikin Group established its “Environmental Vision 2050” as part of its long-term perspective on the issue of the environment. In addition to focusing on the development and distribution of refrigerants less likely to contribute to global warming as well as energy-efficient products and manufacturing activities, we are making progress in lowering greenhouse gas emissions by offering energy-saving solutions based on IoT and AI technologies. We also expect the promotion of refrigerant recovery and recycling operations to contribute to the Company achieving zero greenhouse gas emissions in real terms by 2050. It would appear that the focus of investors when selecting companies now includes not only how strong earnings are, but also how the company is contributing to the resolution of social issues based on global goals such as the SDGs and the Paris Agreement. I expect stakeholders will in the days ahead be focused more than ever on our stance toward solving social issues. Daikin announced its support and agreement with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD2) in May 2019. International attention is currently focused on responding to social changes brought on by climate change, and we believe that business development moving forward will be impossible without resolving these social issues. As an advanced environmental company, Daikin analyses the risks and opportunities posed to its business by climate change, reflects them in its management strategy, and promotes the enhanced disclosure of information in line with recommendations. 2 TCFD is an abbreviation for Task Force on Climate-related Financial Disclosures. It is a task force established by the Financial Stability Board (FSB), which consists of central banks and financial regulators in major countries worldwide. Q5 What are your thoughts on returns to shareholders? Targeting stable and continuous shareholder returns Backed by strong earnings, we increased the annual dividend in fiscal 2019 ¥20 per share year on year to ¥160. For fiscal 2020, we target an annual dividend of ¥160 per share, including an interim dividend of ¥80 and a year-end dividend of the same amount. We will strive to maintain a consolidated dividend on equity (DOE) ratio of 3.0% based on a policy aimed at securing stable and continuous dividend payments. While focusing on improving market capitalization, accelerating the shift to an even stronger business structure, and expanding our business while enacting strategic investment in line with our goal of advancing future growth, Daikin also aims to further enhance shareholder returns. With this in mind, we intend to continue meeting the expectations of our stakeholders as a company contributing to the creation of a sustainable society. June 2019 Masanori Togawa President and CEO Annual Report 2019 13 Review of Operations Review of Operations Air Conditioning Current Steadily expanded overseas sales mainly in Europe, the United States, and Asia; healthy results also in Japan with sales approaching the ¥2.2 trillion mark Despite the negative impact of soaring raw material prices and additional U.S. custom duties attributable to trade friction between China and the United States, results in the Air Conditioning business surpassed those of the previous ﬁ scal year in terms of both sales and operating income. These negative impacts were absorbed due to sales growth in each region and successful efforts to promote a reduction in total costs. Japan Sales in Japan rose 107% year on year. In addition to brisk personal spending, the effect of an extremely hot summer helped drive up demand for residential-use air conditioners. Continuing to promote a sales strategy that focuses in proﬁ tability, sales grew for mid-range and high-end models such as “Urusara 7,” a ﬂ agship product, and “risora,” which pursues both functionality and design. For commercial units, Daikin fully utilized its wide product lineup that includes “FIVE STAR ZEAS,” “Eco-ZEAS,” and the slim design “machi Multi” and strengthened proposal-type sales. Sales increase in each market segment from stores and ofﬁ ces to factories. In Applied Systems, the Company achieved an industry ﬁ rst with the launch of new products featuring the low-GWP refrigerant R32. Sales increased by capitalizing on redevelopment demand in the Tokyo metropolitan area. China and the United States, the Company initiated measures, such as raising sales prices and reducing costs, to ensure proﬁ tability. In the residential unitary product market, Daikin expanded its own dealer network in important regions. In addition to promoting education and support for dealers, the Company’s market share grew signiﬁ cantly thanks largely to the introduction of new inverter products for the middle zone (SEER* 15-17). In the ductless market, sales grew signiﬁ cantly for multi-air conditioners for residential-use mainly in the Northeastern region, which is the largest market. Here, the Company realized an increase in market share. Applied Systems experienced growth in equipment sales. This mainly reﬂ ected efforts to strengthen the sales network and expand the product lineup. The After Sales Service business also witnessed growth. “risora,” which pursues both functionality and design * SEER: An acronym describing the Seasonal Energy Efficiency Ratio for cooling performance Production picks up in earnest at a new factory in the United States Americas Sales in the Americas rose 113% year on year. Brisk personal spending arising from the large-scale tax cuts in the United States energized the market. Sales grew substantially on the back of efforts to upgrade and expand the sales network and launch new products. Facing higher prices for raw materials and the impact of additional tariffs due to trade friction between China Sales in China were unchanged from the previous ﬁ scal year. The severe market environment continued due to the economic slowdown resulting from trade friction between China and the United States coupled with the Chinese government’s policy to curb new housing. Despite these difﬁ cult conditions, Daikin worked diligently to enhance its product lineup and expand sales in regional cities. Based on these endeavors, successful steps 14 Daikin Industries, Ltd. were made to secure sales at the previous ﬁ scal year’s level. By reducing costs through in-house production and automation, the Company also maintained high proﬁ ts. In residential-use air conditioners, Daikin increased the number of “PROSHOP” specialty stores, primarily in regional cities, while boosting sales of the “New Life Multi” series targeting mid- dle-to-upper class residences. In large cities, the Company launched new products for general residences in response to market changes. In the commercial-use market, Daikin utilized a wide product range and captured brisk restaurant, data center, and other demand. For large cities in mature markets, the Company launched the “Intelligent VRV” system, which links to customers via the Internet, while capturing replacement demand. For Applied Systems, Daikin undertook detailed sales activities that extended from small- and medium-sized proposals to large-scale projects. In addition to higher equipment sales on the back of efforts to upgrade and expand the product lineup, sales also grew in the After Sales Service business. “New Life Multi” series, residential multi-split room air conditioners that propose a variety of lifestyles for customers Europe/the Middle East/Africa Sales in Europe, the Middle East, and Africa climbed 107% year on year. In residential-use air conditioners, despite the lingering effects of unseasonable weather in Spain, sales of R32 units and other high value-added products increased mainly in France and Italy. In the commercial-use market, Daikin strengthened spec-in activities for “VRV” systems in a bid to counter price markdowns by competing companies. Although sales of “SkyAir” (air condi- tioning for shops) grew in Europe for R32 units and other high value-added products, orders in the Middle East saw a decline. In Heating, the Company expanded sales and after sales service networks and signiﬁ cantly pushed up sales of heat pump type hot water heating systems. In Applied Systems, products including R32 chillers were launched in response to environmental regulations. At the same time, Daikin strengthened the sales system in each country. Sales grew signiﬁ cantly in the largest market of the Middle East as well as in France and Germany. Asia/Oceania Sales in Asia and Oceania increased 110% year on year. In residential-use air conditioners, sales grew substantially mainly in Thailand, Indonesia, and India as a result of the roll out of such differentiated products as cooling-only inverter units that meet stronger energy-saving regulations. Sales in the commercial-use market expanded in all countries, and especially Vietnam, Thailand, and India. In addition to training dealers enabling them to handle everything from design to installation and sales, this sales growth was largely due to successful efforts aimed at strengthening sales and spec-in activities. In Applied Systems, sales increased signiﬁ cantly on the back of improvements in product supply capabilities. This was mainly due to new plant operations in Malaysia. Expanding sales in Asia which is exhibiting demand growth Daikin’s Unique Solutions Increasing market share through the develop- ment of products and strategies aligned to each region Daikin is the leader in sales in the air conditioning business in India, which is the second largest market in Asia after China. While India is the seventh largest country in the world, ranked by land area, both weather and infrastructure conditions differ dramatically from region to region. In this regard, Daikin has classiﬁ ed India into four distinct regions. The Company’s competitive advantage is derived from the development of products that address the conditions of each region, and the implementation of region-speciﬁ c strategies. India is recognized for its extreme weather conditions, which depending on the region can range from heavy snowfalls to summer temperatures that exceed 50°C. Under these circum- stances, Daikin markets air conditioners that can operate even at 54°C in high temperature areas. At the same time, the Company sells affordable air conditioners that can accommo- date the short winter periods that are common in the moun- tains and plateaus of central India. In response to domestic wastewater issues and the increasingly severe impact that air pollution is having on the areas surrounding New Delhi, the nation’s capital, Daikin has developed air conditioners that do not corrode even in environments that contain sulfuric acid. For the southeast coastal region, the Company markets products that do not break even if dropped from a height of one meter. This is important given the many bad roads that transverse the area and the prevalence of damage during transportation. By developing products that take into account the attributes of each region and match local conditions, Daikin is steadily expanding its market share. Annual Report 2019 15 Review of Operations Review of Operations Air Conditioning Future Addressing changes in the business environment in a timely and ﬂ exible manner Maintaining our trend of increased sales and proﬁ ts Daikin is projecting an even more challenging business environment due to such factors as the growing impact of trade friction between China and the United States and a slowdown in demand in China. Under these circumstances, the Company will maintain its trend of increased sales and proﬁ ts by further improving proﬁ tability while at the same time continuing to undertake forward-looking growth investments. Every effort will be made to achieve targets set at a high level while responding ﬂ exibly to changes in the business environment. Japan Industry demand for residential use is expected to decline compared with the previous ﬁ scal year. This represents a reaction to the sharp surge in demand last ﬁ scal year as a result of the summer heat wave. Meanwhile, industrial demand for commercial use is anticipated to increase year on year due to brisk capital investments and special procurements by schools for air conditioners. In addition to the sales promotion of high value-added products, Daikin will continue with efforts aimed at increasing proﬁ ts. This includes promoting cost reductions and strictly maintaining selling prices. In residential-use air conditioners, we will promote sales of such high value-added products as “Urusara 7” and “risora.” In commercial-use air conditioners, we will expand sales of differentiated products including “MULTI CUBE,” a product that enables individual control even in large spaces like factories, and “Outer Tower,” an air conditioner that is invaluable for use outdoors as a measure against heat. Furthermore, production and installation capabilities are being strengthened to respond to demand by schools for air conditioning. In Applied Systems, the After Sales Service business will be strengthened in addition to the sales promotion of R32 units. Company will look to increase market share by enlarging its own dealer network and launching new products. With the completion of production transfer to the new Goodman factory projected during 2019, productivity is expected to improve even further. In the residential unitary product market, Daikin will promote the inverter market by boosting sales of middle-zone (SEER 15-17) inverter units launched in the previous ﬁ scal year in addition to further expanding sales in the volume zone market. A smart thermostat will also be newly launched, and steps will be taken to pursue energy savings from not only equipment, but also a software perspective. In the ductless market, Daikin will enhance its product lineup for cold regions and work to increase sales over those of the previous year for residential-use products in the Northeast, Northwest and Canada, which are all cold regions. In Applied Systems, the Company will work to boost sales of equipment such as chillers and air handling units in addition to reinforcing its service network. Even in Latin America, Daikin will strengthen its sales system centering on Mexico and work to bolster the Engineering business. Daikin Texas Technology Park where production, development, logistics, sales, marketing and indirect depart- ments work together to create a constant ﬂ ow of innovation. China In light of market uncertainty, Daikin will conduct ﬂ exible business operations in line with market changes and work to build a new business model for continued business growth. In the residential-use market, the Company will enlarge its sales “Outer Tower,” an air conditioner that is invaluable for use outdoors as a measure against heat Americas Amid bullish demand, Daikin aims to expand business and improve proﬁ tability. While residential investment is expected to slow, the 16 Daikin Industries, Ltd. networks in regional cities where growth is expected. At the same time, energies will be directed toward strengthening the product lineup for general residences, which are rapidly increasing in large cities. Customer search will be linked to sales and solutions through such activities as brand appeal of unique Daikin products available on newly established E-commerce sites that are directly managed as well as the creation of customer centers in March 2019. In the commercial-use market, Daikin will expand sales of “Intelli- gent VRV” systems that use the Internet to connect with customers and provide value to customers over the entire air conditioning lifecycle, including energy-saving diagnostics, failure prediction, and replacement proposals. Furthermore, the Company will roll out a new sales model that extends beyond equipment sales with servicing and maintenance. In Applied Systems, efforts will be made to promote proposals in the markets that are expected to grow such as those for data centers and semiconductor factories. In addition to equipment sales centered on chillers, Daikin will expand the After Sales Service business. Wuhan New Life Station, newly opened to promote the Daikin brand in the Midwest region Europe/the Middle East/Africa The business environment in Europe is being affected by such factors as an economic slowdown in Germany and Italy as well as the U.K.’s decision to withdraw from the EU. Amid the growing trend toward increasingly strict environmental regulations, Daikin will work to expand high value-added products. In the residential-use market, the Company will upgrade and expand its product lineup of R32 units in addition to boosting sales. In the commercial-use market, Daikin will promote sales of “SkyAir” using R32 and focus mainly on the large markets of Spain and France. For “VRV” systems, the Company will respond to the tightening of ﬂ uorocarbon regulations by moving ahead of other companies in the introduction of new products that use recycled refrigerants. In the Heating business, the intention is to capture bullish demand and increase market share by appealing to customers with the environmental performance of the Company’s heat pump type hot water heating systems. In Applied Systems, Daikin will enhance marketing capabilities in each country centering on the Middle East, the largest market, and work to expand orders by launching new products of energy-saving and low-GWP refrigerant equipment that comply with stricter environmental regulations. In the Refrigerator and Freezer business, efforts will be made to mutually use the sales networks and product lineups of Zanotti and AHT and work to expand the overall business for cold chain. Accelerating the pace of overall cold chain business rollout through the acquisition of AHT Asia/Oceania With an ever-increasing expansion of the middle class, air condi- tioning demand is expected to grow. To meet this demand, Daikin will extend its sales network in every country from large to regional cities. In addition to launching differentiated products based on regional needs, the Company will work to expand its After Sales Service business and signiﬁ cantly increase sales. In the residential-use market, together with accelerating the market shift to inverters in each country, Daikin will expand sales of differentiated products such as residential-use multi-split air conditioners. In India, the Company will accelerate the estab- lishment of sales networks in regional cities and signiﬁ cantly increase sales. In the commercial-use market, Daikin will continue to focus on fostering dealers. In “SkyAir,” steps will be taken to promote sales centering on Thailand and Vietnam for cooling-only R32-refrigerant inverter air conditioners, which feature greater cost competitiveness. In “VRV” systems, the Company will develop differentiated products in line with regional needs and strengthen spec-in activities. Energies will be directed toward promoting detailed proposal-type sales by application such as for schools and hospitals. In Applied Systems, Daikin will strengthen the recruitment and fostering of system engineering human resources and expand the After Sales Service business including servicing, inspection, and maintenance. Boosting produc- tion capacity in Asia where demand for air conditioning is projected to grow Annual Report 2019 17 Review of Operations Review of Operations Chemicals Current Attracted strong demand in the semiconductor- and automotive-related markets Sales broke through the ¥200 billion mark The Chemicals Business achieved a substantial increase in sales in Japan and Asia. Buoyed also by robust results in Europe and the United States, Daikin maintained a high proﬁ t margin despite the surge in market prices for raw materials. Daikin greatly expanded sales by capitalizing on demand in the semiconductor and automotive markets. Amid a surge in market prices for raw materials, the Company raised selling prices and promoted total cost reductions. These actions led to gains that signiﬁ cantly exceeded the previous fiscal year in both sales and operating income. Fluorocarbon gas in Europe showed a sharp increase in distribution stock from the second half of the ﬁ scal year while sales in Japan and Asia expanded. For ﬂ uoropolymers, in addition to capturing demand in the semiconductor market mainly in Japan, China, and Asia, sales of