Daikin Industries Ltd. Annual Report 2020

Plain-text annual report

Annual Report 2020 Fiscal Year Ended March 31, 2020 INTRODUCTION INTRODUCTION As a group, we will overcome difficult situations and find solutions to social problems through air. 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. Based on the "FUSION 20" slogan, "Co-create new value in the air and environment fields with wisdom and passion," Daikin has promoted the strengthening of its environmental solutions business on a global basis by the adoption of environmentally conscious products using inverter technology and refrigerants with lower global warming potential. Despite the harsh business environment, in the fiscal year ended March 31, 2020 (fiscal 2020), Daikin achieved record-high sales for a seventh consecutive fiscal year. The current COVID-19 pandemic has brought about changes in economic activities and lifestyles. The current COVID-19 pandemic has brought about changes in economic activities and lifestyles. Taking needs into consideration, such as healthy and safe lifestyles, as well as increasing interest in air quality and ventilation, Daikin will create new value in the air and environment fields—new value that will be linked to improvements in its corporate value—by both finding solutions to social problems and achieving business expansion. CONTENTS CONTENTS Our Core Values/ Our Group Philosophy ............................... 1 Review of Operations Financial Section Overview of Global Development ............ 20 A Path to Unique Solutions ....................... 2 Air Conditioning ...................................... 21 Process of Value Creation .......................... 4 Chemicals ............................................... 26 Financial/Non-Financial Highlights ............ 6 At a Glance ................................................. 8 Oil Hydraulics .......................................... 28 Defense ................................................... 29 Market Size and Positioning of Each Business .............................................. 9 Corporate Governance ............................. 30 Corporate Officers ................................... 33 Message from the CEO ............................ 10 CSR Management System ........................ 38 Eleven-Year Financial Highlights ............... 48 Financial Review ...................................... 50 Consolidated Balance Sheet .................... 60 Consolidated Statement of Income .......... 62 Consolidated Statement of Comprehensive Income ......................... 63 Consolidated Statement of Changes in Equity ................................. 64 Consolidated Statement of Cash Flows .... 66 Notes to Consolidated Financial Statements .............................. 67 Independent Auditors’ Report ............... 100 Financial Strategy ..................................... 18 CSR (Corporate Social Responsibility) ..... 40 Corporate Data ..................................... 103 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 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 2020 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, 2020) Employees Group Companies Global Business Presence Worldwide Production Bases Consolidated Subsidiaries: 313 (Japan: 29, Non-Japan: 284) More than 150 Countries More than 100 Factories Net Sales (Fiscal 2020) ¥2,550.3 billion 80,369 Business Results Net Sales Operating Income 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 538.8 42.0 Achieved six consecutive years of record high sales Achieved six consecutive years of record high sales 2013〜2018 年 2013〜2018 年 2014 – 2019 2014 – 2019 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 05 FUSION 10 FUSION 15 FUSION 20 2,550.3 265.5 Operating Income (¥ billion) 300 2,481.1 276.3 250 200 150 100 50 0 (Years Ended March 31) 1925 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Ensuring a Competitive Edge through High Levels of Product Competitiveness and Production Technologies Business and Technology Development 1924 Founding of Osaka Kinzoku Kogyosho Limited Partnership 1935 Development of fluorocarbon refrigerant 1975 Launch of “Hikari Kurieru” air purifier 1982 Launch of Japan's first multi-type air-conditioning system for buildings 1937 Development of Japan's first Freon-type refrigerator 1999 Launch of “Ururu Sarara” world’s first waterless humidifying room air conditioner 1942 Freon production begins 1951 Launch of Japan's first packaged air conditioner 1958 Entry into the room air-conditioning business 2002 Nationwide expansion of the fluorocarbon recovery and destruction business 2002 Launch of “ECOCUTE” heat-pump water heater Accelerating the Pace of Global Expansion while Expanding the Scale of Business during the 2000s Daikin’s Evolution and Strategies 2007 Acquisition of OLY Group, a major global air-conditioning manufacturer 2011 Acquisition of Turkish air-conditioning manufacturer Airfel 2008 Business alliance with Gree Electric Appliances, China’s top air-conditioning manufacture 2012 Acquisition of U.S. residential air-conditioning manufacturer Goodman 2008 Acquisition of German heating manufacturer ROTEX 2015 Granting of worldwide free access to basic patents for using R32 refrigerant 2 FUSION 05 to 20 (Fiscal 2002 – Fiscal 2021) FUSION 05 FUSION10 FUSION15 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 • Expand environment-related businesses • Business alliances and tie-ups, M&A Be a Truly Global Excellent Company • Full-fledged entry into emerging markets and volume zone products • Solutions Business / Environment Innovation Business • Accelerate growth through business alliances and tie-ups, M&A Strengthen Existing Businesses and Expand Business Domains 2,550.3 265.5 Operating Income (¥ billion) 300 2,481.1 276.3 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 250 200 150 100 50 0 (Years Ended March 31) 1925 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 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 05 FUSION 10 FUSION 15 FUSION 20 2014 – 2019 2014 – 2019 2013〜2018 年 2013〜2018 年 Achieved six consecutive years of record high sales Achieved six consecutive years of record high sales and operating income and operating income 538.8 42.0 2004 World's first successful application of streamer electric discharge technology 2005 Opening of China's first dedicated showroom for large-scale air conditioners 2006 Launch in Europe of “Daikin Altherma” air-to-water heat pump system 2007 Launch of “DESICA” world's first humidity control air conditioner without water drainage or supply pipes 2009 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 2017 Establishment of Daikin Texas Technology Park, a production and technology development base 2015 Acquisition of the refrigerant business in Europe from major Belgian chemical group Solvay 2016 Acquisition of U.S. filter manufacturer Flanders 2016 Acquisition of Italian refrigerator/freezer manufacturer Zanotti 2016 Acquisition of Scandinavian filter manufacturer Dinair 2019 Acquisition of Austrian refrigerating and freezing showcases manufacturer AHT Annual Report 2020 3 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. Social Problems Daikin Can Help Solve INPUT Daikin Group’s Business Ac tivities Financial Capital Daikin aims to be a corporate group that creates new value in the air and environment fields. Intensification of climate change Expansion and concentration of energy and power demand Worsening of air pollution • Stable and sound financial structure Total assets ¥2.67 trillion Shareholders' equity ratio 53.8% Manufactured Capital • Market-localized manufacturing system over 100 manufacturing bases globally • PDS manufacturing style for multiproduct mixed production • Efficient production structure utilizing module manufacturing lines • Building of digital factories • Advancement in “small-scale monozukuri” Intellectual Capital • Heat pump, inverter, refrigerant control technologies • Development centers in 25 locations worldwide • Proactive R&D investment R&D Expenses ¥ 68 . 0 billion Human Capital • Diverse workforce Employees over 80,000 Ratio of overseas employees exceeds 80% • Business operations that are integrated and localized • Global human resource development Social and Relationship Capital • Sales and service network • Conducting business in more than 150 countries and regions • Proactive collaboration with industry, government and academia The University of Tokyo, Osaka University, Tsinghua University, etc. Hitachi, Ltd., Mitsui & Co., Ltd., NEC Corporation, etc. Natural Capital • Efficient use of energy, materials and water Energy consumption 14,921TJ Material consumption 1,170,000t Water intake 11,580,000m3 4 After-sales Service, Recovery, Recycling Recovery and recycling of refrigerants Provide services based on the concept of continuous connection with customers and capture replacement demand Procurement Global bulk purchasing and local procurement Promote CSR procurement Usage Provide comfortable air and spaces Reduce environmental loads Strategy FUSION 20 Sales, Transportation, Installation Proposal-type business for existing sales network developed globally Development of service personnel that have solid technical capabilities E S G Other(Oil hydraulics, Defense, electronics)Details▶P.28〜Air ConditioningDetails▶P.21〜ChemicalsDetails▶P.26〜FiltersDetails▶P.9〜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. Daikin Group’s Business Ac tivities OUTPUT (Fiscal 2020) Daikin's Aims for Value Creation Daikin aims to be a corporate group that creates new value in the air and environment fields. P Environmentally conscious products P Energy service solutions Procurement P IAQ/Air Environment Engineering Global bulk purchasing and local procurement Promote CSR procurement P Expansion into next-generation automotive field Strategy FUSION 20 Development, Design Pursue comfort and environmental performance Product development to meet local needs Create new value P Development of composite materials P Development of new refrigerants P Air filter business P Power and industrial (P&I) business P IAQ products utilizing synergies from air-conditioning and chemicals Manufacturing Multiproduct mixed production Reduce environmental loads P Range of energy- efficient oil hydraulic equipment P New business in fields with private demand P Visual R&D systems E S G P Pursue CSR Management Details▶P. 30〜, P. 38〜 Net sales ¥2.55 trillion Overseas sales ratio 77% Operating income ¥265.5 billion Operating income margin 10.4% Income before income taxes ¥256.2 billion Equity ratio 53.8% ROE 12.0% Free cash flow (FCF) ¥146.0 billion Ratio of highly skilled engineers 1 in 3.2 (Daikin Industries only) No. of patent applications More than 1,470 (Fiscal 2018, Daikin Industries only) No. of female managers 63 (Daikin Industries only) Ratio of non-Japanese subsidiaries with local nationals as president 47.1% Customer satisfaction (Base year = 1.00) Japan = 1.14 (Compared to Fiscal 2016) Meetings with institutional investors/ analysts over 400 Events Environmentally conscious products as percentage of sales (residential air conditioners) 97% Reduction in greenhouse gas emissions due to adoption of environmentally conscious products 68 million tonnes of CO2 Reduction in greenhouse gas emissions from production/ development stage 76% reduction (compared to Fiscal 2006) Reduction in CO2 emissions due to forest conservation 7 million tonnes of CO2 Provide new value that makes people and space healthier and more comfortable while at the same time reducing environmental impact. Sustainable Development Goals (SDGs) Daikin is Contributing to 6 of the 17 Sustainable Devel- opment Goals Daikin is Contrib- uting to through Its Business Value Creation for the Earth Reduce environmental impact through all business activities and contribute alleviating 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 contribute 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 • Training of highly skilled personnel • Job creation • Contribution to local economic development • Creation of new products and services that help raise people’s lifestyles 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 2020 5 Other(Oil hydraulics, Defense, electronics)Details▶P.28〜Air ConditioningDetails▶P.21〜ChemicalsDetails▶P.26〜FiltersDetails▶P.9〜Financial and Non-Financial Highlights Financial and Non-Financial Highlights Daikin Industries, Ltd. and Consolidated Subsidiaries Years Ended March 31 Net Sales/Operating Income, Operating Income Margin ①売上高／営業利益・営業利益率（億円）（％） Operating Income Net Sales Operating Income Margin ROE/ROA ROE ROA ④ROE ／ ROA (¥ billion) 