new products for LAN cables in the United States also greatly increased. For ﬂ uoroelastomers, sales expanded mainly in the automotive market in the United States and Japan. In ﬁ ne chemicals, although sales decreased for the surface antifouling agent “OPTOOL,” sales grew for water and oil repellent agents in China and Asia. Fluoropolymers and etching products essential in the manufacture of semiconductors Fluoroelastomer with superior heat resistance used in automobile internal combus- tion engines 18 Daikin Industries, Ltd. Chemicals Future Working to expand sales in robust ﬁ elds Targeting increases in both sales and proﬁ ts Amid forecast sluggish demand for semiconductor- and automotive-related products, Daikin will accelerate the pace of application development in ﬁ elds that are expected to experience medium- to long-term growth. This includes an upswing in demand for lithium-ion batteries attributable to the widespread use of electric vehicles and products that cater to the 5G next-generation communication standard. There is a chance that the business environment will become increasingly difﬁ cult due mainly to a forecast decline in demand as the semiconductor market enters a readjustment phase. Against this backdrop, in addition to promoting sales in the favorable ﬁ elds of batteries as well as information and communications, Daikin will work to secure proﬁ ts by expanding sales of high value-added products, reducing costs, and through selling price measures in order to achieve increases in both sales and proﬁ ts. Contributing to the evolution of next-generation vehicles through ﬂ uorine chemical products for battery materials In fluorocarbon gas, despite the downturn in demand in Europe, Daikin will globally promote sales of low-GWP refrigerants for refrigerators and freezers. In the semiconductor market, together with efforts to secure an increased share by strengthening marketing capabilities, the Company is expecting a recovery in demand relating to IoT and AI from 2020 and beyond and will accordingly reinforce its capabilities to supply and develop differentiated products. In the automotive market, Daikin intends to strengthen spec-in activities and expand sales of the lithium ion battery materials used for next-generation vehicles. In the information and communications ﬁ eld, the Company will work to expand sales to the LAN cable market in which demand is increasing in the United States. Daikin’s Unique Solutions Established a ﬂ uorinated materials informa- tion center in Shenzhen, China Representing a new initiative in its Chemicals business, Daikin established DAIKIN Dream Gallery in Shenzhen City, China to promote the many outstanding functions inherent in ﬂ uorine. Rather than merely exhibit each product, Dream Gallery places greater emphasis on product functionality. In this instance, the goal is to shine a light on the functions that products provide and the potential for a wide-range of new applications born from the functions that these product have. As opposed to the one product-one function concept, Dream Gallery allows visitors to view the many functions inherent in ﬂ uorine in a single location. This facility was set up in conjunc- tion with client engineers as a space to showcase the use of composite-type functions. Looking ahead, plans are in place to attract customers through various initiatives including seminars on cutting-edge technologies and markets. The facility is expected to serve as a forum to draw out ideas while examining functions. Here in Shenzhen, which is regarded as China’s Silicon Valley, every effort will be made to uncover the potential of new businesses, promote the development of innovative applica- tions, and cultivate markets. Moreover, Daikin will also pursue a variety of endeavors including the development of optimal battery and substrate materials for next-generation vehicles in collaboration with Tsinghua University. DAIKIN Dream Gallery Annual Report 2019 19 Review of Operations Review of Operations Oil Hydraulics Current Continued strong performance in Japan and North America Following on from the previous ﬁ scal year, reported record high business results The Oil Hydraulics business comprises a range of oil hydraulic equipment to facilitate the smooth movement of various types of machinery, contributing to energy efﬁ ciency and electrical power savings. In ﬁ scal 2019, revenue increased on the back of upswings in industrial and construction equipment sales in Japan and North America. In the Hydrostatic Transmissions (HST) business, sales increased steadily in Japan. The Company reported record high sales and operating income for the ﬁ scal year under review. Oil Hydraulics Future Solidifying business in Japan and working to strengthen market in Europe and the United States Business conditions are projected to remain challenging in ﬁ scal 2020. Despite expectations of growing uncertainty, Daikin will work to increase its competitiveness in Japan while continuing to improve proﬁ tability. Furthermore, energies will be directed toward expanding business in the global market. In the United States, where Daikin already has a foothold, steps will be taken to launch e-commerce activities as a new sales channel aimed at expanding the areas in which the Company conducts its maintenance, repair, and operation (MRO) business. In its HST business, Daikin will work to expand local production models while optimizing local customer supply. Industry-leading g hydraulic motor r that realizes small size, light weight and high h efﬁ ciency 20 Daikin Industries, Ltd. Daikin’s Unique Solutions Developed water-cooled oil coolers; alleviating air condi- tioning load in factories Similar to an air conditioner cooling the air, an oil cooling unit maintains the oil used in a given machine at an appropri- ately cool level. The water-cooled oil coolers being developed by Daikin have a number of outstanding features. Firstly, excluding the heat released from electrical components, the units release no exhaust heat, as any heat from the product is cooled by the water. By limiting the build-up of heat and reducing the burden on air-conditioning systems in the factory, the units contribute to the conservation of energy. In addition, the water-cooled oil coolers do not have the air ﬁ lters that are commonly used in conventional air-cooled oil coolers, thus reducing man-hours previously spent on cleaning the air ﬁ lters. Third, the condenser, which is considered the key component in the unit, has a specialized double tube structure, making it resistant to clogging. Water-cooled oil cooler that conserves energy by alleviating the burden on air condi- tioning systems in factories Defense Current Strong performance in differentiated home-use oxygen therapy equipment Daikin designs and manufactures products for Japan’s Ministry of Defense based on the defense budget, with products supplied including various types of artillery shells, warheads, and fuses all used for drills, as well as aircraft parts. These precision machining 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. Despite favorable sales of home-use oxygen therapy equipment, net sales in this segment declined in ﬁ scal 2019 compared to the previous ﬁ scal year due to a downturn in artillery shell sales to Japan’s Ministry of Defense. Defense Future Targeting an expansion in medical equipment sales by offering the highest levels of technology Amid expectations for ongoing severity in orders from Japan’s Ministry of Defense in ﬁ scal 2020, Daikin will continue to focus on bolstering earnings in its private-sector business. In the home-use medical equipment business, we expect insurance to begin covering telemedicine used in home-use oxygen therapy in ﬁ scal 2021, contributing to an increase in shipment volume for devices equipped with communication functions. With this in mind, we are focused on the development of an oxygen concentrator that is capable of remote monitoring and is also high-quality and price competitive. Daikin’s Unique Solutions Contributing to the Aviation and Medical Fields with Advanced Precision Machining Technologies Daikin’s unique precision machining technologies continue to meet the various needs of our customers, including in the ﬁ elds of medical equipment and aviation-related products, where there is always demand for the most advanced and precise technologies available. This expertise is seen in particular in the Daikin ﬁ re extinguishers installed near the engines in airplanes. Should a ﬁ re originating in the engine break out, these devices play a vital role in ensuring aircraft safety by discharging a ﬁ re extinguishing agent with force to smother the ﬁ re. In home oxygen therapy equipment, Daikin supports the lives of patients with chronic respiratory ailments through the manufacture and sale of respiration synchronizers and oxygen concentrators. Annual Report 2019 21 Corporate Governance 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 operat- ing environment. Aiming for management with even greater speed, transparency, and soundness, we will continue to boost corporate value by seeking and implementing new ways to achieve optimal corpo- rate 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 effective- ness of the Board of Directors and the Audit and Supervisory Board,” “defining roles and responsibilities of independent exter- nal directors,” and “the policy of having constructive dialogue with shareholders.” Going forward, Daikin will continue to enhance these initiatives. Management and Operational Execution Systems Rather than adopting a U.S.-style “committee system” that com- pletely separates decision making and business oversight from operational execution, the Daikin Group has adopted an “inte- grated management” system in its aim to promote a higher level of management, in view of the special characteristics of the Group’s business and in judging that this is a more-effective means of accelerating decision making and operational execu- tion. This means that the directors jointly take charge of both management responsibilities and business execution responsibili- ties. Directors also bear responsibility for the execution and com- pletion of their own decisions by carrying out their decision making, business execution, and supervision/guidance in an “integrated” manner. In addition, the Group has introduced an “executive officer sys- tem” 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 2019, there were 10 directors (including one female and two non-Japanese directors) who carry out expe- ditious and strategic decision making as well as sound oversight and guidance throughout the Group. Daikin’s Board of Directors includes three external directors (as of June 2019), conditional upon them not having a relationship of interest with the Company. Daikin seeks outside directors that can provide oversight and advice from a high-level perspective based on a wealth of experience and deep insight. To ensure that the external directors can effectively contribute to Daikin’s corpo- rate governance system, assistants to the external directors are 22 Daikin Industries, Ltd. 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 pro- vide 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 end of June 2019, Daikin’s four Audit and Supervisory Board members included two external Audit and Supervisory Board members. The principal nomination criteria for external Audit and Supervisory Board members are the same as those for external directors and include independence from the Company in terms of not having a relationship of interest with the Company. The 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 manage- ment and performance when necessary and also investigates rel- evant units, confirms approval of documents, and regularly exchanges opinions with representative directors, executive offi- cers, 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 per- sonnel transfers, work evaluations, and other matters pertaining to Audit and Supervisory Board Member Office staff members. Corporate Governance Structure (as of the end of June 2019) Shareholders’ Meeting Appointment, dismissal Appointment, dismissal Appointment, dismissal Accounting Auditor Audit & Supervisory Board Audit Board of Directors HRM Advisory Committee Compensation Advisory Committee Group Steering Meeting Group Management Meeting Group Auditors Meeting Internal Control Committee, Corporate Ethics and Risk Management Committee, Information Disclosure Committee, CSR Committee Appointment, supervision Executive Officers Meeting (The rest is abbreviated) External Director/Audit and Supervisory Board Members’ Principal Activities Name Position Principal Activities Chiyono Terada External Director Tatsuo Kawada Akiji Makino Ms. Terada attended 14 of the 15 Board of Directors meetings held during fiscal 2019. 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 propos- als for measures to further promote achievements of female employees. Mr. Kawada attended 14 of the 15 Board of Directors meetings held during fiscal 2019. 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 14 of the 15 Board of Directors meetings held during fiscal 2019. Based on his abundant experience in management and high-level insight, he can provide appropriate supervision of the Company’s management from an independent perspective and actively provides suggestions from his broad and sophisticated perspective regarding matters in the fields of energy, the natural environment, and service businesses. Ryu Yano External Audit and Supervisory Board Member Mr. Yano attended 12 of the 15 Board of Directors meetings held and 13 of the 14 Board of Auditors meetings held during fiscal 2019. Based on his abundant experience and deep insight as a corporate manager, particularly from his broad and advanced perspective developed over many years of experience in business overseas, he provides the necessary input in a timely fashion. Toru Nagashima Mr. Nagashima attended 14 of the 15 Board of Directors meetings held and 14 of the 14 Board of Auditors meetings held during fiscal 2019. 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 Tatsuo Kawada Akiji Makino Ms. Terada has served as president of Art Corporation. Based on her abundant experience and deep insight as a corporate manager, and with her broad and high-level perspective, she appropriately carries out her management duties and measures to further promote the achievements of female employees, taking a consumers’ standpoint, including on the importance of the corporate brand. Ms. Terada was elected as external director to continue to contribute to the Company’s corporate value looking forward. Mr. Kawada has served as chairman and CEO of Seiren Co., Ltd., and has abundant experience and deep insight as a corporate manager. His experience includes changing his company’s business model, innova- tion creation, and transforming corporate cultures. Mr. Kawada was elected as external director to make use of this experience and to 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, to contribute to increasing Daikin’s corporate value. Mr. Makino has served as chairman and CEO 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. Ryu Yano External Audit and Supervisory Board Member Mr. Yano has served as Chairman of the Board and representative director at Sumitomo Forestry Co., Ltd., and has abundant experience and deep insight as a corporate manager. Mr. Yano carries out his duties from a broad and high-level perspective cultivated, in particular, from his wealth of overseas business experience. Mr. Yano was elected as external auditor to draw on his experience to supervise overall man- agement at Daikin and to significantly upgrade the appropriateness of the audit function Toru Nagashima Mr. Nagashima has served as an honorary advisor at Teijin Limited, and has abundant experience and deep insight as a corporate manager, particularly in the field of implementing paradigm shifts from man- ufacturing to services. Mr. Nagashima was elected as external auditor to draw on his experience to sig- nificantly 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. Annual Report 2019 23 Corporate Governance Corporate Governance Agile Management Support System Daikin’s three main management bodies are the Board of Directors, the Group Steering Meeting, and the Executive Officers Meeting and they secure expeditious decision making based on substantial discussion and keeping the number of directors at a minimum. The Board of Directors, along with providing healthy business execution and approprite supervision and guidance, is the deci- sion-making institution for all matters related to the Group as a whole, as stipulated by laws and regulations and by the articles of incorporation. In addition, we periodically conduct a self-evaluation of the Board of Directors’ effectiveness. Individual interviews con- ducted with directors confirm the viability of their effectiveness. In fiscal 2019, the Board of Directors met 15 times, and the average attendance rates of external directors and external Audit and Supervisory Board members at those meetings were 93% and 87%, 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 four times. The Executive Officers Meeting establishes a place where we can expedite thorough deliberations and prompt implementation of important management issues, and it met 19 times in fiscal 2018. 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 sys- tem 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 per- form appropriate decision making through open and active dis- cussions 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 per- sonnel and remuneration processes, Daikin has established the HRM Advisory Committee and the Compensation Advisory Committee. These committees engage in discussions and delibera- tions regarding issues including corporate officer nomination crite- ria, candidates, and remuneration. As of the end of June 2019, both committees comprised five members, including three external directors, one in-house director, and one executive officer in charge of personnel, 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 Committee”. Based on a report from the Compensation Advisory Committee, the directors’ remuneration is determined by a reso- lution of the Board of Directors, while the Audit and Supervisory Board members’ remuneration is determined by a resolution of the Audit and Supervisory Board. 24 Daikin Industries, Ltd. 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 so as to contribute to enhancing the Daikin Group’s value. Performance-linked remunera- tion reflects short-term Group performance and performance of divisions in which a director is in charge, and stock options reflect medium- to long-term performance. External directors and corpo- rate auditors receive “fixed compensation” only. 