3,000 2,000 1,000 0 (%) 15 2,550.3 10.4 10 2016 2017 2018 2019 2020 265.5 5 0 (%) 20 15 10 5 0 12.0 6.4 2016 2017 2018 2019 2020 Steady progress was made on the full fiscal year plan through to the third quar- ter. Revenue increased while earnings decreased for the full fiscal year reflecting the abrupt halt in economic activity from the start of the fourth quarter as a result of the global COVID-19 pandemic. The Air Conditioning business is looking to undertake R&D as well as capital, acquisition, and other strategic investments on the back of a forecast increase in demand going forward. By steadily reaping returns on the aforementioned investments, we will work to boost our performance on a continuous basis and improve ROE/ROA. Total Shareholders’ Equity/ Shareholders’ Equity Ratio ②自己資本・自己資本比率 Total Shareholders’ Equity Shareholders’ Equity Ratio Interest-Bearing Liabilities/ Liability with Interest Ratio ⑥有利子負債／有利子負債比率 Interest-Bearing Liabilities Liability with Interest Ratio (¥ billion) 1,500 1,000 500 0 1,435 53.8 2016 2017 2018 2019 2020 (%) 60 40 20 0 (¥ billion) 750 500 250 0 (%) 30 553.8 20.8 20 2016 2017 2018 2019 2020 10 0 Daikin’s shareholders’ equity ratio came in at 53.8% for the fiscal year under review, exceeding 50% for the third consecutive year. The Company is taking positive steps to ensure its financial stability. While our liability with interest ratio was temporarily high due to major acquisi- tions between 2010 and 2019, we have continued to steadily reduce the balance of interest-bearing liabilities by generating free cash flow and making effective use of Group funds. Free Cash Flow ⑤フリーキャッシュフロー Capital Investments/ Research and Development Expenses ③設備投資／研究開発費 Capital Investments Research and Development Expenses (¥ billion) 150 100 50 0 146.0 2016 2017 2018 2019 2020 In addition to increasing earnings and improving investment efficiency, efforts are also being made to generate cash flow from a working capital perspective. This includes thoroughly reducing the balances of accounts receivable and inventory. 6 (¥ billion) 150 100 50 0 132.0 68.0 2016 2017 2018 2019 2020 From a capital investment perspective, energies are being directed toward upgrading and expanding sales networks and newly constructing plants while boosting production capacity, focusing on emerging countries and key markets where there has been remarkable growth. As far as research and development expenses are concerned, Daikin recognizes that strengthening technological competitiveness is the lifeblood of a manufacturer. On this basis, the Company is coordinating with its eight development sites worldwide and the Technology and Innovation Center (TIC) that serves as the Group’s development control tower, and is accelerating the development of distinctive technologies and products. DOE/Cash Dividends per Share, Dividend Payout Ratio ⑦DOE ／ 1 株当たり配当金・配当性向 Cash Dividends per Share DOE Dividend Payout Ratio Number of Patent Applications Japan Overseas ⑧特許出願件数 (¥) 180 120 60 0 160 27.4 3.3 2016 2017 2018 2019 2020 (%) 30 20 10 0 (Number) 1,000 750 500 250 0 957 513 2015 2016 2017 2018 2019 * Together with making every effort to maintain a ratio of dividends to sharehold- er equity (DOE) of 3.0% or higher based on the principle of always providing sta- ble dividends to shareholders, we will continue striving in our mission to provide shareholders with even greater return by aiming for an increasingly higher level of dividend payout ratio. Daikin is working to stimulate employees’ motivation to invent, spur the cre- ation of intellectual property, increase the quality and quantity of patents in competitive fields, and increase the number of overseas patents in key techno- logical fields in particular in emerging countries. * The latest figures for the fiscal year ended March 31, 2019. Number and Percentage of Women in Management Positions ⑨女性管理職と比率 Women in Management Positions Percentage Number and Percentage of Overseas Bases Where Local Nationals Are President or Executive ⑩海外拠点の現地採用社長・取締役数と比率 Executive President ratio Executive ratio President 60 40 20 0 63 5.4 (%) 6 4 2 0 2016 2017 2018 2019 2020 90 60 30 0 48.6 47.1 68 32 2016 2017 2018 2019 2020 (%) 60 40 20 0 One of the Company’s most important policies revolves around the empower- ment of women in its workforce. Daikin is implementing various measures to accelerate the development of women in management and executive positions, change the mindset of men in management, and support the early return to work of its female employees after childcare leave. As Daikin’s business globalizes, the Company is actively promoting more employ- ees at overseas bases to managerial positions. Daikin holds the Global Daikin Leadership Development Program as a development measure to give locally hired managers the opportunity to run Daikin subsidiaries in their own countries. Through the Adoption of Environmentally Conscious Products, Contribute to Reducing Greenhouse Gas Emissions ⑪環境調和商品の普及による温室効果ガス排出抑制貢献量 Greenhouse Gas Emissions (during development and production) ⑫温室効果ガス排出量（開発・生産時） (million tonnes of CO2) 80 68 60 40 20 0 2016 2017 2018 2019 2020 (million tons of CO2) 2.0 1.5 1.0 0.5 0 1.28 2016 2017 2018 2019 2020 Daikin’s air conditioners, a mainstay product, emit particularly high levels of greenhouse gas emissions when in use. Accordingly, the Company is focusing on promoting the use of inverters and air conditioners that use low-global warming refrigerants. In fiscal 2020, Daikin reduced greenhouse gas emissions by 68 mil- lion tons-CO2, compared to its target of limiting greenhouse gas emissions to 60 million tons-CO2 by fiscal 2021. While Daikin emits two kinds of greenhouse gases during development and pro- duction processes: CO2 from energy use, and fluorocarbons, every effort is being made to minimize environmental impact through production activities. Daikin achieved a 76% reduction (to 1.28 million tons-CO2) in greenhouse gas emissions in fiscal 2020, compared to its target of a 70% reduction (to 1.58 million tons- CO2) from the fiscal 2006 level in development and production greenhouse gas emissions for the Group as a whole in fiscal 2021. Annual Report 2020 7 At a Glance At a Glance Daikin Industries, Ltd. and Consolidated Subsidiaries Years Ended March 31 Air Conditioning 90.6% Percentage of Net Sales Chemicals 7.1% Oil Hydraulics 1.6% Defense 0.7% Net Sales and Operating Income Major Products Description Air Conditioning (¥ billion) 2,500 2,000 1,500 1,000 500 0 236.2 2,309.1 2,309.1 (¥ billion) 250 200 150 100 50 0 2016 2017 2018 2019 2020 • Room air-conditioning systems • Air purifiers • Heat-pump hot-water- supply and room-heating systems • Packaged air-conditioning systems • Multiple air-conditioning systems for office buildings • Air-conditioning systems for facilities and plants • Absorption refrigerators • Freezers • Water chillers • Turbo refrigerator equipment • Air-handling units • Air filters • Industrial dust collectors • Marine-type container refrigeration • Refrigerating and freezing showcases 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. Chemicals (¥ billion) 200 160 120 80 40 0 23.823.8 179.9 179.9 (¥ billion) 35 28 21 14 7 0 • Fluorocarbons • Fluoroplastics • Fluoroelastomers • Fluoropaints • Fluoro coating agents • Semiconductor-etching products • Water and oil repellent agents • Pharmaceuticals and intermediates • Dry air suppliers In 1933, Daikin was the first in Japan to engage in research on fluorinated refrigerants. Today, our activities range from research and development to commercialization, and we offer a lineup of 1,800 fluorine compounds including gas, resin and rubber. 2016 2017 2018 2019 2020 Oil Hydraulics (¥ billion) 40 30 20 10 0 3.3 37.737.7 (¥ billion) 6.0 4.5 3.0 1.5 0 2016 2017 2018 2019 2020 Defense (¥ billion) 20 15 10 5 0 1.31.3 18.718.7 (¥ billion) 1.6 1.2 0.8 0.4 0 2016 2017 2018 2019 2020 8 • Oil hydraulic pumps • Oil hydraulic valves • Cooling equipment and systems • Inverter controlled pump motors • Hydrostatic transmissions • Centralized lubrication units and systems Daikin’s unique hydraulic technologies offer outstanding energy-conservation performance and are contributing to the development of industry by unleashing the potential of power control. • Warheads for Japan’s Ministry of Defense/ Warhead parts used in guided missiles for training purposes • 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. Market Size and Positioning of Each Business Market Size and Positioning of Each Business Creation of synergies by utilizing the afﬁnity of the Filter business with existing businesses, including Air Conditioning and Chemicals. Air Conditioning Refrigerants IAQ (Indoor Air Quality) Three pillars of revenue Chemicals Filters＊＊ (Note: Filters are included in the Air Conditioning business segment) Air Conditioning Business Chemicals Business Global HVAC&R* Market Scale (Daikin estimates) Global Fluorochemicals Market (Daikin estimates) Filter Media(PTFE) Air-conditioning equipment Air-conditioning- related 空調事業　世界の HVAC&R 市場規模 Refrigeration Heating/water heater 2015 Approx. ¥ 31 trillion → 2020 Approx. ¥ 39 trillion (hundred of million of yen) 120,000 100,000 80,000 60,000 40,000 20,000 0 Average annual Average annual growth growth 5% Average annual Average annual growth growth 7% Average annual Average annual growth growth 3% Average annual Average annual growth growth 2% Average annual Average annual growth growth 8% Average annual Average annual growth growth 7% '15 '20 Japan '15 '20 North America '15 '20 China '15 '20 Europe '15 '20 Asia/ Oceania '15 '20 Other 化学事業　世界のフッ素化学市場規模 2015 Approx. ¥ 730 billion → 2020 Approx. ¥ 800 billion (hundred of million of yen) 3,500 2,800 2,100 1,400 700 0 '15 '20 Japan '15 '20 Americas '15 '20 China '15 '20 Europe '15 '20 Asia/Developing countries Heating, Ventilating, Air-conditioning and Refrigerating ＊Heating, Ventilating, Air-conditioning and Refrigerating Filter Business Global Air Filter Market Scale (Daikin estimates) Global Power & Industrial (P&I) Market Scale (Daikin estimates) (hundred of million of yen) 2,500 2,000 1,500 1,000 500 0 エアフィルタ市場規模 2015 Approx. ¥ 450 billion → 2020 Approx. ¥ 550 billion MFAS Business (Dust collection for gas turbines) APCS (Large dust collection system) APCP (Small dust collector) 2015 Approx. ¥ 600 billion 2020 Approx. ¥790 billion '15 '20 Japan '15 '20 North America '15 '20 Europe '15 '20 Asia Annual Report 2020 9 P&I市場規模Message from the CEO Masanori Togawa President and CEO Minimizing the impact from COVID-19 to ensure an improvement in sales Quickly implementing strategies to adapt to changing conditions and targeting further growth by turning challenges into opportunities As the spread of COVID-19 increases in severity, we will exercise our strength as a team to face this unprecedented crisis and create measures both defensive and offensive with the goal of being able to adapt to and overcome any situation. Daikin remains committed to achieving growth in our business and solving social issues by effectively responding to new needs in air quality. 10 Sympathies and gratitude We would like to express our deepest sympathies to those sincere gratitude to those dedicated to preventing the spread of suffering from COVID-19, as well as their families and friends. On infections, including those operating in the fields of medicine and behalf of the Company, I would also like to extend our most government. Fiscal 2020 earnings and measures designed to minimize the impact of COVID-19 Amid a harsh operating environment characterized by a As COVID-19 began to spread around the world from the end slowdown in the Chinese economy, the adverse effects from of January 2020, one of my first acts as CEO was to assume growing trade friction between the US and China, and reduced leadership at the newly established response headquarters and automotive-related demand, Daikin in fiscal 2020 enacted alongside efforts to ensure the safety and health of our strategies aimed at achieving targets in our strategic management employees, quickly implement measures aimed at collecting, and plan, "FUSION 20," expanded sales in all operating regions then acting on, information that seemed to be changing by the around the world and advanced total cost reductions, allowing minute. Economic activity in China came to a standstill from late the Company to meet its targets and secure sales and profit February with the halting of production and the markets, which growth through the third quarter. The effects from the COVID-19 had a profound impact on our Company's sales. Economic activity pandemic from the fourth quarter resulted in sales for the year in was also sharply curtailed in Europe, with measures such as border full reaching ¥ 2,550. 3 billion, up 2. 8 % year on year, with closings and lockdowns going into effect first in Italy and then operating profit coming in at ¥ 265 .5 billion, down 3.9 % year on throughout the region. As the number of people infected rapidly year. The COVID-19 pandemic adversely impacted sales by about expanded, there were forecasts for a sharp decline in earnings, ¥ 45.0 billion and operating profit by about ¥ 22.0 billion, so if we though we were able to reduce sales opportunity losses by rapidly were to exclude the effects from the outbreak, sales and profit adjusting to supply chain disruptions in China and maintaining the would have been up for a tenth consecutive year and at an historic supply of our products. In addition to focusing on an expansion in high performance for the seventh consecutive year. Net income sales in Asia, the United States, and Japan, where the impact from attributable to owners of the parent dipped sharply in fiscal 2020, the outbreak was relatively limited at the time, we were able to due in part to the booking of extraordinary losses on impairment minimize the impact on earnings for the year through a variety of losses in the US filter business. Absent this factor, net income other measures, including those promoting further cost would have been down just 3. 8 % year on year. reductions. FY 2020 Forecast, Result, and Action Plan Forecast FY 2020 Result COVID-19 Effect FY 2021 Action Plan (Announced in May 2020) Sales 2,610.0 B JPY (+5% year on year) 2,550.3B JPY (+2. 8% year on year) - 45.0 B JPY 2, 330.0 B JPY (- 9% year on year) Operating Proﬁt 285.0 B JPY (+3% year on year) 10.9% profit margin 265.5B JPY (-3.9% year on year) 10. 4% profit margin -22.0 B JPY 150.0 B JPY (- 4 4% year on year) 6 . 4% profit margin Annual Report 2020 11 Message from the CEO Action plan for fiscal 2021 As the global economy is impacted by a decline in demand due lasting throughout the year. We have formulated our fiscal 2021 the global spread of COVID-19 and the emergent effects from targets in line with our current outlook and have taken into restrictions on economic activity, there remains some degree of account actual conditions and realities in each business and region. uncertainty as to when the spread of the virus and the resultant Accordingly, our action plan, announced in May, is in line with restrictions will be curtailed and how long it will take for demand conditions that are close to the second scenario, in which the to recover once that curtailment is assured. That said, I believe it is effects of the COVID-19 pandemic extend through the first half of management's job to set goals and take action based on the reality the year. of the present and not to assume that because the future is With the launch of this action plan in fiscal 2021, we believe we unclear, action should be left for a later date. have the potential to spur a rapid V-shaped recovery, depending of We have considered four scenarios in when assessing the level course on market trends and the severity of the effects from the of impact from the COVID-19 pandemic and studied a variety of COVID-19 pandemic. On the other hand, we are also prepared counter measures for each. The first scenario envisages the effects should the effects from the pandemic extend through the third of the outbreak being brought under control in the first quarter of quarter of the year, or in our worst-case scenario, throughout the fiscal 2021, the second sees the effects last through the first half entire year. Given the need to be able to respond flexibly to ever- of the fiscal year, the third assumes the effects last through the changing conditions, we intend to review our action plan every third quarter, and the fourth assumes the worst, with the effects one or two months, depending on the need. "FUSION 20": Results so far and our efforts in the last year of the plan The key aspects of FUSION center on the Company's ability to through the implementation of 176 business division themes and thoroughly execute initiatives in line with the planned strategy and ten Group-wide follow-up themes. Our fiscal 2021 targets focused maintain its commitment to achieving quantitative targets while at on sales of ¥ 2. 8 trillion and operating profit of ¥ 325.0 billion the same time promoting the advancement of flexibility in through January, when the effects from COVID-19 first emerged. management. This flexibility allows the Company to anticipate Excluding the effects from exchange rates, reduced demand as a changes in the operating environment and market trends as they result of a slowdown in the Chinese economy and semiconductor- occur and accordingly review key strategies in a timely manner. related demand we are targeting sales and operating profit for the The environment in which the Group operates is changing faster final year of "FUSION 20" of ¥ 2.9 trillion and ¥ 348 .0 billion, than previously expected, due in part to the rapid advancement of respectively. technologies such as IoT and AI, as well as a growing worldwide We are spending the current year formulating our next strategic commitment to solving environmental issues, including issues management plan, "FUSION 25." To achieve further growth, we related to reducing greenhouse gas emissions. Daikin sees these believe it necessary to not only maintain our current initiatives, but changes in the operating environment as opportunities and in also develop and implement new measures with the future in June 2018 formulated its three-year "FUSION 2020" plan with mind. the aim of strengthening our core businesses, expanding the We expect our mainstay air conditioner business, which includes scope of our business, and changing our business structure. In line the service and solutions business, as well as the air quality-related with these goals, we have continued to implement the measures business, to be a growth business even after COVID-19 is brought contained within plan and maintained related forward investment. under control. We also believe it to be a business that can Even amid a tough operating environment, we focused in fiscal contribute to the needs of society and the resolution of social 2020 on achieving the goals outlined in the "FUSION 20" plan issues by supporting the health and safety of all. Management Approach for the COVID-19 In addition to our focus on generating the results targeted for strengthen our operating structure in response to the challenges the final year in the "FUSION 20" strategic management plan, presented by COVID-19. Moreover, given the difficulty in Daikin is enacting near-term measures and working to reform and predicting the operating environment moving forward, we have 12 launched six emergency projects addressing important strengths in services that connect us directly to our customers to management issues, and are working to further strengthen create new businesses that provide a safe and healthy atmosphere co-creation and cooperation within the group on a global basis, to all. enact reforms to existing procedures and follow-up efforts, speed Based on the "FUSION 20" theme, we are building strategies in decision making, and increase overall speed and dynamic energy. the face of the rapidly escalating effects stemming from the We also recognize that the air-conditioning services business is a COVID-19 pandemic. The first of these involve 43 defensive socially significant business that provides a life line to people, and measures, including those aimed at reducing fixed costs and in addition to focusing on capturing growing demand during the providing rapid support to our dealers and business partners. The economic downturn, we are committed to leveraging our second involves 31 proactive measures, including those aimed at Management Approach for the COVID 19 Crisis Measures Based on the Impact of the Sudden COVID-19 Outbreak (cid:12255) Defensive measures: 43 themes (Thorough suppression of fixed costs, rapid support to dealers and business partners, etc.) (cid:12255) Proactive measures: 31 themes (Strengthening of sales via the Internet, development of measures focused on changes in consumer mood and behavior) (cid:12255) Constitution strengthening and reform: 17 themes (Establishment of a lean, robust fixed cost structure, increased operational efficiency by utilizing AI and IoT in reform of business processes.) Six Emergency Projects Addressing Important Management Issues ❶ Strengthening procurement, manufacturing, inventory, and logistics globally ❷ Outperforming rivals in response to global changes and declining demand; and strengthening sales and marketing capabilities to increase market share while maintaining selling price ❸ Expanding sales of air and ventilation products; developing and launching new differentiated products; and creating solutions on a global level to thoroughly capture the growing demand resulting from greater awareness for air quality and ventilation ❹ Drastically cutting fixed costs (breakeven point and dramatic reduction in ratio of fixed costs to sales) ❺ Prioritizing large-scale investments (capital investments and investments / loans) in the unprecedented uncertainty for the future of the business environment ❻ Raising funds by having a detailed knowledge of the capital demand for the entire Group Strategic Themes for Fusion 20 (cid:12255) 176 themes by business division Sales (cid:12255) 10 Group-wide follow up themes Operating Proﬁt 2 , 800 B JPY 325B JPY Excluding the effect of foreign currency and decreased demand, the standard for the final year of Fusion 20 aims for sales of 2,900 B JPY and operating profit of 348 B JPY. Annual Report 2020 13 Message from the CEO strengthening sales using the Internet and developing services and products in line with changes in consumer sentiment and behavior after COVID-19 is brought under control. The third focuses on 17 measures targeting the reform and strengthening of the Daikin Group business structure, including those establishing a light yet robust fixed-cost structure and those increasing operational efficiency in the business process by advancing the use of technologies such as IoT and AI. In addition to overcoming the current tough operating environment, we aim to lead our rivals in achieving a rapid V-shaped recovery when demand picks up after the effects from COVID-19 are brought under control, and recognizing that the key to winning is in understanding what kind of offensive measures we should take, how to turn a crisis into an opportunity to implement structural reforms, and how best to improve our competitive capabilities. One of our goals in fiscal 2021 is to further strengthen our light yet robust operating structure by accelerating efforts beyond those in the action plan and entrenching fixed cost reductions, while at the same time differentiating ourselves from the competition through investment prioritization, and the active pursuit of R&D, capex and the hiring and training of human resources that are capable of contributing to the next generation of innovative ideas. Addressing important management issues: six emergency projects and three important measures Daikin has launched six emergency projects addressing important in the Company's effort to achieve growth, even after management issues as part of its aim to strengthen co-creation COVID-19 is brought under control. and cooperation, fundamentally reform existing procedures and In the first project (strengthening procurement, manufacturing, follow-up efforts, and increase speed and dynamic power within inventory, and logistics globally), the goal is to create a structure the Group. The six emergency projects are: 1) Strengthening where it is possible to have an almost instantaneous procurement, manufacturing, inventory, and logistics globally; 2 ) understanding of conditions regarding procurement, production, Outperforming rivals in response to global changes and declining logistics, and sales in the five key regions of Asia/Oceania, Europe, demand; and strengthening sales and marketing capabilities to North America, China, and Japan, and where the Company can increase market share while maintaining selling price; 3 ) quickly create and implement optimized measures to limit excess Expanding sales of air and ventilation products; developing and inventories and sales opportunity losses based on shifts in demand launching new differentiated products; and creating solutions on or changes in logistics or regulations. Moreover, should lockdowns a global level to thoroughly capture the