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 external institution on the remunera- tion of corporate officers active in just under 300 Japanese com- panies listed on the First Section of the Tokyo Stock Exchange. The three indices used by the Company are the sales growth rate, operating income margin and ROE, as well as the medium-to- long term increase in corporate value. Total Compensation for Directors and Audit and Supervisory Board Members (Fiscal 2019) Position Total Compensation (Millions of yen) Total of different types of compensation (Millions of yen) Fixed compensation Stock Options Performance- linked compensation Persons paid Directors (excluding external directors) Audit and Supervisory Board Members (excluding external Audit & Supervisory Board members) External Corporate Officers 1,135 69 76 506 69 76 109 519 — — — — 9 2 5 Corporate Officers with Compensation over ¥100 Million (Fiscal 2019) Name Total Consolidated Compensation (Millions of yen) Position Company Fixed compensation Stock Options Total Consolidated Compensation by Type (Millions of yen) Noriyuki Inoue Masanori Togawa Ken Tayano Masatsugu Minaka Jiro Tomita 418 278 178 133 152 Director Daikin Industries, Ltd. Director Daikin Industries, Ltd. Director Chairman Director Director Director Daikin Industries, Ltd. Consolidated Subsidiary, Daikin (China) Investment Co., Ltd. Daikin Industries, Ltd. Consolidated Subsidiary, Daikin Europe N.V. Daikin Industries, Ltd. 189 123 97 11 — 74 58 26 26 14 — 14 — 14 Accounting Auditor Compensation (Fiscal 2019) Auditing expenses 235 million yen Performance linked compen- sation 202 128 55 — 38 6 79 Group-Wide 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 challenges of Group companies through activities based on uni- fied objectives. In addition, to strengthen Group-based auditing and supervisory functions, Daikin is working to enhance its man- agement 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 the end of June, 2019) Position(s) Name Responsibilities & Principal Jobs Chairman of the Board and Chief Global Group Officer Noriyuki Inoue President and CEO, Member of the Board Member of the Board (external) Member of the Board (external) Member of the Board (external) Masanori Togawa Chairman of Internal Control Committee Chiyono Terada President of Art Corporation Tatsuo Kawada Chairman and CEO of SEIREN CO., LTD. Akiji Makino Chairman and CEO of Iwatani Corporation Member of the Board and Senior Executive Officer 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 Member of the Board and Senior Executive Officer Member of the Board and Senior Executive Officer 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 Member of the Board 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 Member of the Board 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) Audit and Supervisory Board Member Audit and Supervisory Board Member Ryu Yano Chairman of Sumitomo Forestry Co., Ltd. Toru Nagashima Honorary Advisor of Teijin Limited Kosei Uematsu Hisao Tamori Senior Executive Officer Takashi Matsuzaki Responsible for Applied Solution Business, R&D in North America, Applied R&D Center, Responsibility of Daikin Open Innovation Lab Silicon Valley Senior Executive Officer Yoshihiro Mineno 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 Koichi Takahashi Responsible for Finance and Accounting/Budget Operations, IT Development, IoT and 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 Responsible for Applied Solution Business in China/ASEAN/Oceania Region, Refrigeration business, Director of Daikin (China) Investment Co., Ltd., COO of McQuay China 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 Katsuyuki Sawai Responsible for Corporate Communication, Human Resources, and General Affairs and General Manager of Shiga Plant Hitoshi Jinno General Manager of Filter Division Executive Officer Kota Miyazumi Responsible for Corporate Planning, General Manager of Marketing Research Division, Director of Planning Group in Marketing Research Division Executive Officer Tsutomu Morimoto Responsible for Goodman Group Business, Executive Secretarial Department Executive Officer Yuji Yoneda Executive Officer Masaki Saji Executive Officer Masafumi Yamamoto Executive Officer Akira Murai Executive Officer Makio Takeuchi Responsible for Air-Conditioning Product Development (including Applied Solution Business and Refrigeration Business) and General Manager of Technology and Innovation Center 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 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 Executive Officer 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 Annual Report 2019 25 CSR Management System CSR Management System 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 key CSR 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 evaluated. In the course of this evaluation, priority themes were selected according to two core topics: “stakeholders concerns and impact,” which includes stakeholder engagement and global guidelines and requirements from the SRI research institution, and the “Importance to 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 c o n c e r n s , i m p a c t s (cid:3) Biodiversity protection (cid:3) Measures against atmospheric pollution (cid:3) Respect for human rights (cid:3) Stakeholder engagement (cid:3) Communities (cid:3) Management of chemical substances Most Important (cid:3) Response to climate change (cid:3) Effective use of resources and energy (cid:3) New value creation (cid:3) Product quality and safety (cid:3) Customer satisfaction (cid:3) Anti-corruption (cid:3) Free competition and fair business dealings (cid:3) Occupational safety and health (cid:3) Labor-management relations (cid:3) Supply chain management (cid:3) Information security (cid:3) Human resource development (cid:3) Workplace diversity (cid:3) Corporate governance Important (cid:3) Waste and water-use reduction Importance to Daikin (cid:3) Environment (cid:3) New value creation, Customer satisfaction, Human resources (cid:3) Fundamental CSR Nine Key CSR Themes 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 Provision” themes and five“Fundamental” themes. Attention to these initiatives in manage- ment activities is incorporated 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 environmental impact. (cid:2) Environment (cid:2) New Value Creation (cid:2) Customer Satisfaction (cid:2) Human Resources We are responding to societal demands for greater transpar- ency and more open business practices. (cid:2) Corporate Governance (cid:2) Respect for Human Rights (cid:2) Supply Chain Management (cid:2) Stakeholder Engagement (cid:2) Communities 26 Daikin Industries, Ltd. CSR Action Plan 2020 Key CSR Themes FY2021 Target FY2019 Result E Environmental Environment Introduce state-of-the-art technologies to the market in order to address environmental and energy issue (cid:129) Reduced emissions of greenhouse gas by 60 million tons of CO2 through the distribution of environmentally conscious products globally (cid:129) Reduced emissions of greenhouse gas resulting from the manufacturing process across the entire Group by 70% from fiscal 2006 levels (cid:129) Implementing and expanding environmental activities in coordination with stakeholders We measure our contribution to reducing emissions of greenhouse gas based on the distribution of environmentally conscious products and our reduction in greenhouse gas resulting from the manufacturing process. Daikin reduced greenhouse gas by 67 million tons of CO2, representing a reduction of greenhouse gas emissions of 75% from fiscal 2006 levels. New Value Creation Share dreams and ambitions inside and out- side Daikin to realize a healthy, comfortable lifestyle through air (cid:129) 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 ¥65.2 billion and the number of patent applications were 904 in Japan and 434 overseas in fiscal 2018 on a unconsolidated basis). 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 Provide peace of mind and reliability through a focus on customer orientation, experience, performance, and advanced technologies (cid:129) Build a service network encompassing the entire globe (cid:129) Building product development capabilities that can sat- isfy the needs of customers worldwide (cid:129) Maintaining optimum levels of quality Respect individual personalities and values, and maximize the potential of each employee so that they can benefit Daikin and society as a whole (cid:129) Achieve a ratio of excellent or advanced skilled engi- neers in manufacturing of four to one (cid:129) Achieve a level of 100 females in management positions (unconsolidated) (cid:129) Increase the ratio of local presidents (cid:129) Reducing the frequency of industrial accidents to zero Thoroughness of respect for human rights Customer Satisfaction Human Resources Respect for Human Rights Supply Chain Management Conduct CSR procurement Stakeholder Engagement Engage in dialogue with stakeholders and reflect this dialogue into management Communities Contribution to environmental conservation, education support, and cooperation with the local community We measure satisfaction through the after-sales service customer satisfaction rating. With the cus- tomer satisfaction rating in the lase fiscal year taken as 1, the customer satisfaction ratings were: Japan 1.13 (compared to fiscal 2016); Singapore 1.00 (compared to fiscal 2016); Indonesia 1.03 (compared to fiscal 2018); India 1.09 (compared to fiscal 2017); and Spain 1.15 (compared to 2017). 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 pro- duction facilities. In the area of occupational, health and safety, we measure the safety of operations at production facilities. We achieved a ratio of excellent or advanced skilled engineers in manufacturing of 2.9 to one (unconsolidated), 59 female in manage- ment positions (unconsolidated), a ratio of local presidents of 46% (overseas Group companies) and frequency rate of industrial accidents throughout the Group of 1.38. We measure how thoroughly respect for human rights has been adopted by our employees through the completion rate for the self-assessment. The completion rate for the self-assessment was 99%. To measure the level of implementation of the CSR by suppliers, we created a questionnaire for suppli- ers. We began running this survey of CSR through the procurement process in fiscal 2019. The CSR pro- curement ratio in fiscal 2019 was 94%. 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 world- wide (114 participants from 37 countries participat- ed and attendees included university professors and experts in their field). 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 ¥1.4 billion. We measure the status of our efforts in corporate governance compliance through the completion rate by employees of the self-assessment. The com- pletion rate for the self-assessment was 99%. G Governance Corporate Governance Thoroughness of compliance Degree of independence from the company, diversity, and transparency of the Board of Directors (Daikin Industries, Ltd. only) We also have a ten-member Board of Directors, including three external directors, one female mem- ber, and two non-Japanese members. (Unconsolidated) Annual Report 2019 27 CSR (Corporate Social Responsibility) CSR (Corporate Social Responsibility) Environment (cid:3) 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 comprehen- sive air-conditioner manufacturer that develops and manufactures both air conditioners and refrigerants. The Daikin Group focuses on the spread of environmentally conscious products using invert- er technology, refrigerants with lower global warming potential worldwide and its services solution business. (cid:3) Daikin’s Initiatives Promotion of Eco-Friendly Technologies and Products The Daikin Group develops and distributes environmentally conscious 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 2019, the percentage of sales of environmentally conscious products related to residential air conditioners was 93%, repre- senting a reduction in emissions of greenhouse gases* of 67 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 cooperat- ing with government and industry bodies to support the estab- lishment 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 conscious products and a baseline of emissions from air conditioners using non-inverter units and conventional refrigerants, combustion-type heating, and hot water heaters. 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 royal- ty-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, aca- demic conferences, and papers on the impact and countermea- sures 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 initia- tives to create energy-efficient markets. As of December 2018, the Daikin Group had sold more than 17 million R32 air conditioners worldwide in 60 countries. We estimate that the global market for R32 air conditioners, when our competitors are included, exceeded 68 million units. Reduction of Greenhouse Gases by 75% Compared to Fiscal 2006 Levels, Goals Achieved Greenhouse gases emitted by the Daikin Group during the pro- duction 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 70% in fiscal 2021 (reduction to 1.58 million tons-CO2). In fiscal 2019, at Daikin America, Inc., replacement and recov- ery of fluorocarbons was under way resulting in a 75% reduction of greenhouse gas emissions compared to fiscal 2006 levels (reduction to 1.31 million tons-CO2). Realization of ZEB (Net-Zero Energy Buildings) at Existing Buildings Daikin’s branch office in Fukuoka, being a medium-sized office building, was lagging behind in efforts to become energy efficient. However, owing to a facility upgrade combined with off-the-shelf technology as well as thorough operational management, we were able achieve “ZEB Ready”* status. Upgrading conventional, existing buildings to ZEB status had, in the past, required complicated technologies as well as enormous deployment costs. At the Fukuoka building, our first stage in reducing energy consumption was to upgrade facilities and thoroughly centralize management of air conditioning, ventilation, and lighting, which are large consumers of electricity. As a second stage, we installed dou- ble-paned windows and a solar power system, which enabled a 67% decline in annual energy consumption (fiscal2018 results) compared to ordinary buildings on the same scale. This knowhow will, we believe, provide a major contribution to spreading ZEB to medium-sized office buildings. Daikin has been recognized for such efforts, and was awarded the Director-General Prize from Agency for Natural Resources and Energy. * Buildings achieving a reduction of greater than 50% compared to the energy saving standard for ordinary buildings. 28 Daikin Industries, Ltd. (cid:3) Environmental Vision 2050 In the Paris Agreement adopted in 2015, the declared goals were to reduce green- house gas emissions to zero in the second half of this century and to keep the glob- al average temperature rise below 2°C compared with before the Industrial Revolution. To demonstrate its approval of the Paris Agreement, the Daikin Group has formulated its “Environmental Vision 2050” to aim for zero greenhouse gas emissions in 2050. Reflected in the latter half of “FUSION 20,” our three-year Strategic Management Plan, we have also started to develop a medium- to long-term strategy targeting 2030. Open Innovation IoT and AI Through products Through solutions Daikin Environmental Vision 2050 We will provide safe, healthy air environments while striving to reduce greenhouse gas emissions to zero. Open Innovation IoT and AI Open Innovation IoT and AI Through the power of air Development of Medium- to Long-Term Strategy toward Realization of Environmental Vision 2050 To create new added value from the air generated by our products across the world and to aim for zero greenhouse gas emissions by means of our products and solutions, we analyzed the future of the air-conditioning business. From the results of that analysis, we are developing and implementing measures under “FUSION,” our Strategic Management Plan formulated with an eye toward 2030. Through products Through solutions Through the power of air Philosophy toward net zero greenhouse gas emissions Image: The power of air s n o i s s i m e s a g e s u o h n e e r G Through products More energy-efﬁ cient products Development and adoption of refrigerants with lower global warming potential Reduce environmental impact throughout the entire life cycle, including production Through solutions Reduction through energy-efficient construction and spread of renewable energy Currently 2050 Offset Use of energy management to carry out efﬁ cient operation of buildings with centralized systems for energy efﬁ ciency and renewable energy Provision of energy services throughout the value chain Offset the remainder by: Switching refrigerants, recovering and recycling refrigerants Spreading use of heat-pump heating Protecting forests Conducting renewable energy businesses Others Bountiful air Highly productive ofﬁ ce environments Rooms that enhance power of concentration Rooms that help people sleep better l s e i g o o n h c e t g n i c n a v d A Health, comfortable air Reducing sleep disorders Rooms that reduce stress Rooms that reduce heat shock Safe, secure air Protecting people’s health from atmospheric pollution Reducing risk of infectious diseases Preventing heat stroke Diversifying needs Growth Strategy Based on Risks and Opportunities The forecast for rapidly increasing demand for air condition — Daikin’s main business — presents us with a huge opportunity. But along with this comes risks for the continuation of our air conditioning business: increased air conditioning means greater energy needs, increasing electricity provision costs, and higher greenhouse gas emissions. We aim to respond to these risks by turning them into opportunities. We will do this by reducing our environmental impact by, for example, developing and spreading the use of high-efficiency air conditioners, creating solutions for buildings that utilize energy effectively throughout the entire facility, and developing and spreading the use of refrigerants with lower global warming potential. In this way, we aim to protect the environment while growing our business. IEA The Future of Cooling Forecast Worldwide air conditioner stock (number of units) and electricity demand In May 2018, the International Energy Agency (IEA) released The Future of Cooling. The report looks at air conditioning and how the rise in its use is driving global energy demand. According to The Future of Cooling, estimates are for air conditioning demand to rise rapidly and for energy demand for space cooling to triple by 2050. (100 millions units) 60 2050 6,200TWh (TWh) 6,000 Energy demand for space cooling to triple by 2050 2015 2,020TWh 50 40 30 20 10 0 4,000 2,000 0 1990 2000 2010 2020 2030 2040 2050 (Year) Other Middle East Mexico Brazil Indonesia India China United States Note: Compiled by Daikin based on Graph figures IEA The Future of Cooling. Annual Report 2019 29 CSR (Corporate Social Responsibility) CSR (Corporate Social Responsibility) New Value Creation (cid:3) 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 tech- nology, we aim to integrate cutting-edge technologies from dif- ferent 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 resolu- tion of social issues such as energy, the environment, and health. (cid:3) Daikin’s Initiative 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 ser- vices related to air and space. As the first project, in July 2019, we started a trial experiment to realize “Future Office Creation” together with partner compa- nies in a member-type workspace in Tokyo’s Marunouchi district. By having users experience the spatial content—“space where they can work more efficiently”, “a space where they can work more healthily”—created by integrating the latest technology, data, and know-how possessed by each participating company, we aim to create new products and services by demonstrating the creation of healthy and comfortable office spaces. 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 tech- nologies 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. 