growing demand resulting occur again and demand deteriorates accordingly, the system from greater awareness for air quality and ventilation; 4 ) would be able to enact production adjustments on a global scale Drastically cutting fixed costs (sharp reduction in break even point to prevent excess inventories from being formed. and in ratio of fixed costs to sales); 5 ) Prioritizing large-scale In regard to the second project (strengthening sales and investments (capital investments and investments/loans) in the marketing capabilities to increase market share in response to unprecedented uncertainty for the future of the business global changes and declining demand while maintaining selling environment; and 6 ) Raising funds by having a detailed price), topping our rivals and increasing market share is key to knowledge of the capital demand for the entire Group. securing earnings in an environment characterized by reduced Within the six emergency projects, three are especially demand and a shrinking market. In this sense, the strength of the 14 ties in our sales network is worth noting. With that in mind, we quality, ventilation, air purification, disinfection, and cleaning as are focused on bolstering support for our sales network, global interest grows amid the COVID-19 pandemic. Production understanding trends in the markets and at our competitors in of residential air purifiers has greatly expanded amid a sharp each region, as well as sales network conditions through close increase in demand in all operating regions, though our efforts in contact with our customers, and implementing measures that this area focus not just on this, but also on promoting solutions, exceed those of our competitors. In addition, we will work to the rapid development of products, and a firm understanding of expand sales through new sales methods, including through the customer needs in potential markets. While demand for air- use of telecommuting, e-commerce, and other means that have conditioning equipment appears likely to temporarily drop, we aim been rapidly adopted with the increase in working from home. to increase sales in line with growing demand related to air The third project (expanding sales of air and ventilation quality. Finally, we are taking a medium- to long-term perspective products; developing and launching new differentiated products; and are also working on the development of high-performance and creating solutions on a global level to thoroughly capture the filters and air purification units that fundamentally improve air growing demand resulting from greater awareness for air quality quality. and ventilation) focuses on capturing demand related to air Concrete measures for co-creation in three areas As we focus on opportunities in an era characterized by addition to technology held by the University of Tokyo and having, ongoing changes, including the rapid progress of new access to the entrepreneurs associated with University-linked technologies such as IoT and AI, climate change, and an increased venture companies, of which there are about 370, to rapidly move focus on environmental issues, we believe co-creation essential to original ideas into practical use, we are working to develop a generating change on our own. More specifically, we believe that system in which workers would be able to move freely between in a period of rapid change, we cannot find all the answers by our company, the University, and our overseas affiliates. To create ourselves, and when taking on the challenge of creating value, we solutions that can be recognized as new value, we believe that it is should also seek to incorporate new ideas and knowledge. With essential to make the best use of external resources, including this in mind, our efforts to transform our business are centered on start-ups with advanced technologies, innovative ideas, and the the idea of co-creation in three areas. The first of these is "co- spirit to take on new challenges. With this in mind, Daikin in creation with our customers," which includes working to expand November 2019 established the Corporate Venture Capital Office our business by revising the "product-out" strategy and adopting (CVC Office) with investment capacity of ¥11.0 billion over five a "market-in," and "customer-in" philosophy for each customer years at the Technology Innovation Center (TIC), our R&D facility, and company on an individual basis. The second area of focus is to promote co-creation efforts with start-up companies. The first "co-creation within the Group." In this area we will aim to achieve project in this effort involved a ¥ 300 million investment in the highest level of optimization, including in research, WASSHA, a company developing an electrical power service development, production, sales, services, and marketing by business through the rental of LED lanterns in the non-electrified strengthening Groupwide collaboration and focusing our areas of Tanzania. The project involves the development of a collective efforts on creating new value. Finally, the third area of subscription-based business in which the mobile phones that are focus is "co-creation with the outside world." In an era of rapid in growing use in the area are used to rent LED lanterns and solar change, it is imperative that we accelerate technological and panels for charging purposes. Customers are charged through product development through open innovation. In short, we their mobile device in advance and only for the time they actually believe that if you try to go it alone, you and your company will use the equipment. We believe the WASSHA project can be seen not be able to adapt to the changes in the business environment as a leading effort in addressing a growing social need in or the ongoing evolution of technology. With this in mind, we are emerging economies, such as those in Asia and Africa, where air collaborating with venture companies and academic institutions to conditioners are not yet commonly used but where there are not only contribute to the resolution of the previously mentioned expectations for their increased use as part of the region's social issues, but also the construction of a new business model. infrastructure moving forward. Through efforts such as these, Based on this concept, we launched an industry-academia Daikin hopes to provide new value to the world as a global leader collaborative effort with the University of Tokyo in February 2018 in air conditioning. as a concrete example of "co-creation with the outside world." In Annual Report 2020 15 Message from the CEO Contributing to the resolution of social issues to build a sustainable society In support of the Paris Agreement adopted in 2015 , Daikin is Driven by economic growth in emerging markets, demand for committed to providing safe and healthy air as part of its air conditioning is expected to expand more than three times by "Environmental Vision 2050," which targets the complete the year 2050. We believe it is our mission to provide healthy and elimination of greenhouse gas emissions by 2050 . The spread of comfortable air environments for people around the world while COVID-19 has also increased global interest in air purification and working to reduce the impact of global warming by as much as ventilation, and we intend to respond quickly to this growing need possible. In fiscal 2019, we launched “Environmental Vision with solutions that make the most of our technologies, products, 2050” with the goal of reducing greenhouse gas emissions to and services. almost zero. We believe that through the development and Moreover, as ESG (environmental, social, governance) investment dissemination of products and services that contribute to the gains ground, investor focus increasingly appears centered on the conservation of energy and the prevention of global warming, we climate change-related actions of companies. In other words, the are contributing to the reduction of greenhouse gas emissions in perspective for selection in investment is shifting from how well a society and at the same time further developing our business. company is doing in terms of earnings to how the Company is Daikin announced its support and agreement with the contributing to the resolution of social issues focused on common global goals, including SDGs and the goals of the Paris Agreement. Moving forward, I think stakeholders in general will be increasingly recommendations of the Task Force on Climate-related Financial Disclosures (TCFD*) in May 2019 . Together with the disclosure of financial information, we are committed to disclosing information focused on how companies act in regard to resolving social issues. related to our ESG efforts, including in regard to climate change. In Over the past few years, Daikin has been looking for ways to particular, we analyze the risks and opportunities climate change grow our business while balancing the positives and negatives presents to our business, and then reflect these findings in our resulting from the spreading use of air conditioners. management strategy and risk management. We also disclose our Air conditioning has transformed the indoor environment in progress in related efforts and target further growth in our particularly hot areas, and in the process has become an important business as we work toward the decarbonization of society. part of the infrastructure supporting modern society. Through our business, we have been able to contribute to people's health by preventing heat stroke and improving air quality while also contributing to regional economic development by improving worker efficiency. On the other hand, the increased use of air conditioning also increases the volume of electricity usage and contributes to global warming. Shareholder returns ＊ TCFD was established by the Financial Stability Board in 2015. It recommends that companies evaluate business risks and business opportunities linked to climate change as well as identify financial impacts and make related disclosures. Daikin showed an ongoing improvement in earnings through to flexibly revise our approach to our business and review our the third quarter of fiscal 2020. Even with the spread of action plan in line with the trends in an ever-changing business COVID-19 in the fourth quarter, we were able to minimize its environment. impact and pay an annual dividend in line with our ¥160 forecast. We will continue to strive toward maintaining a consolidated While the full impact from the spread of COVID-19 remains dividend on equity (DOE) ratio of 3.0 % based on a policy aimed uncertain, we have made a firm start in fiscal 2021 by formulating at ensuring stable and continuous dividend payments. We will an action plan with specific measures based on actual conditions determine our fiscal 2021 dividend forecast based on a at each of our businesses and locations. Depending of course on comprehensive assessment of business performance, funding market trends and the eventual scope of the COVID-19 impact, demand, and the payout ratio. we are targeting a rapid V-shaped recovery in earnings while also We will announce our forecasts for the impact on demand from making preparations should the effects from the pandemic prove the COVID-19 pandemic as soon as we can assess its impact on more enduring than initially expected. We have not to set a earnings with a sufficient degree of certainty. forecast for the fiscal 2021 dividend at this time, mainly as we aim 16 A message to the stakeholders With the full impact from the COVID- 19 pandemic still On this note, we thank you for your understanding and kindly unknown, I believe the operating environment moving forward is ask for your continued support as we move forward. likely to remain severe. However, the Daikin Group will strive to respond flexibly to the ever-changing situation, working together as one to overcome the difficulties in front of us and secure both short-term earnings and medium- to long-term growth. I am proud of the characteristic strength we have shown as a company in the face of this crisis. In addition, when looking ahead to the world after COVID-19, I believe we will advance toward our goal of ensuring growth by demonstrating this strength and contributing to a society in which people live and work in both health and safety. Masanori Togawa President and CEO June 2020 Annual Report 2020 17 Financial Strategy Deepening and Promoting "Ratio Management" Company Wide Capital Cost-Oriented Financial Strategy Daikin undertakes "ratio management" focusing on capital costs to increase corporate value. The background behind introducing "ratio