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. In fiscal 2019, we introduced brazing skill training support sys- tems at three technical skill dojos (training centers) in Japan and commenced operations. Starting in the current fiscal year, we plan to deploy the systems at overseas locations. Providing Comfortable Air-Conditioned Spaces in Buildings for Fixed Monthly Fees Daikin Airtechnology & Engineering Co., Ltd., a wholly owned subsidiary of Daikin Industries, established Air as a Service, Ltd. (AaaS) jointly with Mitsui & Co., Ltd. Owning air-conditioning equipment on behalf of facility owners, AaaS offers subscrip- tion-type services that provide users with comfortable air-condi- tioned spaces for a fixed monthly fee. Typically, the air-conditioning equipment in buildings and com- mercial facilities is bought in bulk and owned by the building owners, who usually conduct routine inspections, repairs, and maintenance at their own expense. The maintenance manage- ment and replacement of air-conditioning equipment, however, requires a lot of money and effort, and the equipment is often used far beyond its service life and not properly maintained, which leads to deterioration in air-conditioning effectiveness and a rise in energy costs. On behalf of the facility owners and for a fixed monthly fee, AaaS provides services ranging from air-condi- tioning equipment installation and updates to the operational management of the equipment. By maintaining energy-saving and comfortable air-conditioned spaces, the company also reduc- es the burden on the owner and improves tenant satisfaction. Increasing Outdoor Comfort with “Outer Tower” Outdoor Air Conditioner Daikin Industries has launched ”Outer Tower,” an outdoor-use air condi- tioner that brings comfort to outdoor spaces where the heat can become a problem, such as café terrace seating and public spaces in midsummer. This product delivers cold air from the sides of its tower-shaped body in all four directions—to the front, back, left, and right—to a distance of about three meters. Since the structures of a general indoor air condi- tioner unit and an outdoor unit have been integrated into one self-con- 30 Daikin Industries, Ltd. tained unit, refrigerant piping work is unnecessary, and thus an ”Outer Tower” can be installed anywhere you like. Cool spots can be created outdoors. Customer Satisfaction (cid:3) 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, cul- ture, 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. (cid:3) Daikin’s Initiatives Implementing Global Quality Guidelines In its Global Quality Guarantee Rules, the Daikin Group has pre- scribed its basic stance on quality standards across its Group com- panies and outlined the responsibility and authority structure to ensure the seamless implementation of measures for quality monitoring and correction. We have acquired ISO9001 certifica- tion at all production facilities, and, through our quality manage- ment 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 sys- tem, the Daikin Group conducts evaluations through internal audits and maintains a continuous cycle of implementation, eval- uation, and improvement. In addition, every year, we plan and implement a quality assur- ance program for the fiscal year that outlines quality priority mea- sures and targets for each business division based on the Group’s annual policy guidelines. Developing Our Service Structure in Japan and Abroad The Daikin Contact Center is a general inquiry service that accepts inquiries regarding repair requests, technical consulta- tions, 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 with “speed, accuracy, and good mangers” to respond to the variety of requests specific to each country or region. In fiscal 2019, we renewed our existing customer inquiry service in China. In addition to repairs and other problems that have tradi- tionally formed part of the service, we have created a system where- by air-conditioning professionals can provide advice, such as on model selection and usage suggestions, as a general inquiry service. 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 2019, the overall satisfaction score was 4.56 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. In fiscal 2019, we responded to feedback from customers in Japan who were worried about humidity countermeasures for homes that had been left vacant for long periods of time by launching “Karaie,” which dehumidifies homes with no need to throw away water. We also answered calls for diversification of interior design by launching “risora,” the front panel of which can be painted in the customer’s favorite from a choice of 600 colors. Global Product Development System to Meet Diverse Regional Needs The functions and performance required of air conditioners vary greatly from region to region, depending on factors that include the climate, culture, power supply situation, and income levels. To rapidly develop products in line with such local circumstances, we have R&D centers in 25 locations around the world and have established a system that allows us to offer local products at com- petitive prices. We also share the know-how gained at each base and utilize that expertise throughout the entire Group to accelerate the development of products that satisfy our customers. Of the 25 locations, five locations in Europe, the United States, India, China, and Japan are designated as mother R&D centers. Previously, R&D responsibilities were shared by areas of expertise assigned to specific regions. For example, Japan was solely responsible for bringing together key technologies, India for the Company’s responses to high ambient temperatures, and Europe for heating, and each region fulfilled a global mother function. First Place in “Corporate Telephone Answering Contest” At the 22nd “Corporate Telephone Answering Contest,” spon- sored by the Japan Telecom Users Association (JTUA), the Daikin Contact Center received a Directors Award (ranked first overall). Also, for the second consecutive year, Daikin was selected as a Gold Ranked Company. Highly rated criteria in the gaining the awards were the quick, polite, and detailed explanations, and the friendly way in which inquiries are handled. “Assisnet Service” Supports Maintenance Management of Air-conditioning Equipment Daikin Industries launched its ”Assisnet Service” to support, at low cost, the maintenance management of air-conditioning equipment in buildings and commercial facilities. The service covers the periodic inspections required under the Fluorocarbons Emission Reduction Act, the notifica- tion of abnormal air conditioner operations, and the ascertaining of cumulative operating hours. Making inspections mandatory is extremely important from the viewpoint of preventing global warming. On the other hand, these add new duties on top of the normal equipment main- tenance and management tasks for employees in small and medi- um-sized buildings and stores. As they do not have dedicated equipment managers, and their workload is greatly increased, reductions are being requested. The ”Assisnet Service” provides comprehensive support for inspections and maintenance management, enabling increased efficiency in the management operations of air-conditioning equipment. Annual Report 2019 31 CSR (Corporate Social Responsibility) CSR (Corporate Social Responsibility) Human Resources (cid:3) 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 satis- faction”, the personnel who can take on the responsibility to per- form 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. (cid:3) 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 manufactur- ing. 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 2019, the number of qualified personnel in Japan was one in 2.9 people. Meanwhile, we are working to enhance training opportunities in the form of Off-JT that include: the Daikin Leadership Development Program, which fosters the executives who can play an active role on the front line of our global business; over- seas base practical training to develop young, globally minded human resources; and the “Daikin Information and Communications Technology College,” an in-house lecture to train the personnel responsible for technological and business development in the AI field. * Off-the-Job Training, a method of learning away from work to gain extra knowledge and skills Appointment of Local People in Executive Positions at Overseas Facilities In conjunction with the globalization of the Daikin Group’s busi- ness, we are also advancing with efforts to globalize our manage- ment team and are aggressively promoting local employees at overseas bases to executive and positions. At the end of fiscal 2019, 46% of the presidents at our overseas bases and 43% 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 goals, we are aiming to have at least one female director at Daikin Industries and increase the number of female managers to 100 by the end of fiscal 2021. As of the end of fiscal 2019, there were 59 female managers, and we are reforming the awareness of managers and employees with regard to women’s issues, while expanding the support measures designed to assist in balancing work and childcare. In March 2019, having been evaluated as an outstanding enterprise in encouraging women’s success in the workplace, it was announced that Daikin Industries had been granted Nadeshiko Brand designation—for the sixth time, and the fifth consecutive year—by both the Ministry of Economy, Trade and Industry and the Tokyo Stock Exchange. New Factory Commences Full-Scale Operations in Vietnam, Spreading Adoption of Energy-saving Air Conditioners Due to the expense of electricity bills that take away a large part of people’s incomes, air conditioners that offer high energy sav- ings, such as inverter air conditioners, are in demand in Vietnam. To provide for the stable supply of high-quality, energy-saving air conditioners, Daikin Air Conditioning Vietnam established a new factory near Hanoi in May 2018. In fiscal 2021, production capacity will be doubled compared with fiscal 2019 to one mil- lion units per year, and the company is planning to increase the number of employees in Vietnam as a whole from 1,779 in fiscal 2019 to 2,250. The company will also focus on developing human resources, such as sales and services staff, who are indis- pensable in the adoption of Daikin air conditioners. There having been roughly a five-fold increase in demand for air conditioners in Vietnam between 2008 and 2018, it is expected that the expansion trend will continue in the years to come. Promoting Understanding of LGBT Issues At Daikin Industries, the understanding of LGBT issues has been deepened by holding practical training, including basic knowl- edge of LGBT issues and workplace responses, for around 500 directors, managers, and team leaders. In addition, the defini- tions of “marriage” and “gender” were clarified in personnel terms, and “actual marriage (including same-sex partners)” and “gender through self-identity (gender with which someone iden- tifies)” recognized. Overseas Bases Becoming Main Centers for Developing Human Resources That Support Adoption of Air Conditioners The Daikin Group is advancing the building of manufacturing systems around the world. Daikin Industries (Thailand) Ltd. is spearheading the training of the technicians involved in manufacturing at the Daikin Air Conditioning Vietnam plant, which commenced operations in May 2018. The new factory in Vietnam has a shortage of skilled technicians who have the basic skills to manufacture air conditioners. Training for about 60 management-level employees from the Vietnamese company was therefore held at the Thai factory even before the new factory had com- menced operations. Daikin in Japan provided guidance for the introduc- tion of the latest technologies, such as the utilization of IoT technology for the production control system, which is the first of its kind in Asia and Oceania. This has naturally led to Daikin Air Conditioning Vietnam train- ing the Thai company technicians that had instructed the Vietnamese. Such intercountry exchanges provide opportunities for both the instruc- tors and trainees to improve their leadership and technical skills, while serving to increase their motivation. 32 Daikin Industries, Ltd. Initiatives to Reduce Workplace Related Accidents to Zero To ensure operational and employee safety at its production facil- ities in each region worldwide, the Daikin Group has created occupational health and safety management systems (OHSAS) at 44 facilities and is acquiring certification for international stan- dards, 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 2019, the frequency rate of industrial accidents throughout the Group was 1.38, an improvement of 0.05 from fiscal 2018. CSR Management/ Compliance Risk Management (cid:3) CSR Management The Daikin Group established the important themes of “CSR for value provision” 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 compre- hensive and Groupwide CSR. In fiscal 2018, at the CSR Committee, we discussed the neces- sity and content of our long-term environmental vision encom- passing the Paris Agreement’s aim to keep the rise in temperature below 2°C, and the sustainable development goals (SDGs) adopt- ed by the United Nations and reported to the president. (cid:3) 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, includ- ing risk management, are functioning properly Groupwide. Chaired by the officer in charge of corporate ethics and compli- ance, 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 comprehen- sive common rules to tackle compliance and risk management. The issues faced by each company and the progress toward reso- lution are reported to the Corporate Ethics and Risk Management Committee. In fiscal 2019, compliance meetings were held in Asia, Oceania, Europe, and China to share information on self-assessment as well as on education and training initiatives. 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 over- seas. CRLs encourage adherence to the Group Code of Conduct, while regularly checking the status of compliance and risk man- agement and sharing information, and they are focused on fos- tering a “culture free of compliance violations” and to elevating “mechanisms to ensure that there are no compliance violations.” (cid:3) 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 2019, 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 Charge 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 Annual Report 2019 33 CSR (Corporate Social Responsibility) 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 princi- ples 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-Assesment 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 com- pliance with the Group Code of Conduct, we established an item relating to respect for human rights in the annual self-assesment 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 thor- ough 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 pub- lish a series of human rights articles in the Company newsletter to raise awareness of human rights. In fiscal 2019, e-learning was conducted for all employees in Japan to raise human rights awareness and prevent harassment. Using recent social trends and specific examples of harassment, we worked to raise the awareness of each and every employee. Establishment of Consultation Desk Daikin Industries has established a Corporate Ethics Consultation Desk that gives consultations and receives opinions on general corporate ethics from employees. We also conduct harassment training geared toward department heads and managers, includ- ing training for newly appointed managers, to alert them with regard to the handling of information when consulted. We have in place a system for taking prompt measures by which the Legal Affairs Department investigates the content of reports and tip-offs and decides on measures to prevent recur- 34 Daikin Industries, Ltd. rence following discussions with the department in charge. To make the existence of the Corporate Ethics Consultation Desk common knowledge, its contact information is listed on the Compliance Card carried by employees. 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 sup- pliers 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. In fiscal 2019, we conducted a CSR survey of 135 major busi- ness partners in Japan, as a result of which the CSR procurement implementation rate was found to be 94%. We conduct inter- views with suppliers who are judged to be at risk and provide suggestions on how to improve and guidance according to the guidelines. From the current fiscal year, we will work to further improve the CSR level of domestic suppliers and roll out this ini- tiative globally. 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 suppli- ers, 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 quali- ty audits and quality improvements, collaborating with its suppli- ers 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 inju- ries. In fiscal 2019, we introduced “chemSHERPA,” the scheme for communicating information on chemical substances contained in products recommended by the Ministry of Economy, Trade and Industry, and requested its introduction by our business partners. We aim to manage chemical substances efficiently by having the Company and our business partners use standardized report forms and databases. Stakeholder Engagement (cid:3) 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-condi- tioning 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 envi- ronmental and energy issues, we use that information in our technology as well as product and business development. In fiscal 2019, we held a total of six events in five areas. The U.S. consul general in Osaka was invited as a special guest to a North American social gathering held at Daikin Ales Aoya, our Global Training Center in the city of Tottori City. Daikin’s energy-saving technologies and environmental strategies were explained, and lively discussions held on the potential of IoT and AI technologies. 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. As part of this, we held a Sustainability Briefing in fiscal 2019. Having explained our envi- ronmental efforts, such as our Environmental Vision 2050 that we formulated in 2018, and our approach to human resource development, we received many opinions. To make it easier for shareholders to exercise their voting rights at ordinary general meetings of shareholders, the Japanese and English versions of convocation notices are posted on our website and that of the Tokyo Stock Exchange prior to being sent. The exercise of voting rights on PCs, smartphones and mobile phones is also possible. Regional Society The Daikin Group is made up of 291 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 his- torical 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 conservation,” “education support,” and “cooperation with the local communi- ty” 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 natu- ral 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 2019, a total of 190 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 tradition- al 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 help- ing 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 oper- ated 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. Annual Report 2019 35 Eleven-Year Financial Highlights 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 ﬂ ow Cash dividends Ratios (%): Gross profit margin Operating income margin EBITDA margin Return on shareholders’ equity (ROE) Shareholders’ equity ratio 2009 2010 2011 2012 ¥1,202,420 ¥1,023,964 ¥1,160,331 ¥1,218,701 363,660 302,266 30,535 61,394 118,325 21,755 ¥62,238 (99,302) (37,065) 48,382 319,301 275,263 28,220 44,038 96,462 19,391 ¥129,227 (39,848) 89,379 (34,942) 361,665 286,210 30,771 75,455 127,168 19,873 ¥78,411 (23,306) 55,105 (37,623) 371,902 290,709 32,987 81,193 131,719 41,172 ¥44,967 (62,955) (17,988) (1,113) ¥1,117,418 ¥1,139,656 ¥1,132,507 ¥1,160,564 417,919 471,686 399,313 496,179 372,481 487,876 389,891 502,309 ¥ 74.51 1,615.98 (127) 38.00 ¥ 66.44 1,701.29 306 32.00 ¥ 68.14 1,672.74 189 36.00 ¥ 141.37 1,725.64 (62) 36.00 30.24% 31.19% 31.17% 30.52% 5.11 9.84 4.28 42.21 4.30 9.42 4.01 43.54 6.50 10.96 4.04 43.08 6.66 10.81 8.30 43.28 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. 5. Effective from April 1, 2018, the consolidated financial statements for the fiscal year ended March 31, 2018 have been revised in accordance with a change in accounting policy. Net Sales (¥ billion) 2,500 2,000 1,500 1,000 500 0 Operating Income Net Income Attributable to Owners of the Parent (¥ billion) 300 250 200 150 100 50 0 (¥ billion) 200 150 100 50 0 09 10 11 12 13 14 15 16 17 18 19 09 10 11 12 13 14 15 16 17 18 19 09 10 11 12 13 14 15 16 17 18 19 36 Daikin Industries, Ltd. 2013 2014 2015 2016 2017 2018 2019 Millions of Yen ¥1,290,903 ¥1,787,679 ¥1,915,014 ¥2,043,691 ¥2,043,969 ¥2,290,561 ¥2,481,109 388,046 299,419 33,569 88,627 140,151 43,585 568,323 411,786 40,177 156,537 235,439 92,787 649,902 459,314 42,892 190,588 268,354 119,675 ¥103,161 ¥179,713 ¥160,423 (218,386) (115,225) 143,520 (80,835) 98,878 (38,249) (77,331) 83,092 (83,073) 711,576 493,704 46,138 217,872 302,075 136,987 ¥226,186 (105,493) 120,693 (85,422) 730,935 500,166 53,870 230,769 315,798 153,939 ¥267,663 (128,823) 138,840 (73,544) 798,829 545,089 62,051 253,740 348,574 189,052 ¥223,740 (127,459) 96,281 (93,955) 868,923 592,668 65,216 276,255 375,570 189,049 ¥250,009 (165,773) 84,236 (68,721) ¥1,735,836 ¥2,011,870 ¥2,263,990 ¥2,191,105 ¥2,356,149 ¥2,475,708 ¥2,700,891 705,871 618,118 693,944 801,854 662,413 1,024,725 608,981 609,430 1,014,409 1,111,636 554,371 1,296,553 585,642 1,416,075 ¥ 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 ¥ 646.39 4,841.15 288 160.00 30.06% 31.79% 33.94% 34.82% 35.76% 34.87% 35.02% 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 52.37 11.13 15.14 13.94 52.43 Research and Development Expenses Shareholders’ Equity Total Assets (¥ billion) 75 60 45 30 15 0 (¥ billion) 1,500 1,200 900 600 300 0 (¥ billion) 3,000 2,500 2,000 1,500 1,000 500 0 09 10 11 12 13 14 15 16 17 18 19 09 10 11 12 13 14 15 16 17 18 19 09 10 11 12 13 14 15 16 17 18 19 Annual Report 2019 37 Financial Review Financial Review Summary of the Period Japan During the fiscal year ended March 31, 2019, the overall world economy In the Japanese commercial air-conditioning equipment market, industry expanded moderately in the first half of the period; however, increasing demand rose year on year due to strong capital investment. In the market uncertainty and signs of a slowdown in growth were seen from the latter for stores and offices, the Daikin Group expanded sales thanks to the strong half of the period onward. In the U.S. economy, although residential invest- performance of the “SkyAir” series, including “FIVE STAR ZEAS” and ment slowed, personal consumption remained strong due to large tax cuts. “Eco-ZEAS,” and “machi Multi,” which features individual operation and a The growth of the European economy slowed from the latter half of the slim design. In the market for buildings and facilities, a new model was period due to the stagnation of the German economy and concerns about released in the “VRV” series, further improving energy-saving performance the U.K.’s exit from the EU without a withdrawal agreement. The Chinese and installation flexibility. Furthermore, backed by robust demand and the economy slowed down from the latter half of the period onward due to increasing need for improvements in the work environment, mainly for offices increasingly serious trade friction between the United States and China, and factories, sales expanded for proposal-based products that meet user and inventory adjustments for high-tech products. The growth of the applications, including “MULTI CUBE,” which enables individual control of Japanese economy was sluggish due to a slowdown in exports, despite temperature and air volume even in a large space. As a result, net sales of firm personal consumption and capital investment. commercial air-conditioning systems increased over the previous fiscal year. Amid this environment, the Daikin Group’s consolidated net sales rose to In the Japanese residential air-conditioning equipment market, industry ¥2,481.1 billion (a year-on-year increase of 8.3%). As for profits, consolidated demand remained firm owing to the summer heat wave. In addition to the operating income rose to ¥276.3 billion (a gain of 8.9% from the previous launch of the new “Urusara 7,” a high-end model equipped with a function fiscal year). Net income attributable to owners of the parent decreased by that even controls humidity with the Group’s proprietary AI, sales of “risora,” 0.0% to ¥189.0 billion, partly owing to the decrease in income taxes in the an air conditioner combining design with functionality, showed a robust previous fiscal year resulting from tax revisions in the United States. performance. As a result, net sales of residential air-conditioning systems Performance by Business Segment (cid:129) Air-Conditioning and Refrigeration Equipment Americas Region exceeded that of the previous fiscal year. Total sales of the Air-Conditioning and Refrigeration Equipment segment In the Americas, net sales increased year on year as a whole due to the increased 8.2% from the previous fiscal year, to ¥2,222.2 billion. Operating success of both sales strategies and strong demand. Net sales of residential income rose 6.3% year on year, to ¥237.6 billion. air-conditioning systems rose over the previous fiscal year as a result of the launch of new products such as a low-cost mini split model and a unitary product with an inverter, and efforts to develop a new sales network as well as increase selling prices. Net sales grew year on year in light commercial air-conditioning systems for medium-sized office buildings due to expanded 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 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019 Domestic Overseas sales Operating income Operating income margin 38 Daikin Industries, Ltd. sales of the “VRV” series. In the market for large buildings (Applied Systems), Asia/Oceania Region reinforcement of the sales network and enhancement of the product lineup In the Asia and Oceania regions, net sales rose year on year as a whole. Sales amid strong demand led to sales expansion of Applied Systems mainly for of residential air-conditioning systems in Southeast Asia were strong due to rooftops. In addition, sales expansion in the after-sales service business led the development of dealer networks covering urban and regional areas, with to an increase in net sales over the previous fiscal year. net sales increasing over the previous fiscal year. Net sales of commercial China air-conditioning systems grew year on year mainly due to the expansion of dealer networks and successful efforts to bolster ‘spec-in’ activities. In India, In China, amid the increasingly harsh market environment resulting from the sales of residential air-conditioning systems increased due to the expansion trade friction with the United States as well as government policies to restrict of dealer networks and sales expansion in regional cities. Sales of commercial new housing construction, the Group changed its product strategies and air-conditioning equipment were also strong. As a result, net sales expanded expanded sales to regional cities. As a result, net sales remained flat year on over the previous fiscal year. year. At the same time, the Group maintained high earnings by minimizing the impact of changes in currency exchange rates and increases in purchasing Europe/The Middle East/Africa costs, reducing fixed costs, and promoting cost reductions. In the residential-use In Europe, while a deceleration was seen in the economy, net sales increased market, in addition to the “New Life Multi” series aimed at the mid-range year on year as a whole as the Group’s efforts to bolster sales capabilities and high-end residential market, the Group responded to changes in the and the launch of new products in European countries resulted in sales market by expanding the “Affordable Multi” series to capture a share of the growth, especially in such major countries as France. Sales of residential general residential market. As the number of real estate projects fell, the air-conditioning systems rose in each major country due to the expansion of Group expanded the sales network of its “PROSHOP” specialty outlets mainly sales of air-conditioning systems with low global warming potential (low-GWP in the regional cities where sales were relatively strong. In the commercial-use systems) and as the result of efforts aimed at the summer heat wave in market, while the number of large-scale projects such as new buildings fell, the Northern Europe. Net sales of commercial air-conditioning systems grew year Group invested its resources in such growing markets as the restaurant, medical, on year due to new construction and the capture of replacement demand, and information fields. In the big cities, the Group focused on capturing along with other factors such as the promotion of low-GWP systems in the replacement demand through “Intelligent VRV” systems, which use the market for stores. Net sales of heat pump hot water heating systems grew Internet to connect with customers. In the Applied Systems air-conditioning significantly year on year due to a reinforcement of the Group’s dedicated sales equipment market, the Group proposed systems tailored to the needs of system, the development of heating system sales routes, and the introduction diverse customers and increased equipment sales for projects ranging of new products. from such large-scale projects as infrastructure investment to small- to In the Middle East and Africa, net sales increased year on year as a whole medium-scale projects, and also expanded sales in the maintenance and amid instability in the political scene, such as the reinstatement of sanctions on after sales service business as well. Iran. In the Middle East, the Group expanded its sales network and reinforced Selling, General and Administrative Expenses Sales by Segment Segment Profit (¥ billion) 600 400 200 0 (¥ billion) 2,500 2,000 1,500 1,000 500 0 (¥ billion) 300 200 100 0 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019 Air conditioning Chemicals Other Air conditioning Chemicals Other Annual Report 2019 39 Financial Review Financial Review its management of projects for which orders had been received. In Africa, (cid:129) Other Operations sales of residential and commercial air-conditioning systems also increased. Overall sales of the “Others” segment increased by 6.6% compared to the In Turkey, even as inflation negatively impacted personal consumption and previous fiscal year to ¥58.1 billion. Operating income expanded by 27.5% building investment, the Group raised prices and expanded sales of relatively year on year to ¥6.1 billion. strong residential heating systems. As a result, net sales increased significantly Sales of oil hydraulic equipment for industrial machinery grew year on year on year in the local currency. On the other hand, yen-equivalent net year due to strong performance in the Japanese and U.S. markets. Sales of oil sales decreased year on year due to the impact of the sharp depreciation of hydraulic equipment for construction machinery and vehicles were up year the Turkish lira. In the marine vessels business, net sales rose year on year on year due to robust sales to key customers in Japan and the United States. due to an increase in unit sales of marine container refrigeration units. In defense systems-related products, net sales of home oxygen equipment (cid:129) Chemicals were strong, while sales of ammunition to the Ministry of Defense fell. As a result, overall net sales decreased compared to the previous fiscal year. Overall sales of the Chemicals segment increased by 9.6% from the previous In the electronics business, net sales grew year on year, as a result of strong fiscal year to ¥200.8 billion and operating income grew by 27.5% year on sales of “SpaceFinder,” a database system for the design and development year to ¥32.5 billion. Net sales of fluoropolymers rose year on year due to sectors in line with customer needs such as solutions for quality issues, shortened the expansion of sales of new products for LAN cable applications in the U.S. design and development periods, and support for cost reductions, and sale of market and strong demand for semiconductor-related applications in each “Smart Innovator,” a business application development system. region around the world. Net sales of fluoroelastomers also increased year on year due to robust demand in the automotive and semiconductor fields in Currency Exchange Rates the Japanese and U.S. markets. Among specialty chemicals, net sales of In foreign currency markets, the yen remained essentially unchanged against anti-fouling surface coating agents fell year on year due to the significant the U.S. dollar while appreciating ¥2 against the euro. The average rates for effects of declining demand in China. On the other hand, net sales of oil and the fiscal year under review were US$1=¥111 and 1=¥128. Fluctuations in water repellents grew year on year due to firm demand in Japan, China, and currency exchange rates resulted in a decrease of ¥28.0 billion in sales and Asia. As a result of these factors, overall sales of specialty chemicals were up ¥14.0 billion in operating income below what they would have been in the compared to the previous fiscal year. As for fluorocarbon gas, overall sales of absence of fluctuations. gas increased substantially year on year as a result of price revisions undertaken primarily in Japan and Europe to address rising prices of raw materials and a tight supply-demand balance. Yen-U.S. dollar rate Yen-euro rate Fiscal 2018 Fiscal 2019 ¥111 ¥130 ¥111 ¥128 Cash Dividends per Share Total Assets Working Capital and Current Ratio (¥) 200 150 100 50 0 (¥ billion) 3,000 2,000 1,000 0 (¥ billion) 600 400 200 0 (%) 240 160 80 0 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019 Working capital Current ratio 40 Daikin Industries, Ltd. SG&A Expenses and Operating Income Cash Flows As a result of increases in personnel costs and other factors, SG&A expenses During the fiscal year under review, net cash provided by operating activities rose 8.7% over the previous fiscal year, to ¥592.7 billion. was ¥250.0 billion, an increase of ¥26.3 billion from the previous fiscal year, Consolidated operating income expanded 8.9% year on year, to ¥276.3 principally due to an increase in income before income taxes. Net cash used billion, while the operating income remained unchanged compared to the in investing activities was ¥165.8 billion, an increase of ¥38.3 billion from previous fiscal year at 11.1%. the previous fiscal year, primarily due to an increase in expenditures for the acquisition of consolidated subsidiaries. Net cash used in financing activities Assets, Liabilities, and Total Equity was ¥68.7 billion, a decrease of ¥25.2 billion from the previous fiscal year, (cid:129) Assets mainly due to an increase in short-term borrowings. After including the effect At the end of fiscal 2019, consolidated total assets amounted to ¥2,700.9 of foreign exchange rate changes to these results, the net increase in cash and billion, up ¥225.2 billion from the previous fiscal year-end. Current assets cash equivalents for the fiscal year under review, amounted to ¥10.2 billion, a were up ¥112.3 billion from the end of the previous fiscal year, to ¥1,317.6 decrease of ¥2.7 billion from the previous fiscal year. billion, because of an increase in trade accounts receivable and other factors. Noncurrent assets rose by ¥112.9 billion from the previous fiscal year-end, to Capital Investment ¥1,383.3 billion, due mainly to an upswing in the incidence of customer-related Adhering to the basic strategy of “Focusing Management Resources on assets resulting from the acquisition of consolidated subsidiaries. More Profitable Areas,” the Daikin Group’s capital expenditures were mainly allocated to the Air-Conditioning and Refrigeration Equipment and (cid:129) Liabilities and Net Assets Chemicals segments, with the total amounting to ¥87.2 billion. Consolidated total liabilities increased by ¥102.7 billion compared to the In the air-conditioning and refrigeration equipment field, Daikin invested end of the previous fiscal year, to ¥1,254.0 billion. This was largely due to an ¥14.1 billion, centered on research and development as well as the ratio- upswing in short-term borrowings and other factors. Net assets grew ¥122.5 nalization of room air conditioners and package air conditioners. At Daikin billion from the previous fiscal year-end, to ¥1,446.9 billion, due to net Europe N.V. Group, investments of ¥9.4 billion were made primarily to income attributable to owners of the parent and other factors. As a result of increase capacity and to attain rationalization objectives. the aforementioned, the shareholders’ equity ratio remained at the same In the chemicals field, Daikin invested ¥8.4 billion, mainly to increase level as the previous fiscal year-end at 52.4%. Net assets per share improved capacity and meet rationalization objectives. In addition, Daikin America, Inc. to ¥4,841.15 from ¥4,433.62 for the previous fiscal year. made investments of ¥4.0 billion for increasing capacity. The main sources of funds for these investments were bank borrowings and retained earnings. Note that the Daikin Group did not make any major disacquisitions of equipment or facilities during the fiscal year under review. 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 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019 Shareholders’ equity Shareholders’ equity ratio Capital investment Depreciation and amortization (excluding amortization of goodwill) Annual Report 2019 41 Financial Review Financial Review R&D Expenses (cid:129) Air-Conditioning and Refrigeration Equipment In view of the rising concern about global warming on a worldwide scale R&D expenses for air-conditioning and refrigeration operations totaled and issues related to energy, the Daikin Group working mainly through its ¥56.7 billion. Technology and Innovation Center (TIC) engages in leading-edge research and In its wall-mounted-type “Urusara 7” series of air-conditioning units for development programs designed to proactively contribute to the resolution of residential use, Daikin developed a new “automated AI-based comfort” global environmental issues, while also expanding the Group’s business operating function that automatically regulates the thermal environment to operations. In 2018, Daikin concluded an “academia-industry collaboration preferred levels in line with changes in the weather and season. The Company agreement” with the University of Tokyo. Both organizations are adopting a has taken an interest in monitoring the impact of humidity on the body’s comprehensive approach toward joint research and development as well as temperature for a long period of time. While successful in developing a personnel exchange. Steps are also being taken to promote increasingly technology that controls humidification and dehumidification, this is the first sophisticated collaboration with venture companies related to the University. product in its series to combine proprietary humidity and other control Daikin has already formed collaborative ties with a number of other tertiary technologies with the learning function that AI provides in delivering a institutions including Kyoto University as well as Tsinghua University and preferred thermal environment and a comfortable indoor environment all Peking University in China in its efforts to promote academia-industry year round. collaboration. The Company is also pursuing opportunities through In the field of equipment for residential use, Daikin has also looked closely cooperation with the corporate sector. By actively advancing collaborative at the damage caused to and mold found in houses and their stored items by ties, Daikin is endeavoring to generate innovation, help resolve a wide-range humidity depending on the location of the house and use of rooms. This led to of complex social issues, and create new businesses. At the same time, the release in February 2019 of the residential-use wall-mounted “Karaie” energies are being directed toward the creation of the “office of the future.” dehumidification dryer, which eliminates the need to dispose of water, and Building on the wealth of data gained from open spaces, the Company can be operated on a continuous basis 24 houses a day, 365 days a year. This contributed to the establishment of “CRESNECT,” a co-creation platform for dryer applies the water supply-free humidification technology equipped on spatial data, in a bid to generate new value and services while harnessing Daikin’s “Urusara 7” room air conditioners. This humidification technology the know-how inherent within each participating partner. Through this uses an absorption material (desiccant element) to absorb moisture contained initiative, positive steps will be taken to substantially increase the efficiency in indoor air and exhausts the absorbed moisture as high-humidity air in and pace of research and development, and to create differentiated gaseous form to the outside, thereby enabling dehumidification without the products in each region worldwide. In fiscal 2019, R&D expenses included need to dispose of water. in Group-wide SG&A expenses as well as the cost of goods sold came to In regard to commercial air conditioning equipment, Daikin released the ¥65.2 billion. “FIVE STAR ZEAS” series and “Eco-ZEAS” series as new models in the Research and Development Expenses (¥ billion) 80 60 40 20 0 ROE (%) 16 12 8 4 0 ROA (%) 8 6 4 2 0 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019 42 Daikin Industries, Ltd. “SkyAir” lineup of store and office air conditioners in April 2018. These series (cid:129) Chemicals are the only air conditioners