management" started with our intention to pivot away from emphasizing monetary amounts (i.e., net sales, operating profit) on P/L statements, aiming to become global No. 1 under explaining DVA to employees in terms of corporate value rising when profits generated from business activities over an entire year exceed capital costs. Companywide ROIC Tree ROIC was introduced as an internal management indicator to "FUSION" launched in 1996 . We then began "ratio monitor capital efficiency beginning with reducing inventories and management" to focus more on operating profit "margin," to facilitate greater implementation among employees. profitability, and financial structure based on our aim to "become More specifically, we have positioned ROIC as an internal an attractive company that draws together people, capital, and management indicator linked to Companywide ROE targets and information" under the revamped FUSION in 1999. then apply it to each business target as a means to specifically "Ratio management" involves overseeing "profitability, cash, and show how ROIC is connected to the duties of each employee. For financial structure" as a set using indicators such as free cash flow and DVA*1 along with ROE and ROA. Regarding DVA, we have shifted to ROIC (return on invested capital) and free cash flow as example, during employee training we describe ROIC as a tree to explain concepts such as how inventory reduction improves ROIC and the relationship between selling prices and costs to increase management indicators for each division in recent years, as all profitability. Beyond Japanese employees, we use the "ROIC Tree" segments have reached the black. ＊1 DVA: Daikin economic value added concept to explain to foreign staff how ROIC is linked to their daily duties. We adopted DVA with the start of ratio management as an indicator that resonates easily by simplifying and fostering employee understanding of EVA (economic value added). Beyond simplifying the calculation formula, we focused on promoting DVA internally by We promote 10 key Companywide themes essential for achieving "FUSION 20" final year targets; 1-7 listed below show the connection between seven of those themes and the ROIC Tree. ROIC Tree Profitability ROIC (Return on Invested Capital) Asset efficiency Net sales/operating profit margin Invested capital turnover rate Marginal profit ratio Fixed ratio No. of days working capital is held Fixed asset turnover rate ① Maximize variable cost C/D ② Implement selling price increase ③ Control logistics cost surge, implement C/D measures, revamp SCM ④ Reduce fixed costs ⑤ Enhance product quality Financial Analysis over the Past Decade Daikin achieved a V-shaped recovery amid major economic changes following the collapse of Lehman Brothers, achieving ten consecutive years of sales growth from fiscal 2011 through fiscal 2020 and nine consecutive years of operating profit for nine years straight through to fiscal 2019. This breakthrough earnings growth reflects Daikin's penetration of the North American air-conditioning market after acquiring major US air-conditioning manufacturer Goodman in 2012. In addition, we position operating profit margin as an indicator of profitability under "Ratio Management" and set a target of 12.0 % for the final year target of "FUSION 20," while operating profit margin rose to 11.1% in fiscal 2019. We are working to reach targets for ROE of 14 .0 % and ROA of 8 . 4%, both of which serve as indicators of asset efficiency. ⑦ Accelerate investment returns No. of days inventory is held No. of days receivables are held ⑥ Reduce inventories Management Indicators from Fiscal 2011 (%) 18 ROE ROA Operating profit margin 15.7% 15.7% 14.5% 14.5% 13.9% 13.9% 13.1% 13.1% 13.1% 13.1% 13.4% 13.4% 10.7% 10.7% 10.0% 10.0% 11.3% 11.1% 11.3% 11.1% 11.1% 11.1% 8.3%8.3% 7.8%7.8% 8.8%8.8% 6.5%6.5% 4.0%4.0% 1.7%1.7% 6.7%6.7% 3.6%3.6% 6.9%6.9% 5.0%5.0% 6.1%6.1% 5.6%5.6% 3.0%3.0% 7.8%7.8% 7.3%7.3% 6.8%6.8% 12.0% 12.0% 10.4% 10.4% 6.4%6.4% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 (FY) 15 12 9 6 3 0 18 In fiscal 2021, the final year of "FUSION 20 ," we will work to R&D at normal levels of ¥130 billion and ¥ 70 billion, respectively, enhance our financial structure through both defensive and as we view such investment as vital for future growth. offensive measures to reach the plan's targets despite severe Nevertheless, we will flexibly determine the feasibility of conditions caused by COVID-19. investment by carefully monitoring conditions and prioritizing Daikin's market capitalization has grown by around 20 times investment. As for capital investments, we plan to keep over the 25 years between end-March 1995 and end-March aggressively investing in enhancing production capacity targeting 2020 , being ranked eighth in market cap growth over the 30 North America, India, and SE Asia—all of which are key markets years of the Heisei Era (1989 -2019 ). for the air conditioning business—and growth markets for the Notes: For companies listed on Japanese stock exchanges. Comparisons between January 9, 1989 and April 26 , 2019 (source: Nikkei). Investment & Shareholder Returns In the latter half of the "FUSION 20" three-year plan, we chemicals business. As for shareholder returns, by striving to maintain a consolidated ratio of dividend to net assets (Dividend on Equity, DOE) of 3.0 % while at the same time aiming for an even higher consolidated dividend payout ratio, we will introduce initiatives to further increase returns to our shareholders with the core goal of targeted growth investment of around ¥ 600 billion including stable and continuous dividends. capital investments and R&D (investment plan: ¥ 362 billion; R&D: ¥ 220 billion). Investments for M&A will continue to be aggressively implemented as part of our business strategy. In addition to increasing production capacity, strengthening product development, and enhancing the sales and after sales service systems, we will work to strengthen business In fiscal 2020, despite economic conditions deteriorating sharply in the fourth quarter, annual dividend came to ¥160 owing to solid earnings growth seen through the third quarter. Internal reserves will be applied to strategic investments in order to expand business and increase competitiveness such as reinforcing management practices, promoting global businesses, competitiveness through such activities as accelerating the air- and accelerating eco-conscious product development. conditioning solutions business using IoT/AI, building a digital factory, strengthening and improving environmental technologies to comply with tighter environmental regulations, acquiring advanced technologies through open innovation, and hiring and developing IT-related personnel. Total Shareholder Return (TSR) Daikin's TSR outperformed TOPIX and TOPIX Machinery over a three-, five-, and ten-year period and TSR also surpassed cost of In fiscal 2021, conditions remain severe with no end in sight for equity capital owing to stable shareholder returns and strong the COVID-19 outbreak, yet we target capital investments and share price performance. Total shareholder return (TSR* 2 ) (Index) Daikin TOPIX TOPIX Machinery TSR (Annualized) 1 year Holding period TSR（年率）保有期間 Daikin TOPIX ダイキン TOPIX TOPIX 機械 TOPIX Machinery 3 years 5 years 10 years Cumulative Annualized Cumulative Annualized Cumulative Annualized 2.8% 21.9% 6.8% 72. 5% 11.5% 269. 6% 14.0% -9.5% - 0 . 4% -0.1% 1. 8% 0.4% 78 . 4% 6.0% 3年 16 . 8% 8 .1% 10 .1% 5年 17. 9 % 8 . 0 % 6 . 8% 10年 17. 8% 9.7% 12.1% -11.2% - 8 . 5% -2.9% -3 . 0% -0.6% 84 .7% 6.3% ＊ Annualized rate is the geometric mean of cumulative returns. 600 550 500 450 400 350 300 250 200 150 100 50 0 2010/3 2011/3 2012/3 2013/3 2014/3 2015/3 2016/3 2017/3 2018/3 2019/3 ■ Trading volume (thousand shares) 72,000 60,000 48,000 36,000 24,000 12,000 0 2020/3 ＊2 TSR (Total Shareholder's Return): Factors in capital gains and dividends when measuring the total return generated by a stock ＊ TSR is calculated by Daikin using cumulative dividends and share price fluctuations whereas TOPIX is calculated using share prices indices including dividends (formulated by the Company based mainly on Bloomberg data) ＊ Graph values are indexed market prices in terms of TSR, with March 31, 2010 closing price data set at 100 (holding period through end-March 2020 ) Annual Report 2020 19 Management Indicators from Fiscal 2011 (%) ROE ROA Operating profit margin 18 15 12 9 6 3 0 15.7% 15.7% 14.5% 14.5% 13.9% 13.9% 13.1% 13.1% 13.1% 13.1% 13.4% 13.4% 10.7% 10.7% 10.0% 10.0% 11.3% 11.3% 11.1% 11.1% 11.1% 11.1% 7.8%7.8% 7.3%7.3% 6.8%6.8% 6.1%6.1% 5.6%5.6% 12.0% 12.0% 10.4% 10.4% 6.4%6.4% 8.3%8.3% 7.8%7.8% 8.8%8.8% 6.9%6.9% 5.0%5.0% 6.7%6.7% 3.6%3.6% 3.0%3.0% 6.5%6.5% 4.0%4.0% 1.7%1.7% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 (FY) Review of Operations Overview of Global Development Conducting business in more than 150 countries and regions, Daikin has built more than 100 production bases underpinned by market-oriented production methods. Global Bases Deployed Area: Conducting business in more than 150 countries and regions Employees: Employees: 80,369 Consolidated Subsidiaries: Consolidated Subsidiaries: 313 Europe 9,407 78 7 China 18 ,996 36 4 Other Regions (Latin America, Middle East, Africa, etc.) 5,134 61 Asia/Oceania 16,456 51 4 Japan 12,879 29 4 United States 17,497 58 6 Employees Consolidated Subsidiaries Global R&D Centers (Air Conditioning Business Only) Expansion of Global Business Foundation Japan Non-Japan Net Sales Subsidiaries Employees 2001 33% 2019 77% 2001 40 % 2019 91% 2001 38 % 2019 84 % Note: Percentages in the center of each graph indicate the overseas ratio in domestic and overseas totals. 20 Air Conditioning Japan Business History In 1951 , Daikin launched Japan’s first packaged air conditioner. Since then, we have pressed forward and diversified to provide air-conditioning systems that meet the needs of factories and ships, vehicles, buildings and residential housing. Daikin has Market Environment The air-conditioning market in Japan is mature, and is anchored by replacement demand. As Japan’s economy in fiscal 2020 is colored by increasingly darker shades recession, on top of the impact from a hike to the consumption tax, the spread of COVID-19 has had a chilling effect on consumption and investor sentiment. Business Conditions Together with capturing special procurements for industry-use air-conditioning systems for public elementary and junior high schools, we bolstered sales of “FIVE STAR ZEAS,” “machi Multi,” and “MULTI CUBE” products. Residential-use systems saw demand for a wide-range of the product lineup. Market share expanded on the back of the wall-mounted “Urusara X” with internal cleaning function for the indoor unit and “risora,” which pursues both functionality and design. expanded its market share with a fine-tuned sales network and the pursuit of a broad lineup of high-value-added products that offer energy conservation and comfort. Production and Development Sites We are advancing high-end technology to raise energy efficiency and comfort. In addition, using “DAIKIN LAUNCH X,” our newly established online platform, we can accurately ascertain the opinions of users, and swiftly apply them to product develop- ment. Daikin is also moving forward on IoT and AI to facilitate functions such as automated operation. Products and Services in Line with Needs • “Urusara X,” a wall-mounted air conditioner that utilizes AI for automated control of temperature and humidity • “MULTI CUBE” enables individual control of temperature and air volume, even in large spaces such as factories • “Assisnet Service” and “Kirei Watch” utilize IoT to inspect, maintain and manage industrial air-conditioning systems Room air conditioner “Urusara X” that automatically controls temperature and humidity “risora” that pursues both design and functionality Strategy Going Forward In addition to special procurements by schools coming full circle, there has also been the impact incurred by the spread of COVID-19, and we anticipate that demand will decline. As concerns with regard to air quality rise, we will work to boost market share and raise profitability by expanding sales of high-value-added products based on promoting the appeal of ventilator function. In tandem with continuing to build upon a flexible production structure, we will move forward on strength- ening support for our dealerships. New Value, New Solutions & Growth The portable air conditioner “Carrime,” representing Daikin’s first determination to commercialize a product through the cloud funding service Makuake, has been honored