in the industry to realize a higher level of comfort R&D expenses for Chemicals operations totaled ¥6.6 billion. than ever before by simultaneously setting the temperature and dehumidifica- Daikin conducts R&D for new products and new applications based on its tion level. These air conditioners are also newly equipped with a “dehumidi- rich experience in fluorine products and fluorochemical technology. In the fying cooling mode” that realizes a more comfortable environment than ever fluoropolymer resin and fluoroelastomer fields, fluorochemicals exhibit good before during hot and humid summers. Moreover, applying its proprietary heat resistance, low drug reactivity, and dielectric properties. Using these streamer discharge technology, Daikin newly developed “Streamer Internal properties, Daikin is developing new differentiated products for automotive, Cleaning,” a function designed to suppress the growth of mold, a cause of semiconductor, wire and cable (IT field), and other applications. Daikin also unpleasant odors, inside indoor units. Daikin also newly developed a “night- develops coatings based on the non-adhesive and chemical resistant properties time watch” function that provides a warning using an LED light and buzzer of fluoride-based substances, and develops textile treatment materials and when it detects a person during the night when no one is around. Daikin carpet treatment materials based on the water and oil repellent properties. offers these for restaurants and hospitals. In addition, Daikin also released In addition, Daikin engages in a wide range of fluoride-related R&D, including the “VRV X” series, a flagship model, and the “VRV A” series, a standard the development of liquid crystal related materials based on the functionality model, for its commercial-use multi-split type air conditioners in July 2018. of fluorine-containing compounds and the provision of contracted synthesis The newly developed outdoor unit for these models is equipped with a com- research for pharmaceutical intermediates. In the coolants field, Daikin is pact, high-efficiency all aluminum microchannel heat exchanger. This heat accelerating the development of next-generation coolants that utilize artificial exchanger reduces the installation footprint by 7% compared with convention- intelligence and that comply with environmental regulations. In addition to al units equipped with copper and aluminum heat exchangers. These models these developments, as part of R&D in peripheral areas aimed at developing are also effective in limited rooftop spaces. Equipped with a high-capacity new techniques and applications, Daikin is working on the development of compressor and through improved heat exchange efficiency, the heat film process products and multilayered materials and conducts advanced exchangers in these outdoor units demonstrate a cooling capacity up to an materials research related to the medical, optical, environmental, electric power outdoor temperature of 41°C while also enabling operations at an outdoor battery, and energy areas. Through these initiatives, Daikin is endeavoring to temperatures of 50°C. The release of these models has improved operating further secure the global No. 1 position and sole provider of fluorochemical capacity during the intense heat of recent years. In August 2018, Daikin solutions. Especially, in the next-generation power semiconductor field, using released the commercial-use “GREEN Multi” multi-split type air conditioner, its original fluoropolymer resins, Daikin has developed new materials that find which is the first air conditioner in the industry to adopt the low-GWP refrig- application in the film condenser field that have five times the conductivity erant HFC-32 (R32) for a far greater environmental performance than con- ratios of polypropylene-based materials. ventional models. HFC-32 has a lower global warming potential (GWP) By furthering and accelerating its R&D, the TIC, which has the mission of than the conventional R-410A. Distinguished by its outstanding energy effi- new product development in Daikin’s Chemicals business, is seeking to ciency and ability to reduce refrigerant charging volume, the environmental develop technologies that will lead on next-generation themes. impact resulting from the refrigerant used in this product realizes a 76% reduction compared with the conventional model. This percentage is equiva- (cid:129) Other Operations lent to the reduction targets for 2029 under the Kigali Amendment. Moreover, R&D expenses for the Other operations totaled ¥1.9 billion. the high energy-savings, even during periods of use, reduce CO2 emissions In oil hydraulics, Daikin is drawing on the special features of its hybrid oil and thus mitigate the environmental impact. hydraulic systems technology, which combines oil hydraulic technology and In regard to applied units, in North America, Daikin expanded its inverter technology to realize energy conservation and high functionality that high-efficiency product and function lineup with the release (May 2018) of could not be realized with previously existing hydraulic systems. In addition, high-efficiency, high air density rooftop air conditioners and small- and in Japan and overseas, besides the medium- to low- and small-volume markets, medium-sized rooftop “Rebel” air conditioners equipped with a total heat where use is expanding, Daikin is also developing units for high-pressure exchange function. In Europe, against a backdrop of increasing pressure to shift and high-volume applications. In the industrial press and other industrial to low-GWP refrigerants due to fluorine gas and energy-savings regulations, in machinery applications, Daikin’s “Super Unit” has won high acclaim for its July 2018 Daikin was the first in the industry to release a non-inverter scroll low electric power consumption. It also contributes to improvement in the chiller using R32 refrigerant. Daikin also released a free cooling model in workplace environment and reduction in environmental impact because of November 2018. In China, Daikin released turbo chillers and screw chillers its lower noise, reduced heat emission, and smaller tank size. Moreover, that comply with new GB standards, and released an air-cooled heat pump Daikin has launched a large-scale extruder system that equals electric power module chiller for cold regions using R32 refrigerant. as a motive force for its responsiveness and energy conservation. By expanding the lineup of units in this series to meet the special needs of countries in Annual Report 2019 43 Financial Review Financial Review Asia and other regions for handling multiple voltages and other features, stagnation in the global economy, we will work together to continue to Daikin will promote the adoption of this system for presses and other refine our efforts to strengthen our sales and marketing capabilities, improve machines and move forward with sales expansion globally. product development, production, procurement, and quality capabilities, Also, Daikin is proceeding with the development of an energy conservation enhance our human resources capabilities, and reduce both fixed and variable system for use on special vehicles. One of these units, a hydraulic hybrid system costs in each region around the world. Furthermore, we will respond to the for use on vehicles, has already been adopted. In addition to conventional changes in the structure of industry and society brought about by advances hydraulic systems, Daikin is proceeding with the development of advanced in digital technology, by creating new products and services through mutual environmentally responsive products that go beyond existing frameworks communication with customers, engaging in academic-industrial collaboration and will find applications globally. in technology development, and collaborating with other members of industry, In defense systems, Daikin conducts R&D related to artillery shell and including venture capital companies, to acquire differentiated technologies guided missiles components, mainly for Japan’s Ministry of Defense, as well and search for new business segments. as equipment used in home oxygen therapy. For the fiscal year ending March 31, 2020, we are forecasting a 7.6% increase in consolidated net sales, to ¥2,670.0 billion, with operating income Dividend Policy and Dividends Applicable to the Fiscal Year expected to climb 3.2% year on year, to ¥285.0 billion, and net income The Company will continue to focus on expanding its businesses while attributable to owners of the parent expanding 2.1%, to ¥193.0 billion. The investing its assets strategically and improving its financial structure by such estimated exchange rates for the fiscal year are ¥108 to the US dollar and means as proceeding with the reduction of overall costs and enhancing its ¥125 to the euro. fiscal position. Through these initiatives, we are committed to being a truly global and excellent company while at the same time further improving our corporate value and enhancing profit returns to our shareholders. Principal Risks Associated with the Daikin Group’s Operations Sharp changes in politico-economic conditions Specifically, by striving to maintain a consolidated ratio of dividend to net or supply-demand relationships in principal markets assets (Dividend on Equity, DOE) of 3.0% while at the same time aiming for The Group develops, manufactures, sells, and procures goods and services an even higher consolidated dividend payout ratio, we will introduce initiatives throughout the world, and there is a possibility that Group performance to further increase returns to our shareholders with the core goal of stable could be impacted due to changes in the business environment in the markets and continuous dividends. or regions in which the Group operates, such as political or economic trends, Internal reserves will be applied to strategic investments in order to expand the introduction of more-stringent environmental regulations, increased business and increase competitiveness such as reinforcing management competition from competitors, or sudden rises in the cost of raw materials. In practices, promoting global businesses, and accelerating eco-conscious addition, Daikin is attempting to further expand its manufacturing and sales product development. network and enhance Groupwide profitability through investment such as For the fiscal year ended March 31, 2019, the Company has proposed an the acquiring of air-conditioning equipment dealers or companies, such as annual cash dividend of ¥160 (¥70 for the interim dividend and ¥90 for the the Goodman Global Group, Inc. (completed in fiscal 2013), and the estab- year-end dividend), representing a ¥20 increase over the previous fiscal year. lishment of manufacturing facilities. However, there is a possibility that the For the fiscal year ending March 31, 2020, the Company plans to pay an Group’s performance could be impacted, depending on the state of prog- annual cash dividend of ¥160 (¥80 for the interim dividend and ¥80 for the ress of such activities. year-end dividend). Outlook for Fiscal 2020 Cold summer weather and other unusual weather patterns accompanied by changes in demand for air conditioners With regard to the global economy in the future, we expect a gradual Air-conditioning and refrigeration operations accounted for 89.6% of the slowdown. In addition to the slowdown of the Chinese economy, reduced Daikin Group’s consolidated net sales in fiscal 2019. Therefore, the Group housing investment in the United States, and the economic downturn in strives to accurately monitor weather information and weather-related Europe, factors such as a reduced interest in investment due to China-U.S. demand trends in the world’s principal markets. It also employs flexible trade friction can put further downward pressure on the global economy. We manufacturing methods and marketing policies designed to minimize the forecast a downturn in the Japanese economy due to a slowdown in exports impact of those demand trends on its performance. However, depending on and capital expenditure adjustments. Amid this business environment, for the magnitude of demand changes resulting from cold summer weather or this year (2019), we set “With Our 3 Structures of Collaborative Innovation, other unusual weather patterns, there is a possibility that the Group’s Let Each of Us Act Quickly and Decisively” as the Group’s New Year’s slogan performance could be impacted. with the aim of generating results. Specifically, in the face of this growing 44 Daikin Industries, Ltd. Large fluctuations in currency exchange rates Major changes in the market prices of securities Overseas sales accounted for 76.4% of the Daikin Group’s consolidated net and other assets sales in fiscal 2019. The acceleration of global business development going The Group’s holdings of securities are primarily holdings designed to forward is expected to further elevate this overseas sales ratio. Consolidated strengthen collaborative business expansion measures in cooperation with financial statements are prepared by translating local currency-denominated business partners and to strengthen relationships with business partners. items for Group operations in each global region, including sales, expenses, However, in the case of large fluctuations in securities markets, bankruptcies and assets. Accordingly, depending on currency exchange rates at the time of of business partners, and similar situations, there is a possibility that it could the currency translation, there may be an impact on yen translation values have an impact on the Group’s performance. even when there has been no change in local currency-denominated figures. In addition, because the Group engages in foreign currency-denominated Impairment of long-lived assets transactions in raw materials and component procurement and in the sale of In connection with its business assets, goodwill generated on the occasion of goods and services, there is a possibility that changes in currency exchange corporate acquisitions, and similar items, the Group records various types of rates could impact manufacturing costs and sales performance. To avoid such tangible and intangible long-lived assets. With respect to these assets, in currency exchange rate-related risks, the Group undertakes short-term risk cases going forward when such factors as performance trends and market hedging via forward exchange contracts and similar instruments. Daikin also price drops prevent the generation of expected cash flows, there may be undertakes medium- to long-term measures to continuously adjust procurement cases in which the assets in question may require impairment treatment. and manufacturing operations and optimize them for changing currency In the case of such impairment of long-lived assets, there is a possibility exchange-rate trends, and to balance imports and exports in each currency. that it could have an impact on the Group’s performance. Through this, the Group works to realize a business structure that is not greatly impacted by changes in currency exchange rates. However, currency Natural disasters exchange rate-related risks cannot be completely avoided. In the case that such natural disasters as major earthquakes and typhoons Major product quality claims 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 The Group strives to ensure thorough quality management for all its products, Group’s performance. 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. Major problems in manufacturing The Group strives to implement thorough preventative maintenance measures at all its production facilities, regardless of whether they are in Japan or overseas. In addition, particularly with respect to the Chemicals business, the Group is working to strengthen its facility safety audits, security management systems, and other related systems. Moreover, with respect to manufacturing problems, the Group has purchased insurance to cover facility damage and foregone earnings, but, in the case that a major problem were to occur in manufacturing operations, there is a possibility that it could have an impact on the Group’s performance. Annual Report 2019 45 Consolidated Balance Sheet Consolidated Balance Sheet Daikin Industries, Ltd. and Consolidated Subsidiaries March 31, 2019 ASSETS Current assets: Cash and cash equivalents (Notes 8 and 16) Short-term investments (Note 16) Trade receivables (Notes 7, 8 and 16): Notes Accounts Allowance for doubtful receivables Inventories (Note 3) Prepaid expenses and other current assets Total current assets Property, plant and equipment: Land Buildings and structures Machinery and equipment Furniture and fixtures Lease assets (Note 15) Construction in progress Total Accumulated depreciation Net property, plant and equipment Investments and other assets: Investment securities (Notes 5, 8 and 16) Investments in and advances to unconsolidated subsidiaries and associated companies Goodwill (Note 6) Customer relationships Other intangible assets Deferred tax assets (Notes 2 and 12) Assets for retirement benefits (Note 9) Other assets Total investments and other assets Total See notes to consolidated financial statements. 46 Daikin Industries, Ltd. Millions of Yen 2019 2018 ¥ 367,189 ¥ 357,027 592 58,725 389,106 (9,148) 436,358 74,783 62,764 338,401 (8,834) 387,226 68,710 1,317,605 1,205,294 43,492 374,356 582,500 200,912 3,427 34,824 42,997 346,768 555,628 183,591 4,063 34,014 1,239,511 1,167,061 (756,548) 482,963 (712,227) 454,834 198,698 24,647 322,319 189,365 106,457 25,057 14,510 19,270 900,323 221,251 24,184 309,282 130,851 75,926 21,213 14,735 18,138 815,580 ¥2,700,891 ¥2,475,708 LIABILITIES AND EQUITY Current liabilities: Short-term borrowings (Notes 8 and 16) Current portion of long-term debt (Notes 8 and 16) Current portion of long-term lease obligations (Note 15) Trade payables (Note 16): Notes Accounts Income taxes payable (Note 16) Provision for product warranties Accrued expenses (Note 7) Other current liabilities (Note 7) Total current liabilities Long-term liabilities: Long-term debt (Notes 8 and 16) Long-term lease obligations (Note 15) Liabilities for retirement benefits (Note 9) Deferred tax liabilities (Notes 2 and 12) Other long-term liabilities Total long-term liabilities Commitments and contingent liabilities (Notes 15 and 17) Equity (Notes 10, 11 and 21): Common stock—authorized 500,000,000 shares; issued 293,113,973 shares Capital surplus Stock acquisition rights Retained earnings Treasury stock, at cost: 605,740 shares in 2019 and 677,039 shares in 2018 Accumulated other comprehensive income (loss): Unrealized gains on available-for-sale securities Deferred gains on derivatives under hedge accounting Foreign currency translation adjustments Remeasurements of defined benefit plans Subtotal Noncontrolling interests Total equity Total Millions of Yen 2019 2018 ¥ 146,066 ¥ 45,530 92,386 1,242 14,541 189,994 25,576 52,602 135,180 111,229 768,816 335,989 9,959 11,098 101,956 26,223 485,225 85,032 83,650 1,721 1,133,101 (2,589) 57,686 619 63,808 (5,232) 1,417,796 29,054 1,446,850 76,989 1,499 13,890 170,101 21,496 48,009 122,057 103,760 603,331 421,051 9,302 10,551 83,261 23,890 548,055 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 ¥2,700,891 ¥2,475,708 Annual Report 2019 47 Consolidated Statement of Income Consolidated Statement of Income Daikin Industries, Ltd. and Consolidated Subsidiaries Year Ended March 31, 2019 Net sales (Note 7) Cost of sales (Note 14) Gross profit Selling, general and administrative expenses (Notes 6, 7 and 14) Operating income Other (expenses) income: Interest and dividend income Interest expense Equity in earnings of associated companies Exchange losses Subsidy income Gains on sales of land Losses on disposals of property, plant and equipment and other intangible assets Loss on sales of land Gains on sales of investment securities (Note 5) Impairment losses on investment securities (Notes 5 and 16) Loss on restructuring of a subsidiary Losses from natural disasters Other—net Other expenses—net Income before income taxes Income taxes (Note 12): 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 19): Basic net income Diluted net income Cash dividends applicable to the year See notes to consolidated financial statements. 48 Daikin Industries, Ltd. Millions of Yen 2019 2018 ¥2,481,109 ¥2,290,561 1,612,186 1,491,732 868,923 592,668 276,255 12,249 (11,852) 2,119 (4,848) 2,570 0 (803) (7) 40 (315) (679) 582 (944) 275,311 77,607 2,039 79,646 195,665 (6,616) 798,829 545,089 253,740 11,284 (10,656) 2,547 (1,675) 1,521 33 (496) 223 (1) (2,919) (1,744) (1,883) 251,857 77,158 (20,250) 56,908 194,949 (5,897) ¥ 189,049 ¥ 189,052 Yen ¥646.39 645.95 160.00 ¥646.53 646.08 140.00 Consolidated Statement of Comprehensive Income Consolidated Statement of Comprehensive Income Daikin Industries, Ltd. and Consolidated Subsidiaries Year Ended March 31, 2019 Net income Other comprehensive (loss) income (Note 18): Unrealized (losses) gains on available-for-sale securities Deferred (losses) gains on derivatives under hedge accounting Foreign currency translation adjustments Remeasurements of defined benefit plans Share of other comprehensive (loss) income in affiliates accounted for using the equity method Total other comprehensive (loss) income Millions of Yen 2019 ¥195,665 2018 ¥194,949 (16,899) (109) (8,109) 448 (1,167) (25,836) 21,543 848 11,673 1,043 560 35,667 Comprehensive income ¥169,829 ¥230,616 Total comprehensive income attributable to: Owners of the parent Noncontrolling interests See notes to consolidated financial statements. ¥163,451 6,378 ¥224,280 6,336 Consolidated Statement of Changes in Equity Consolidated Statement of Changes in Equity Daikin Industries, Ltd. and Consolidated Subsidiaries Year Ended March 31, 2019 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, 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) 270 431 21,544 Balance, March 31, 2018 292,436,934 85,032 84,389 1,511 987,547 (2,894) 74,586 848 728 11,797 72,834 Net income Cash dividends, ¥160 per share Effect of change of the fiscal year-end of certain consolidated subsidiaries (Note 2.a) 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 (201) 71,500 178 (917) 189,049 (42,407) (1,088) (2) 307 189,052 (39,473) (4) 444 (330) 1,039 35,659 3,365 189,052 (39,473) (4) 444 (330) 39,024 (5,669) 1,298,064 26,258 1,324,322 189,049 (42,407) (1,088) (2) 485 189,049 (42,407) (1,088) (2) 485 210 (16,900) (109) (9,026) 437 (25,388) 2,796 (22,592) (917) (917) Balance, March 31, 2019 292,508,233 ¥85,032 ¥83,650 ¥1,721 ¥1,133,101 ¥(2,589) ¥57,686 ¥ 619 ¥63,808 ¥(5,232) ¥1,417,796 ¥29,054 ¥1,446,850 See notes to consolidated financial statements. Annual Report 2019 49 Consolidated Statement of Cash Flows Consolidated Statement of Cash Flows Daikin Industries, Ltd. and Consolidated Subsidiaries Year Ended March 31, 2019 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 13) Cash and cash equivalents acquired from acquisition of newly consolidated subsidiaries, net of considerations paid Proceed from merger 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 5) Increase in time deposits 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 13) Cash dividends paid to owners of the parent Cash dividends paid 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 Effect of change of the fiscal year-end of consolidated subsidiaries (Note 2.a) Cash and cash equivalents, end of year See notes to consolidated financial statements. 50 Daikin Industries, Ltd. Millions of Yen 2019 2018 ¥275,311 ¥251,857 (71,415) 99,315 (40) 315 803 (2,119) (36,847) (38,790) (4,920) 291 8,619 9,213 13,126 (137) (2,716) (25,302) 250,009 (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 (85,487) 1,822 (85,680) 2,393 (67,932) (25,332) 21 48 (80) (6,161) (1,444) 47 (592) (6,015) (165,773) 100,640 (118,172) (42,407) (4,414) (4,368) (68,721) (5,286) 10,229 357,027 (67) ¥367,189 (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 Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements Daikin Industries, Ltd. and Consolidated Subsidiaries Year Ended March 31, 2019 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 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 2018 consolidated financial statements to conform to the classifications used in 2019. 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 291 (269 in 2018) 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 19 (18 in 2018) 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 10 (14 in 2018) subsidiaries and 9 (10 in 2018) associated companies had been consolidated or accounted for using the equity method, respectively, the effect on the accompanying consolidated financial statements would not have been material. For the year ended March 31, 2019, Zanotti S.p.A and seven other companies changed their fiscal year-ends from December 31 to March 31. The Company included the subsidiaries’ operating results for the 12-month period in the consolidated statement of income and included their operating results for the 3-month period in the consolidated statement of changes in equity by directly charging to retained earnings as the effect of the change in fiscal year-end of certain consolidated subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. All material unrealized profit included in assets resulting from transactions within the Group is eliminated. b. Unification of Accounting Policies Applied to Foreign Subsidiaries for the Consolidated Financial Statements - In accordance with the Accounting Standards Board of Japan (“ASBJ”) Practical Issues Task Force (“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 (“U.S. GAAP”) (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 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. Annual Report 2019 51 Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements 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 a capital surplus as long as the parent retains control over its subsidiary. The Group acquired 100% of the equity interest of Cool International Holding GmbH on February 22, 2019 and accounted for this acquisition by the purchase method of accounting (see Note 4). 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. f. Allowance for Doubtful Receivables - The allowance for doubtful receivables 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 value. h. Property, Plant and Equipment - Property, plant and equipment is 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 dependent on 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 adjusted 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. 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. 52 Daikin Industries, Ltd. 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 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 non-employees 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 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. On February 16, 2018, the ASBJ issued ASBJ Statement No. 28, “Partial Amendments to Accounting Standard for Tax Effect Accounting,” which requires deferred tax assets and deferred tax liabilities to be classified as investments and other assets and long- term liabilities, respectively. Deferred tax assets were previously classified as current assets and investments and other assets, and deferred tax liabilities were previously classified as current liabilities and long-term liabilities under the previous accounting standard. The revised accounting standard is effective for annual periods beginning on or after April 1, 2018. The Company retrospectively applied the revised accounting standard effective April 1, 2018, and deferred tax assets of ¥32,518 million and deferred tax liabilities of ¥27,399 million which were previously classified as current assets and current liabilities, respectively, as of March 31, 2018, have been reclassified as investments and other assets and long-term liabilities, respectively, in the accompanying consolidated balance sheet. Deferred tax assets and liabilities of the same taxpayer are offset, and both total assets and total liabilities decreased by ¥14,246 million compared with those before the change. Also, in the note on Income Taxes (Note 12), the content prescribed in Paragraphs 3 to 5 of the Partial Amendments of Accounting Standard for Tax Effect Accounting has been added. However, the content related to the previous fiscal year is not described in accordance with the transitional treatment prescribed in Paragraph 7 of the Partial Amendments of Accounting Standard for Tax Effect Accounting. Annual Report 2019 53 Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements 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, retrospectively 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 and ASU 2016-02 for annual periods beginning on April 1, 2019. The Group expects that the adoption of these accounting standards will result in an increase of approximately ¥60.8 billion in both assets and liabilities. The Group does not anticipate any material impact on its operating results. 54 Daikin Industries, Ltd. 3. INVENTORIES Inventories at March 31, 2019 and 2018 consisted of the following: Finished products and merchandise Semifinished products and work in process Raw materials and supplies Total 4. BUSINESS COMBINATIONS Millions of Yen 2019 2018 ¥293,446 ¥264,867 50,746 92,166 45,199 77,160 ¥436,358 ¥387,226 Acquisition of an Entity during the Year Ended March 31, 2019 1. Outline of the business combination: (1) Name and business contents of the acquiree: Name: Cool International Holding GmbH Business contents: Holding company for manufacturing and sales companies for commercial refrigerating and freezing showcases (2) Main reason for the business combination: The business combination with AHT Cooling Systems GmbH (hereinafter, “AHT”), which was owned by Cool International Holding GmbH, and the addition of AHT’s refrigerating and freezing showcases to the products of the Company enables the Company to become a one-stop provider offering products and services based on its wide range of air-conditioning and refrigeration equipment products, new energy saving and environmental solutions, and total coordination of comfortable shopping spaces. This is expected to further strengthen the Company’s business as a comprehensive air-conditioning and refrigeration equipment manufacturer. (3) Date of the business combination: February 22, 2019 (4) Legal form of the business combination: Acquisition of equity interest for cash consideration (5) Name of the acquiree after business combination: Cool International Holding GmbH (6) Ratio of equity interests acquired: 100% (7) Basis for determination of the acquirer: Daikin Europe N.V., a subsidiary of the Company, is regarded as the acquiring company since Daikin Europe N.V. acquired all equity interests of Cool International Holding GmbH for cash consideration. 2. Period of operating results of the acquiree included in the consolidated financial statements: The operating results of the acquiree were not included because the deemed acquisition date was March 31, 2019, and the consolidated balance sheet of this subsidiary was consolidated based on the financial statements of the subsidiary as of March 31, 2019. 3. Amount and breakdown of the acquisition costs: Payment for acquisition of equity interests: Cash EUR578 million (¥72,068 million) 4. Amount and breakdown of the main acquisition-related costs: Expenses related directly to the acquisition, including mainly advisory expenses: EUR10 million (¥1,381 million) 5. Amount of goodwill recognized, reason for recognition, and method and period for amortization of goodwill: (1) Amount of goodwill recognized: EUR241 million (¥30,137 million) (2) Reason for recognition: Future business activities are expected to generate excess profitability. (3) Method and period for amortization of goodwill: Straight-line method over 10 years Annual Report 2019 55 Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements 6. Amount and breakdown of the assets acquired and liabilities assumed at the acquisition date: Current assets Fixed assets Total assets Current liabilities Long-term liabilities Total liabilities Millions of EUR 202 753 955 130 490 620 Millions of Yen ¥ 25,233 93,823 ¥119,056 ¥ 16,189 61,077 ¥ 77,266 7. Amount of identifiable intangible assets other than goodwill, its details, and major weighted-average useful life: Customer relationships Trademarks Technologies Total Millions of EUR 452 199 35 686 Millions of Yen ¥56,301 24,788 4,412 ¥85,501 Weighted-Average Useful Life 23 years Non- amortization 7 years 8. Unaudited summaries of estimated impact on consolidated financial statement of income: Estimated impact of this acquisition on the consolidated financial statement of income for the fiscal year ended March 31, 2019, which shows the effects of the acquisition as if it had been completed on April 1, 2018, are as follows: Net sales Operating income Income before income taxes Net income Amount per common share Millions of Yen ¥63,032 2,037 (1,575) (1,030) Yen ¥(3.52) These summaries of estimated impact were based on the assumption that this business combination had been completed on April 1, 2018, i.e., at the beginning of the fiscal year ended March 31, 2019. Amortization of goodwill and other intangible assets arising from this acquisition for the period from April 1, 2018 to March 31, 2019 is not reflected in the estimated impact. These summaries have not been audited by an independent auditor. 5. MARKETABLE AND INVESTMENT SECURITIES The acquisition costs and aggregate fair values of marketable available-for-sale securities included in investment securities at March 31, 2019 and 2018 were as follows: Securities classified as available-for-sale: Equity securities Debt securities Total Millions of Yen 2019 Cost Unrealized Gains Unrealized Losses Fair Value ¥110,707 ¥79,198 ¥(2,340) ¥187,565 300 300 ¥111,007 ¥79,198 ¥(2,340) ¥187,865 56 Daikin Industries, Ltd. 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 Marketable available-for-sale securities that were sold during the year ended March 31, 2018 were as follows: March 31, 2018 Available-for-sale: Equity securities Millions of Yen Realized Gains Realized Losses Proceeds ¥938 ¥223 There were no marketable available-for-sale securities that were sold during the year ended March 31, 2019. The impairment losses on marketable available-for-sale securities for the years ended March 31, 2019 and 2018 were ¥44 million and ¥1 million, respectively. 6. GOODWILL Amortization expenses for goodwill were ¥26,992 million and ¥28,180 million for the years ended March 31, 2019 and 2018, respectively, which were included in selling, general and administrative expenses. 7. RELATED PARTY TRANSACTIONS Material transactions and balances with related parties for the years ended March 31, 2019 and 2018 were as follows: (1) 2019 (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 Chiyono Terada External Director/CEO and President of Art Corporation Ownership of the Company (%) 0.00 Ownership of the Company (%) 0.00 Millions of Yen Transactions Resulting Account Balances Description of Transaction Commissions for moving business and delivery business 2019 ¥524 Account Accrued expenses and other current liabilities 2019 ¥47 Millions of Yen Transactions Resulting Account Balances Description of Transaction Commissions for moving business and delivery business 2019 ¥ 69 Account Accrued expenses and other current liabilities 2019 ¥ 6 Sales of products 247 Accounts receivable 30 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. Annual Report 2019 57 Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements (2) 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 Chiyono Terada Description of Post External Director/CEO and President of Art Corporation Ownership of the Company (%) 0.00 Ownership of the Company (%) 0.00 Millions of Yen Transactions Resulting Account Balances Description of Transaction 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 Sales of products 176 Account Accrued expenses and other current liabilities Accounts receivable 2018 ¥ 4 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. 8. SHORT-TERM BORROWINGS AND LONG-TERM DEBT Short-term borrowings of the Group at March 31, 2019 and 2018 consisted of the following: Bank overdrafts and notes to banks Commercial paper Total Millions of Yen 2019 ¥136,066 10,000 ¥146,066 2018 ¥45,530 ¥45,530 Unused short-term bank credit lines were ¥205,495 million at March 31, 2019. The weighted-average interest rates of bank overdrafts and notes to banks at March 31, 2019 and 2018 were 0.49% and 1.39%, respectively. The weighted-average interest rate of commercial paper at March 31, 2019 was (0.01)%. 58 Daikin Industries, Ltd. Long-term debt at March 31, 2019 and 2018 consisted of the following: 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 3.75% (2019) and from 0.00% to 4.00% (2018), due through 2026 Unsecured loans from banks and others with interest ranging from 0.17% to 3.69% (2019) and from 0.12% to 3.74% (2018), due through 2023 Total Less current portion Long-term debt, less current portion Annual maturities of long-term debt outstanding at March 31, 2019 were as follows: Year Ending March 31 2020 2021 2022 2023 2024 2025 and thereafter Total The assets pledged as collateral at March 31, 2019 and 2018 were as follows: Time deposits Note receivables Debt corresponding to the above: Note payables Millions of Yen 2019 2018 ¥ 40,000 ¥ 40,000 10,000 10,000 30,000 10,000 10,000 6,400 10,000 10,000 30,000 10,000 10,000 13,200 171,971 184,833 140,004 428,375 (92,386) 190,007 498,040 (76,989) ¥335,989 ¥421,051 Millions of Yen ¥ 92,386 94,415 63,327 141,812 4,108 32,327 ¥428,375 Millions of Yen 2019 ¥ 677 2,246 2018 ¥ 524 3,065 4,033 3,987 In addition, investment securities pledged as collateral for the investee’s borrowings from financial institutions at March 31, 2019 and 2018 were as follows: Investment securities Millions of Yen 2019 ¥800 2018 ¥800 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. Annual Report 2019 59 Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements 9. 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, 2019 and 2018 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 Effect of change of the fiscal year-end Foreign currency translation adjustments Others Balance at end of year Millions of Yen 2019 2018 ¥107,786 ¥ 99,159 5,330 1,326 6 771 (4,456) 837 (15) (723) 9 4,965 1,127 7,451 (3) (5,177) 74 226 (36) ¥110,871 ¥107,786 (2) The changes in plan assets for the years ended March 31, 2019 and 2018 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 (losses) gains Contributions from the employer Benefits paid Foreign currency translation adjustments Others Balance at end of year Millions of Yen 2019 2018 ¥114,476 ¥102,957 3,568 (410) 3,620 (3,938) (582) 56 3,609 7,560 4,910 (4,569) 23 (14) ¥116,790 ¥114,476 (3) The changes in defined benefit obligation for the years ended March 31, 2019 and 2018 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 2019 ¥2,506 832 (831) ¥2,507 2018 ¥2,703 901 (1,098) ¥2,506 60 Daikin Industries, Ltd. (4) Reconciliations between the liabilities recorded in the consolidated balance sheet and the balances of defined benefit obligation and plan assets at March 31, 2019 and 2018 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 2019 ¥(106,176) 116,790 10,614 (7,202) 2018 ¥(104,213) 114,476 10,263 (6,079) Net amount of liabilities and assets recorded in the consolidated balance sheet ¥ 3,412 ¥ 4,184 Liabilities for retirement benefits Assets for retirement benefits Net amount of liabilities and assets recorded in the consolidated balance sheet ¥ (11,098) 14,510 ¥ 3,412 ¥ (10,551) 14,735 ¥ 4,184 (5) The components of net periodic benefit costs for the years ended March 31, 2019 and 2018 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 Total Millions of Yen 2019 ¥5,330 1,326 (3,568) 1,286 (127) 831 88 2018 ¥4,965 1,127 (3,609) 2,061 (183) 901 4 ¥5,166 ¥5,266 (6) Amounts recognized in other comprehensive income (before income tax effect) in respect of defined benefit plans for the years ended March 31, 2019 and 2018 were as follows: Past service cost Net actuarial gains Total Millions of Yen 2019 ¥ 873 (1,476) ¥ (603) 2018 ¥ 131 (1,723) ¥(1,592) (7) Amounts recognized in accumulated other comprehensive income (before income tax effect) in respect of defined benefit plans for the years ended March 31, 2019 and 2018 were as follows: Unrecognized past service cost Unrecognized net actuarial gains Total Millions of Yen 2019 ¥ 323 6,419 ¥6,742 2018 ¥ (549) 7,894 ¥7,345 Annual Report 2019 61 Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements (8) Plan assets (a) Components of plan assets Plan assets at March 31, 2019 and 2018, 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 2019 2% 2 35 18 19 5 19 2018 3% 9 29 17 18 1 23 100% 100% (b) Method of determining the expected rate of return on plan assets To determine the expected long-term rate of return on plan assets, we consider current and target asset allocations, as well as historical and expected returns on various categories of plan assets. (9) Assumptions used for the years ended March 31, 2019 and 2018 were as follows: Discount rate Expected rate of return on plan assets Expected rate of future salary increases 2019 Mainly 0.3% Mainly 2.5% Mainly 3.5% 2018 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 ¥5,913 million and ¥5,855 million for the years ended March 31, 2019 and 2018, respectively. 