by the world-renown design award iF DESIGN AWARD 2020, receiving the product category award. “Carrime” is a portable heat pump type air conditioner that can be hand-carried to a variety of locations, including kitchens, garages and other sites where it is difficult to install conventional air conditioners. In this product we have pursued an uncompromising design that is both easy to carry and blends in well with interior settings, that is compact, yet realizes full-blown cooling. “Carrime” portable air conditioner Annual Report 2020 21 OutlookCurrent statusAir Conditioning Business History Americas Daikin made its first attempt to enter the U.S., the world’s largest air- conditioning market, in the 1980s. However, given the well-entrenched culture of ducted air conditioning, market entry proved difficult and a withdrawal was unavoidable. We subsequently revisited the idea of establishing a U.S. presence during our advance to establish business globally, and after entering the year 2000, with the acquisition of the O.Y.L. Industries Bhd and Goodman Global Group, Inc., added ducted air conditioning products to our lineup marking the start of full-fledged operations in the U.S. Market Environment The air-conditioning market in the U.S. is similar to Japan in that it relies mainly on replacement demand. During the first half of fiscal 2020, demand was underpinned by personal consumption, but from March onward it stalled due to the spread of COVID-19. Business Conditions In the mainstay residential unitary product market Daikin success- fully expanded its own distributer network and sales were brisk. In the ductless product domain, sales rose for low-cost models in the residential market. With “VRV”, we bolstered our direct-to-user sales activities. In Applied Systems, in addition to growing equip- ment sales, we also expanded our services business. Production and Development Sites At Goodman’s new factory, “Daikin Texas Technology Park,” we are working to strengthen production capabilities and raise productivity. We are fortifying functionality as a digital factory by applying the latest Daikin technology and also spreading this to production sites in other regions. By newly establishing development sites we are enhancing our ability to develop products that meet customer needs. Products and Services in Line with Needs • Middle-zone (SEER* 15-17) inverter units • “Daikin One” smart thermostat • Development of “VRV” for the residential market • Air conditioners for cold regions that can work when the external temperature is down to -15 degrees * SEER: An acronym describing the Seasonal Energy Efficiency Ratio for cooling performance “Daikin One” smart thermostat that provides an air-conditioning solution for an entire home VRV system solution for the residential market Strategy Going Forward The spread of COVID-19 is stagnating personal consumption and capital investment, and demand is in decline. Given this situa- tion, we will introduce new residential unitary products that will serve specifically as replacements, strengthening technological online support for dealers and working to increase market share. In addition, we will pursue higher profit margins by enhancing productivity at new factories and reducing fixed costs. New Value, New Solutions & Growth In April 2020, Daikin made a substantial investment in Locix Inc., a Silicon Valley-based startup venture. Locix employs spatial intelligence solutions that use a combination of indoor posi- tioning technology, advanced AI, and Wi-Fi to acquire and analyze location, as well as spatial and visual data, to enable actionable insights. With this allocation, Daikin aims to reduce labor hours at installation sites through automated remote monitoring services, and by detecting and analyzing the presence and movement of people and assets in an office building. In this way Daikin expects to see a solutions business for office spaces emerge. Examples of Locix location information sensors 22 Current statusOutlookReview of Operations China Business History Daikin entered the China market in the mid-1990 s when there were already numerous Japanese air conditioner manufacturers with a presence there. Daikin, the latecomer, differentiated itself by applying its energy on establishing an image as a high-end brand, and in building up its own dealer network. Moreover, we introduced ceiling-embedded indoor units and residential multi- split room air conditioners in our efforts to create a new type of air conditioning culture. Market Environment In fiscal 2020, the economy in China was already slowing down on account of trade friction with the U.S., and then added to this was the spread of COVID-19, which from February led to stagnation, and a sudden stall of economic activities. Business Conditions In the residential market, we pushed forward with the launch of “PROSHOP” specialty outlets located in regional cities where growth could be anticipated. In addition to products for mid- to high-end residences, we also enhanced our lineup of products for general residences. In the commercial market, the servicing and maintenance business expanded in line with the progress made to link devices to IoT, while we accelerated our pivot to the solutions business. Production and Development Sites We are focusing efforts on deploying the latest technology and services, and putting the Internet to use, we are introducing services such as “Intelligent VRV,” a system that offers centralized control of air conditioners, failure prediction and other services. In addition, for those residences and shops that place special empha- sis on interior spaces, we continue to introduce products with exceptional design. Products and Services in Line with Needs • “New Life Multi” series for mid- to high-end residences allows simple selection and connectivity to not only air conditioners, but to floor heaters, bathroom dryers and others • “Intelligent VRV” provides centralized control of air conditioners, failure prediction and other services via the Internet “New Life Multi” series targeting middle- to upper-class residences (left: kitchen use; right: closet use) Strategy Going Forward We will continue to develop sales outlets in regional cities, while working to expand sales of IoT products and grow our servicing and maintenance business that utilizes operational data. In parallel with these efforts, we will also respond to rapidly rising air-quality needs triggered by the spread of COVID-19. In addi- tion, we will keep an eye on the status of market recovery and aim for business expansion. New Value, New Solutions & Growth In our efforts to enhance communication with customers, we have established a comprehensive customer center in Shanghai, and also utilize telephone and SNS channels. Going beyond a passive response for repairs, such as with conventional call centers, we also work to actively contact customers likely to visit outlets or exhibits, and Daikin product users, which will lead to sales and replacement orders. Moreover, we are also performing sales activities in coordination with “PROSHOP” specialty outlets that aggregate query information. We continue to press forward with AI, and of the approximately 4,500 chat queries that take place in a month, 70% are handled via automated response. Comprehensive customer center in Shanghai Annual Report 2020 23 Current statusOutlookAir Conditioning Business History Europe/The Middle East/Africa Our presence in Europe started by establishing a production and sales base in Belgium in the early 1970 s. We succeeded in bolstering sales in Italy, Spain, France, and other nations all across the EU, and the scale of our business grew rapidly. After entering the year 2000, we also expanded into the Heating business and Refrigerator and Freezer business. Market Environment Despite Brexit issues in the UK and political instability in the Middle East giving rise to uncertainties, the European economy in fiscal 2020 was growing gradually. However, from February, Italy became an epicenter of the COVID-19 pandemic, and this led to severe economic deterioration. Business Conditions Given rising environmental consciousness, sales of high-value-add- ed products increased. Sales of R32 refrigerant models for residen- tial use expanded. Commercial sales also grew on the back of “VRV” that uses recycled refrigerants and for refrigerant-saving models. Heating business sales were favorable, and market share rose, owing to sales of heat pump type hot water heating systems. Production and Development Sites In Europe, which is highly environmentally conscious, we are taking the initiative to enhance our lineup with R32 models and refrigerant-saving models, staying a step ahead of competitors. We are also working on making heat pump type hot water heat- ing system highly efficient, as they have experienced growing demand in recent years. In the Refrigerator and Freezer business, we continue to develop and launch products that set themselves apart with CO2 refrigerant and other environmental measures. Products and Services in Line with Needs • R32 model lineup ahead of other companies via room air conditioners and “SkyAir” (air conditioning for shops) • “VRV L∞P” that uses recycled refrigerant • “Daikin Altherma” heat pump type hot water heating system that leads to the suppression of greenhouse gas emissions. • One-stop system proposals that cover the entire cold chain, from food shipping to storage Accelerating the pace of overall cold chain business development Refrigerant reclamation and destruction facility in Germany, part of a scheme for the recovery, reclamation and destruction of refrigerant Strategy Going Forward The constraints placed on economic activities, including the lockdown of cities to combat the spread of COVID-19, portends falling demand. We aim to boost sales of environmentally con- scious products for residential and industrial use. Moreover, we will endeavor to raise market share in the Heating business by promoting the environmental characteristics of heat pump type hot water heating system. In the Refrigerator and Freezer busi- ness we will be uniting with Zanotti and AHT to accelerate business development across the cold chain. New Value, New Solutions & Growth Since November 2019, Daikin has partnered with WASSHA Inc., a company using IoT technology to develop an electrical power service business in Africa, to start a field trial of a new business model in Tanzania. In the field trial, Daikin will introduce high-efficiency air conditioners to small stores and ordinary homes in Tanzania through a subscription method, and verify business feasibility, based on WASSHA’s fee collection technology that works with mobile money. This will facili- tate greater possibilities for the spread of air conditioners, even in low-income markets. In June 2020, the two companies established a new company, “Baridi Baridi Inc.,” and have since commenced full-fledged business activities. Business model utilizing the subscription method in Africa 24 Current statusOutlookReview of Operations Asia and Oceania Business History Daikin began product exports and knockdown production from the 1960s, and from the 1990s, strengthened its sales network in countries around the region and advanced the introduction of energy-conserving and cooling-only models tailored to regional needs. From 2010 onward, air conditioning demand soared in line with economic development, and Daikin reinforced its production capabilities with the establishment of plants in Thailand, India, Malaysia and Vietnam. Market Environment Asia is in the process of air-conditioning equipment adoption, making this a promising market for growth. The economy in Asia in fiscal 2020, already buffeted by a drop in emerging market currencies, was further hit by the spread of COVID-19, particularly due to its reliance on China, and economic stagnation followed. Business Conditions From major metropolises to regional cities in each country, togeth- er with enhancing our sales network, we fortified service struc- tures and moved forward to increase our sales force personnel. In residential-use models, we expanded sales of products that stood out, such as cooling-only inverter air conditioners. Sales of indus- trial-use models also grew in each of the key countries as we promoted proposal sales tailored to applications and made efforts to nurture dealerships. Production and Development Sites In addition to cooling-only inverter air conditioners, we actively develop products that meet the needs of particular regions, such as air conditioners that can stand up to the over-50-degree heat of India, and