10. EQUITY Japanese companies are subject to the Companies Act of Japan (the “Companies Act”). The significant provisions in the Companies Act that affect financial and accounting matters are summarized below: (a) Dividends Under the Companies Act, companies can pay dividends at any time during the fiscal year in addition to the year-end dividend upon resolution at the shareholders’ meeting. For companies that meet certain criteria including (1) having a Board of Directors, (2) having independent auditors, (3) having an Audit & Supervisory Board, and (4) the term of service of the directors being prescribed as one year rather than 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 certain limitations 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. 62 Daikin Industries, Ltd. (c) Treasury Stock and Treasury Stock Acquisition Rights The Companies Act also provides for companies to purchase treasury stock and dispose of such treasury stock by resolution of the Board of Directors. The amount of treasury stock purchased cannot exceed the amount available for distribution to the shareholders which is determined by 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. Purchase of treasury stock acquisition rights are presented as either a separate component of equity and any purchased stock acquisition rights deducted directly from stock acquisition rights. 11. STOCK OPTIONS The stock options outstanding at March 31, 2019, were as follows: Stock Option 2014 Stock Option 2015 Stock Option 2016 Stock Option 2017 Stock Option 2018 Stock Option Persons Granted Number of Options Granted Date of Grant Exercise Price Exercise Period 9 directors 45 employees 9 directors 46 employees 8 directors 53 employees 8 directors 53 employees 7 directors 59 employees 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 42,700 shares 2018.7.13 ¥ 1 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 From July 14, 2021 to July 13, 2033 The stock option activity was as follows: 2012 Stock Option 2013 Stock Option 2014 Stock Option Shares 2015 Stock Option 2016 Stock Option 2017 Stock Option 2018 Stock Option Year Ended March 31, 2018 Vested April 1, 2017—Outstanding 17,000 32,000 95,000 53,200 58,100 Granted Exercised Canceled March 31, 2018—Outstanding Year Ended March 31, 2019 Vested (13,000) (5,000) (45,000) 48,800 4,000 27,000 50,000 53,200 58,100 48,800 April 1, 2018—Outstanding 4,000 27,000 50,000 53,200 58,100 48,800 Granted Exercised Canceled March 31, 2019—Outstanding Exercise price Average stock price at exercise Fair value price at grant date (4,000) (27,000) (10,000) (30,500) 42,700 ¥ 2,186 ¥ 4,500 ¥ 6,715 ¥ 1 ¥ 1 ¥ 1 ¥ 1 40,000 22,700 58,100 48,800 42,700 ¥12,956 ¥12,491 ¥13,439 ¥13,388 ¥ 676 ¥ 1,220 ¥ 1,697 ¥ 7,726 ¥7,859 ¥10,711 ¥11,670 The assumptions used to measure the fair value of 2018 Stock Option Estimate method: Black-Scholes option-pricing model Volatility of stock price: 30.61% Estimated remaining outstanding period: 9 years Estimated dividend: Risk-free interest rate: ¥140 per share (0.0)% Annual Report 2019 63 Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements 12. 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 30.6% and 30.8% for the years ended March 31, 2019 and 2018, respectively. The tax effects of significant temporary differences and tax loss carryforwards that resulted in deferred tax assets and liabilities at March 31, 2019 and 2018 were as follows: Deferred tax assets: Provision for product warranties Tax loss carryforwards Unrealized profit on inventories Software and other intangible assets Investment securities Inventories Accrued bonus Deferred revenue Liabilities for retirement benefits Allowance for doubtful receivables Foreign income tax credit Other Total of tax loss carryforwards and temporary differences Less valuation allowance for tax loss carryforwards Less valuation allowance for temporary differences Total 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 2019 2018 ¥ 12,795 10,427 9,307 8,668 5,421 5,135 4,368 3,100 2,498 1,994 77 20,293 84,083 (8,206) (6,947) (15,153) ¥ 68,930 ¥ 11,832 9,027 9,436 7,108 6,769 4,397 4,094 3,075 2,291 1,768 68 20,442 80,307 (14,537) ¥ 65,770 ¥ 68,816 ¥ 44,858 39,862 19,342 4,662 1,722 11,425 37,534 25,943 4,721 1,742 13,020 ¥145,829 ¥ (76,899) ¥127,818 ¥ (62,048) The expiration of tax loss carryforwards, related valuation allowances, and the resulting net deferred tax assets as of March 31, 2019 were as follows: After One Year through Two Years After Two Years through Three Years Millions of Yen After Three Years through Four Years After Four Years through Five Years After Five Years Total ¥92 (90) ¥5 (5) ¥410 ¥356 ¥9,387 ¥10,427 (268) (119) (7,549) (8,206) One Year or Less ¥177 (175) 2 2 142 237 1,838 2,221 March 31, 2019 Deferred tax assets relating to tax loss carryforwards Less valuation allowances for tax loss carryforwards Net deferred tax assets relating to tax loss carryforwards 64 Daikin Industries, Ltd. 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 years ended March 31, 2019 and 2018, were as follows: Normal effective statutory income tax rate Differences in foreign subsidiaries’ tax rates Taxes and tax effects on dividends from foreign subsidiaries Amortization of goodwill Tax credit for research and development Permanently non-deductible expenses, such as entertainment expenses Valuation allowance Permanently non-taxable income, such as dividend income Impact from tax reform in the United States Other - net Actual effective income tax rate 2019 30.6% (5.5) 3.7 2.7 (2.2) 0.5 0.1 (0.1) (0.9) 28.9% 2018 30.8% (4.9) 4.6 3.2 (2.0) 0.5 (0.9) (0.5) (7.7) (0.5) 22.6% 13. SUPPLEMENTAL CASH FLOW INFORMATION The Group acquired Cool International Holding GmbH and its subsidiaries during the year ended March 31, 2019. Reconciliation between cash paid for the equity interest of Cool International Holding GmbH 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 Noncontrolling interests Cash paid for the equity interest Cash and cash equivalents of consolidated subsidiaries Millions of Yen 2019 ¥25,233 93,823 30,137 (16,188) (61,077) 140 72,068 (7,358) Payment for acquisition of equity interest of newly consolidated subsidiaries, net of cash and cash equivalents acquired ¥64,710 Repayments of long-term debt included ¥40,389 million for repayments of long-term debt by Cool International Holding GmbH and the other companies which the Group acquired for the year ended March 31, 2019. 14. RESEARCH AND DEVELOPMENT COSTS Research and development costs included in cost of sales and selling, general and administrative expenses were ¥65,216 million and ¥62,051 million for the years ended March 31, 2019 and 2018, respectively. Annual Report 2019 65 Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements 15. LEASES The Group leases certain computer equipment and other assets. Obligations under finance leases and future minimum payments under non-cancelable operating leases at March 31, 2019 were as follows: Due within one year Due after one year Total 16. FINANCIAL INSTRUMENTS AND RELATED DISCLOSURES Millions of Yen Finance Leases ¥ 1,242 9,959 ¥11,201 Operating Leases ¥24,742 64,310 ¥89,052 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 risk from changes in interest rates, which is 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. 66 Daikin Industries, Ltd. 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 were based on quoted price in active markets. If a quoted price were not available, another rational valuation technique were used instead. Instruments whose fair values could not be readily determined were not included in the following. Cash and cash equivalents Short-term investments Trade notes and accounts receivable Investment securities Total Trade notes and accounts payable Short-term borrowings Income taxes payable Long-term debt Total Derivatives 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, 2019 Carrying Amount Fair Value Unrealized Loss ¥ 367,189 ¥ 367,189 592 447,831 187,865 592 447,831 187,865 ¥1,003,477 ¥ 204,535 ¥1,003,477 ¥ 204,535 146,066 25,576 428,375 146,066 25,576 431,326 ¥ 804,552 ¥ 969 ¥ 807,503 ¥ 969 Millions of Yen March 31, 2018 Fair Value ¥357,027 401,165 211,459 ¥969,651 ¥183,991 45,530 21,496 502,054 ¥753,071 ¥ (1,262) Carrying Amount ¥357,027 401,165 211,459 ¥969,651 ¥183,991 45,530 21,496 498,040 ¥749,057 ¥ (1,262) ¥2,951 ¥2,951 Unrealized Loss ¥4,014 ¥4,014 Assets Cash and cash equivalents The carrying values of cash and cash equivalents approximate fair value because of their short maturities. Short-term investments The carrying values of short-term investments approximate fair value because of their short maturities. Trade notes and accounts receivable The carrying values of trade notes and accounts receivable approximate fair value because of their short maturities. Investment securities The fair values of equity securities are measured at the quoted market 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 5. Annual Report 2019 67 Notes to Consolidated Financial Statements 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 Millions of Yen March 31, 2019 Contract Amount Due after One Year Contract Amount ¥ 9,881 14,697 33,144 1,729 753 196 3,089 1,264 1,893 863 420 128 4,886 1,221 830 2 1,568 1,976 241 Fair Value ¥ 5 (11) (142) 98 3 (2) (3) 5 (3) 0 (43) (0) (44) 10 3 0 (0) 50 (1) Unrealized Gain (Loss) ¥ 5 (11) (142) 98 3 (2) (3) 5 (3) 0 (43) (0) (44) 10 3 0 (0) 50 (1) ¥ 722 ¥ 47 ¥ 47 Forward exchange contracts: Selling: GBP EUR USD AUD NZD ZAR CZK HKD SGD MYR TRY BRL IDR INR PHP THB AED Buying: CNY EUR Commodity futures contracts: Buying: Metal 68 Daikin Industries, Ltd. 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 Derivative transactions to which hedge accounting is applied Forward exchange contracts: Selling: GBP EUR USD CZK TRY Buying: CNY Interest rate swaps: Fixed-rate payment, floating-rate receipt Fixed-rate payment, floating-rate receipt* 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) Millions of Yen March 31, 2019 Contract Amount Due after One Year Fair Value ¥(158) 92 (4) 77 6 101 Hedged Item Receivables Receivables Receivables Receivables Receivables Payables Contract Amount ¥ 6,307 32,091 1,620 5,704 1,418 7,576 Long-term debt ¥173,215 ¥154,886 ¥ 722 Long-term debt 63,000 63,000 Raw materials ¥ 7,223 ¥ 161 Annual Report 2019 69 Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements Forward exchange contracts: Selling: GBP EUR USD ZAR CZK TRY Buying: CNY Interest rate swaps: 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 * 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 2019 ¥9,549 1,284 ¥10,833 2018 ¥9,263 529 ¥9,792 Cash and cash equivalents Short-term investments Trade notes and accounts receivable Investment securities: Millions of Yen March 31, 2019 Due after One Year through Five Years Due after Five Years through Ten Years Due in One Year or Less ¥367,189 592 447,792 ¥39 Available-for-sale securities with contractual maturities (corporate bonds) Total ¥815,573 ¥39 Cash and cash equivalents Trade notes and accounts receivable Investment securities: Available-for-sale securities with contractual maturities (corporate bonds) Total Please see Note 8 for annual maturities of long-term debt. Millions of Yen March 31, 2018 Due after One Year through Five Years Due after Five Years through Ten Years Due in One Year or Less ¥357,027 401,166 ¥758,193 Due after Ten Years ¥300 ¥300 Due after Ten Years ¥300 ¥300 70 Daikin Industries, Ltd. 17. COMMITMENTS AND CONTINGENT LIABILITIES Commitments for capital expenditures outstanding at March 31, 2019 totaled approximately ¥7,490 million. The Group had the following contingent liabilities at March 31, 2019 and 2018. Trade notes endorsed Guarantees on the borrowings of Air as a Service., LTD. Millions of Yen 2019 ¥1,733 70 2018 ¥2,154 18. COMPREHENSIVE INCOME The components of other comprehensive income (loss) for the years ended March 31, 2019 and 2018 were as follows: Unrealized (losses) gains on available-for-sale securities: (Losses) gains arising during the year Reclassification adjustments to profit or loss Amount before income tax effect Income tax effect Total Deferred (losses) gains on derivatives under hedge accounting: 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: (Losses) gains arising during the year Total other comprehensive (loss) income Millions of Yen 2019 2018 ¥(23,504) 4 (23,500) 6,601 ¥(16,899) ¥30,981 (223) 30,758 (9,215) ¥21,543 ¥ 505 ¥ 1,850 (698) (193) 84 (598) 1,252 (404) ¥ (109) ¥ 848 ¥ (8,393) 284 (8,109) ¥ (8,109) ¥11,612 61 11,673 ¥11,673 ¥ (556) ¥ (286) 1,159 603 (155) 1,878 1,592 (549) ¥ 448 ¥ 1,043 ¥ (1,167) ¥ 560 ¥(25,836) ¥35,667 Annual Report 2019 71 Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements 19. NET INCOME PER SHARE Reconciliations of the differences between basic and diluted net income per share (EPS) for the years ended March 31, 2019 and 2018 were as follows: Year Ended March 31, 2019 Basic EPS: Millions of Yen Net Income Thousands of Shares Weighted- Average Shares Yen EPS Net income available to common shareholders ¥189,049 292,470 ¥646.39 Effect of dilutive securities: Stock options Diluted EPS: Net income for computation Year Ended March 31, 2018 Basic EPS: 197 ¥189,049 292,667 ¥645.95 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 20. SEGMENT INFORMATION 204 ¥189,052 292,613 ¥646.08 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.” 72 Daikin Industries, Ltd. 3. Information about sales, profit, assets and other items Reportable Segment Millions of Yen March 31, 2019 Air Conditioning Chemicals Total Other Total Reconciliations Consolidated Sales: Sales to external customers ¥2,222,173 ¥200,790 ¥2,422,963 ¥58,146 ¥2,481,109 ¥2,481,109 Intersegment sales 714 18,124 18,838 646 19,484 ¥(19,484) 2,222,887 218,914 2,441,801 58,792 2,500,593 (19,484) 2,481,109 237,646 32,534 270,180 6,066 276,246 9 276,255 2,230,118 230,736 2,460,854 41,009 2,501,863 199,028 2,700,891 Total Segment profit Segment assets Other: Depreciation ¥ 57,166 ¥ 13,489 ¥ 70,655 ¥ 1,667 ¥ 72,322 Amortization of goodwill 26,792 200 26,992 26,992 Investment balance in unconsolidated subsidiaries and associated companies accounted for using the equity method Investment in property, plant and equipment and intangible assets 13,552 10,097 23,649 23,649 68,982 15,914 84,896 2,266 87,162 Reportable Segment Millions of Yen March 31, 2018 ¥ 72,322 26,992 23,649 87,162 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 1,981,546 216,296 2,197,842 37,624 2,235,466 240,242 2,475,708 Total Segment profit Segment assets Other: Depreciation ¥ 52,054 ¥ 12,988 ¥ 65,042 ¥ 1,605 ¥ 66,647 Amortization of goodwill 28,148 32 28,180 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 82,751 11,873 94,624 1,966 96,590 ¥ 66,647 28,180 23,254 96,590 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 ¥211,637 million and ¥244,909 million at March 31, 2019 and 2018, 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. Annual Report 2019 73 Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements 4. Supplemental information (1) Information about geographical areas (a) Sales Japan USA China Millions of Yen March 31, 2019 Asia and Oceania Europe Other Consolidated ¥585,107 ¥625,041 ¥379,628 ¥387,093 ¥366,670 ¥137,570 ¥2,481,109 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 Note: Sales are classified by country or region based on the physical locations of customers. (b) Property, plant and equipment Japan USA China ¥161,703 ¥134,542 ¥70,657 Japan USA China ¥154,690 ¥123,080 ¥70,958 Millions of Yen March 31, 2019 Asia and Oceania ¥61,803 Millions of Yen March 31, 2018 Asia and Oceania ¥57,418 Europe ¥44,607 Other ¥9,651 Consolidated ¥482,963 Europe ¥39,801 Other ¥8,887 Consolidated ¥454,834 (2) Information about goodwill (a) Balance of goodwill by reportable segment Goodwill for each reportable segment at March 31, 2019 and 2018 was as follows: Goodwill Goodwill Millions of Yen 2019 Air Conditioning Chemicals Other ¥321,183 ¥1,136 Millions of Yen 2018 Air Conditioning Chemicals Other ¥307,868 ¥1,414 Eliminations and Corporate Eliminations and Corporate Consolidated ¥322,319 Consolidated ¥309,282 21. SUBSEQUENT EVENT Resolutions approved by the Company’s Board of Directors’ at the meeting held on May 9, 2019 are subject to approval at the general shareholders’ meeting planned to be held on June 27, 2019. Appropriations of Retained Earnings Payment of year-end cash dividends of ¥90 per share to shareholders at March 31, 2019, totaling ¥26,326 million is to be settled. 74 Daikin Industries, Ltd. Independent Auditors’ Report Independent Auditors’ Report Annual Report 2019 75 Corporate Data Corporate Data (As of March 31, 2019) Company Name Head Office Tokyo Office Fiscal Year-End Date Date of Founding Date of Establishment Paid-in Capital Number of Shares of Common Stock Issued Number of Shareholders Major Shareholders Number of Subsidiaries and Affiliated Companies Number of Employees Stock Exchange Listing Advertising Method Shareholder Register Administrator Ordinary General Meeting of Shareholders Auditor 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 March 31 on an annual basis October 25, 1924 February 11, 1934 ¥85,032 million 293,113 thousand 26,643 (cid:129) The Master Trust Bank of Japan, Ltd. (Trust Account) (cid:129) Japan Trustee Services Bank, Ltd. (Trust Account) (cid:129) Sumitomo Mitsui Banking Corporation (cid:129) Japan Trustee Services Bank, Ltd. (Trust Account 5) (cid:129) Japan Trustee Services Bank, Ltd. (Retirement Benefit Trust Account for The Norinchukin Bank, re-entrusted by Sumitomo Mitsui Trust Bank, Limited) (cid:129) MUFG Bank, Ltd. (cid:129) Japan Trustee Services Bank, Ltd. (Trust Account 4) (cid:129) Japan Trustee Services Bank, Ltd. (Trust Account 7) (cid:129) Government of Norway (Standing proxy Citibank, N. A., Tokyo Branch) (cid:129) JP Morgan Chase Bank 385151 (Standing proxy Mizuho Bank Settlement Sales Department) Subsidiaries: 291 Affiliates: 19 76,484 (Consolidated) Tokyo 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 circumstanc- es, the Company will post advertisements in the Nikkei Shimbun. Mitsubishi UFJ Trust and Banking Corporation 3-6-3, Fushimicho, Chuo-ku, Osaka 541-8502, Japan June Deloitte Touche Tohmatsu LLC Trends in Total Shareholders' Return (TSR*1) (Index) 600 Daikin TOPIX TOPIX Machinery TSR (Annual Rate) Holding period Daikin TOPIX TOPIX Machinery 3 years 16.8% 8.1% 10.1% 5 years 17.9% 8.0% 6.8% 10 years 17.8% 9.7% 12.1% 550 500 450 400 350 300 250 200 150 100 50 0 2009/3 2010/3 2011/3 2012/3 2013/3 2014/3 2015/3 2016/3 2017/3 2018/3 (cid:3) Trading Volume (Thousands of shares) 72,000 60,000 48,000 36,000 24,000 12,000 0 2019/3 *1 TSR (Total Shareholders’ Return): Total rate of return on investment that combines capital gains with dividends. Notes: 1. Daikin calculates TSR utilizing the cumulative dividend amount and stock price fluctuation; TOPIX calculates TSR based on the stock market index inclusive of dividends (Source: Prepared by the Company based on Bloomberg and other data) 2. Graph data represents market prices indexed by TSR with closing price data as of March 31, 2009 as a base of 100 (holding period up to March 31, 2019) 76 Daikin Industries, Ltd. 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 Japanhttp://www.daikin.comAnnual Report 2019 DAIKIN INDUSTRIES, LTD.

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