air conditioners that can cool multiple rooms with the limited power supplies of Indonesia. Products and Services in Line with Needs • Cooling-only inverter air conditioners that strengthen cost competitiveness • Air conditioners that can operate in oppressive outside tem- peratures and that can be transported over bad roads • Air conditioners that stand up to unstable power supply situa- tions Burgeoning Asian market Increasing production capacity in Asia, where air-conditioning demand is expanding Strategy Going Forward As the spread of COVID-19 causes demand to fall, Daikin will continue its work to expand sales of products that stand out, and to enhance and nurture its dealerships. In addition, we will continue to strengthen relationships with dealers by ensuring a stable supply of products, use technology and sales promotion support, and enhance training through online measures, while pursuing increased market share. New Value, New Solutions & Growth The penetration rate for air conditioners in India currently stands at less than 10%, while in 10 to 15 years that is expected to rise to the 60% level. This means that demand can be anticipated to surge. Moreover, this is a market with a huge demand for maintenance and servicing, given power fluctuations caused by frequent electricity outages and breakdowns of heat exchangers due to air pollution. Daikin has established its second Indian training center, which raises the number of service staff that can be trained in a year 1.7 times, to 50,000. We are also pressing forward on staff training in Vietnam and other locations, and by 2025, aim to increase service staff training in Asia to 200,000 per year. Accelerating human resource development in India Annual Report 2020 25 Current statusOutlookChemicals Pursuing comprehensive cost-cutting such as reaping the benefits of softer raw materials prices amid severe business conditions led by lower semiconductor and automotive-related demand Business Environment Overall in the Chemicals segment net sales fell year over year due to the decline in demand worldwide in the semiconductor and auto- motive-related markets, the downturn in the gas market in Europe, and the impact of the spread of COVID-19 from the fourth quarter. Initiatives In fiscal 2020, we strengthened connections among our global business facilities, pursued application development themes, imple- mented business expansion themes, and promoted materials devel- opment with end-users based on the Daikin Group policy “3 Struc- tures of Collaborative Innovation.” However, our existing businesses have been impacted by deteriorating operating conditions. As for fluorocarbon gas, the impact of the drop in sales mainly due to the accumulation of distribution inventory was significant in the European market, where demand had been strong in the previous fiscal year. As a result, overall sales of gas decreased substantially year on year. Despite relatively strong LAN cable-related demand, net sales of fluoropolymers decreased year on year due to declining demand for semiconductor and automotive-related applications world- wide. Net sales of fluoroelastomers also decreased year on year due to the impact of falling demand in the automotive field mainly in the U.S., European, and Chinese markets. Among fine chemicals, overall sales were down compared to the previous fiscal year due to sluggish sales for anti-fouling surface coating agents, mainly in Asia, and stagnant demand for oil and water repellents in China and the United States. Fluorinated materials contributing to the next-generation automotive trend “CASE” Fluorinated materials supporting the miniaturization of semiconductor integrated circuits 26 Current statusReview of Operations We will pursue initiatives to increase market share by capturing rising demand in the rapidly developing Chinese semiconductor market while accelerating the development of applications in the telecommunications field with the spread of 5G Objective We will accelerate the development of applications in the telecom- munication and semiconductor fields—for which medium- to long-term growth looks promising—as well as for next-generation automotive materials. Business Strategy In addition to uncertainty about when the semiconductor and automotive markets will recover, business conditions are expected to remain severe, including constrained individual consumption and capital expenditures caused by the impact of COVID-19. Daikin will continue working to increase its share of the semi- conductor and telecommunication markets, develop next-genera- tion automotive lithium-ion batteries, and bolster spec-in activities. In addition, Daikin will take advantage of the COVID-19 outbreak to develop businesses that meet market needs including higher demand for oil and water repellent agents used in protective medical clothing and masks as well as greater demand for tablet computers with the spread of online education and remote working as part of “new lifestyles.” Accelerating the development of applications for fluorinated materials with excellent electrical properties in line with the spread of 5G “OPTOOL” delivers excellent antifouling performance on touch screen surfaces New Value, New Solutions & Growth Using AI to Accelerate Product Development Daikin Industries is accelerating the transformation of product development processes, such as using simulation technologies developed in-house. The fruits of our AI usage are emerging, such as achieving a more than eight-fold improvement in efficiency by drawing on the expertise and experience of researchers accumulated to date, verifying ideas through considerable experimental repetition, and utilizing MI (materials informatics) technology for selecting new materials synthesis routes. Looking ahead, we will accelerate the use of AI technology in R&D, including sensory evaluation using image analysis and materials design/process optimization using MI. Enhancing its relationships with industry and academia, Daikin will work to accelerate early market releases and application development by shortening new product development processes, thus leading to further business contributions. Annual Report 2020 27 OutlookOil Hydraulics Reported Record-high Sales in the Hydrostatic Transmissions (HST) Business Business Environment In terms of sales of oil hydraulic equipment for industrial machinery, the business environment of the Oil Hydraulics business was harsh due to factors that included the prolonged impact of the trade friction between the United States and China and the effects of stagnant demand mainly in the automobile industry. Demand for oil hydraulic equipment for construction machinery to customers in North America was firm. Initiatives The Oil Hydraulics business comprises a range of oil hydraulic equipment to facilitate the smooth movement of various types of machinery, contributing to energy efficiency and electrical power savings. In fiscal 2020, for our industrial machinery customers we pro- moted product development in accordance with user needs while working on market development, efforts to increase market share, and sales expansion. We also worked on productivity improve- ments and monozukuri reform by the operation of a new plant and process integration. In the HST business, we reported record-high sales due to expansion in sales to customers in North America. Aim to increase domestic market share and accelerate expansion of global business scale Target In addition to customer development through the introduction of new products, we aim to expand sales by meeting the needs, which have been growing in recent years, for labor saving features and automation as well as for predictive maintenance and the status monitoring of equipment and machinery. Business Strategy In fiscal 2021, amid an expected significant decline in demand from lower capital investment, mainly in Japan and North Ameri- ca, we will work to improve our business structure. For example, we will achieve this by enhancing our product capabilities through industry-academia collaboration and strengthening our sales and marketing capabilities. We will also promote business expansion on a global basis and strengthen the newly launched e-commerce efforts in North America, where maintenance, repair and operation (MRO) busi- ness is being developed. In the HST business, we aim to further expand sales by introduc- ing new products for priority markets in Europe and the United States. New Value, New Solutions & Growth “Rakufil” Long-life Filters for Oil Cooling Units Developed In collaboration with Nippon Muki, we have developed “Rakufil” long-life filters for oil cooling units. Conventional oil cooling unit filters are prone to clogging and require frequent clean- ing of the cooling fins as well as the replacement of the filter once every two weeks. “Rakufil” eliminates the need to clean the cooling fins, because the filter microfibers collect oil mist and dust. In addition, since a large amount of mist can be collected by the proprietary filter element molding, the filter replacement frequency is once a year, and thus a significantly longer service life has been achieved. 28 “Rakufil” frees users of the need to maintain the cooling fins on oil cooling units. Current statusOutlookDefense Review of Operations Increase Sales in Defense and Civilian Fields Business Environment Ten years have passed since launching home-use oxygen therapy equipment on the market, with the number of units exceeding 30,000. Initiatives In the Defense Systems business, Daikin designs and manufac- tures products for Japan’s Ministry of Defense based on the defense budget, with products supplied including various types of ordnance used for drills, and aircraft parts. In the private-sec- tor, Daikin manufactures and sells home-use oxygen therapy equipment. Daikin provides respiration synchronizers and oxygen concentrators, products that require the highest levels of preci- sion, performance, functionality, and quality. In fiscal 2020, Daikin released and has seen sales growth for the world’s first oxygen concentrators equipped with communi- cation functions that detect a patient’s respiratory rate. More- over, in the ten years since the launch of home-use oxygen therapy equipment on the market, the number of units has grown and, in turn, has increased earnings in the overhaul business. Work to increase sales of home-use oxygen therapy equipment in Japan and China Target We aim to expand the overhaul business while increasing for differentiated home-use oxygen therapy equipment. Business Strategy Assuming a decline in orders from Japan’s Ministry of Defense, we will work to increase earnings in fiscal 2020 through aggressive efforts to increase sales of differentiated products in civilian fields. Our oxygen concentrators are equipped with respiratory rate detection functions able to remotely identify changes in patient symptoms, and amid rising expectations among physicians, we aim to increase market share by enhancing our lineup of differenti- ated products. In the overhaul business, we target further earn- ings growth by raising customer satisfaction through improved operational efficiency. New Value, New Solutions & Growth Launch of the Oxygen Concentrator Equipped with Respiratory Rate Detection Function and Pulse Oximeter Capable of Measuring Blood Oxygen Levels without Drawing Blood Daikin developed and began selling oxygen concentrators that not only monitor usage time and flow rate settings, but are also equipped with a respiratory rate detection function. In May 2020 we are launching the Litetec DP1 pulse oximeter, which through the use of light is able to easily measure blood oxygen levels without drawing blood. Moving forward, we intend to expand our product lineup through the effective use of IT. Annual Report 2020 29 Current statusOutlookCorporate Governance Corporate Governance Basic Policy of Corporate Governance The Daikin Group strives to raise corporate value through corpo- rate governance. We carry out decision-making with foresight, as well as by executing business with greater speed, transparency, and soundness in response to challenges and changes in the busi- ness environment. We strive to improve our current integrated management frame- work, under which directors assume responsibility for both busi- ness execution and management. In this way, we fulfill our responsibility for management, making strategic decisions quickly and providing appropriate supervision. We also seek to improve the monitoring function conducted by third parties, including multiple external directors. We aim for management with greater speed, soundness, and transparency. We will continue to boost corporate value by seeking and implementing new ways to achieve optimal corporate gover- nance, pursuing best practices in all facets and at all levels of the Daikin Group. Regarding Japan’s Corporate Governance Code set by the Tokyo Stock Exchange, Daikin has already implemented all the principles contained in the revisions of June 1, 2018, including “enhancing information disclosure,” “maintaining the effectiveness of the Board of Directors and the Audit and Supervisory Board,” “defining roles and responsibilities of independent external directors,” and “the policy of having constructive dialogue with shareholders.” Going forward, Daikin will continue to enhance these initiatives. Management and Operational Execution System 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 “integrat- ed 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 execution. “Integrated management” means that the directors jointly take charge of both management responsibilities and business execu- tion responsibilities. Directors also bear responsibility for the execution and completion of their own decisions by carrying out their decision making, business execution, and supervision/guidance in an “integrated” manner. The multiple outside directors provide monitoring of the status of busi- ness execution from an independent perspective and take respon- sibility to support “integrated management” from the standpoint of transparency and integrity by offering appropriate oversight and advice with regard to decision making. In addition, the Group has introduced an “executive officer system” to accelerate the speed of execution based on autonomous judgments and directions in units handling each region, division, and function. Appointments of executive officers are carried out by the Board of Directors. Appointment of Directors When appointing directors, the Daikin Group gives emphasis to factors ranging from the globalization of the Group’s businesses and the broadening of its business fields to a diverse range of background factors, such as nationality, gender, and career history. As of the end of June 2020, there were 11 directors (including one female and one non-Japanese directors) who carry out expedi- tious and strategic decision making as well as sound oversight and guidance throughout the Group. 30 Daikin’s Board of Directors includes four external directors (as of end of June 2020), conditional upon them not having a relation- ship 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. Accordingly, Daikin appoints outside directors with business experience, mainly as directors at listed companies, and that do no have concurrent outside director position at five or more companies. To ensure that the external directors can effectively contribute to Daikin’s corporate governance system, assistants to the external directors are assigned in the Company. They strive to provide the external directors with information, early notice of Board of Directors meetings, and prior notice of Board of Directors meeting agenda items, as well as implementing prior explanations of partic- ularly important agenda items. In addition, when external directors are unable to attend a Board of Directors meeting, the assistants provide them with related materials and subsequent explanations of meeting proceedings. Audit System Daikin employs an Audit and Supervisory Board System and has established the Audit and Supervisory Board. As of end of June 2020, 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 mem- bers are the same as those for external directors and include inde- pendence from the Company in terms of not having a relationship of interest with the Company. The Audit and Supervisory Board members attend meetings of the Board of Directors, as well as other important meetings, and receive reports. In addition, they can express diverse opinions. To ensure effective audit functions, the Audit and Supervisory Board receives reports on important issues related to management and performance when necessary and also investigates relevant units, confirms approval of documents, and regularly exchanges opinions with representative directors, executive officers, and the accounting auditors. In addition, the Audit and Supervisory Board Member Office has been established, and the staff perform their duties under the orders and direction of the Audit and Supervisory Board members. The opinions of the Audit and Supervisory Board are respected on matters related to personnel transfers, work eval- uations, and other matters pertaining to Audit and Supervisory Board Member Office staff members. Corporate Governance Structure (as of the end of June 2020) Shareholders’ Meeting Appointment, dismissal Appointment, dismissal Appointment, dismissal Accounting Auditor Audit & Supervisory Board Audit Group Auditors Meeting Internal Control Committee, Corporate Ethics and Risk Management Committee, Information Disclosure Committee, CSR Committee Board of Directors HRM Advisory Committee Compensation Advisory Committee Group Steering Meeting Group Management Meeting Appointment, supervision Executive Officers Meeting (The rest is abbreviated) Tatsuo Kawada Akiji Makino Ryu Yano Toru Nagashima Chiyono Terada Tatsuo Kawada Akiji Makino Shingo Torii External Director/Audit and Supervisory Board Members’ Principal Activities Name Position Principal Activities Chiyono Terada External Director Ms. Terada attended 14 of the 15 Board of Directors meetings held during fiscal 2020. Based on her abundant experience in management and high-level insight, she can provide appropriate supervision of the Company's management from an independent perspective; provides management with the consumers’ point of view, including the importance of the Company’s corporate brand; and makes proactive proposals for measures to further promote achievements of female employees. Mr. Kawada attended 15 of the 15 Board of Directors meetings held during fiscal 2020. 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 changes in business models, innovation, and other matters. Mr. Makino attended 15 of the 15 Board of Directors meetings held during fiscal 2020. 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 sophisti- cated perspective regarding matters in the fields of energy, the natural environment, and service businesses. External Audit and Supervisory Board Member Mr. Yano attended 12 of the 15 Board of Directors meetings held and 12 of the 14 Board of Auditors meetings held during fiscal 2020. Based on his abundant experience and high-level insight as a corporate manager, particularly from his broad and sophisticated perspective developed over many years of experi- ence in business overseas, he provides the necessary input in a timely fashion. Mr. Nagashima attended 14 of the 15 Board of Directors meetings held and 14 of the 14 Board of Auditors meetings held during fiscal 2020. 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 perspective developed through 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 External Director Ms. Terada has served as President and Representative Director of Art Group Holdings, Co., Ltd. Based on her abundant experience and high-level insight as a corporate manager, and with her broad and sophisti- cated 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 high-level insight as a corporate manager. His experience includes changing his company’s business model, innovation 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 sophisticated 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 sophisticated perspective, contribute to increasing Daikin’s corporate value. Mr. Torii has served as Representative Director and Vice Chairman of the Board of Suntory Holdings Limited and has abundant experience and deep insight as a corporate manager into corporate management that anticipates customer needs, improving corporate value through ESG activities, etc. Mr. Torii was elected as external director to draw on this background and experience to provide appropriate supervision of the con- duct of management from an independent point of view, and, offering proposals regarding management from his broad and sophisticated perspective, contribute to increasing Daikin’s corporate value. 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 sophisticated 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. Mr. Nagashima has served as President and Representative Director of the Board at Teijin Limited, and has abundant experience and high-level insight as a corporate manager, particularly in the field of imple- menting paradigm shifts from manufacturing to services. Mr. Nagashima was elected as external auditor to draw on his experience to significantly upgrade the appropriateness of the audit function. Ryu Yano External Audit and Supervisory Board Member Toru Nagashima Note: All of the Company’s external directors and external auditors meet the qualifications for independence established by the Tokyo Stock Exchange Annual Report 2020 31 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 by keeping the number of directors at a minimum they secure expeditious decision making based on substantial discussion. The Board of Directors, along with providing healthy business exe- cution and appropriate supervision and guidance, is the decision- making institution for all matters related to the Group as a whole, as stipulated by laws and regulations and by the articles of incorpora- tion. Individual interviews conducted with directors confirm the via- bility of their effectiveness. In fiscal 2020, 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 98% 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 2020, it met nine times. The Executive Officers Meeting was established as a place where we can expedite thorough deliberations and prompt implementation of important management issues, and it met 17 times in fiscal 2020. In addition, to respect and protect the interests of diverse stake- holders 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 the effectiveness and appropriateness of the Board of Directors and the corporate governance system through inter- views with the Directors and Corporate Auditors and deliberations by the Board of Directors. The Board of Directors of Daikin is assessed on its ability “to perform appropriate decision making through open and active discussions and play an effective role in improving corporate value over the medium-to-long term”. We will continue to improve board effectiveness, as well as engage in other initiatives, including discussions of cross-Group strategies and issues and enhanced reports of the status of business execution. 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 deliberations regarding issues including corporate officer nomination criteria, candidates, and remuneration. As of July 2020, both committees comprised six mem- bers, including four 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 the report of the Compensation Advisory Committee within the maximum limit of total remuneration deter- mined by the Annual General Meeting of Shareholders. Based on a report from the Compensation Advisory Committee, the directors’ remuneration is determined by a resolution of the Board of Directors, while the Audit and Supervisory Board members’ remuneration is determined by a resolution of the Audit and Supervisory Board. In response to the expectations of shareholders and in accor- dance with management policy, compensation for in-house direc- tors is structured to maintain the motivation of in-house directors 32 at a high level continuously over the medium- to long-term so as to contribute to enhancing the Daikin Group’s corporate value. Performance-linked remuneration reflects short-term Group perfor- mance and performance of divisions in which a director is in charge, and stock options reflect medium- to long-term perfor- mance. External directors and corporate 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 compa- nies listed on the First Section of the Tokyo Stock Exchange. The three indices used by the Company are the sales growth rate, oper- ating 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 2020) Position Total Compensation (Millions of yen) Directors (excluding external directors) Audit and Supervisory Board Members (excluding external Audit & Supervisory Board members) External Corporate Officers 1,136 70 78 Total of different types of compensation (Millions of yen) Fixed compensation Stock Options 484 70 78 154 — — Performance- linked compensation 496 — — Persons paid 9 3 5 Corporate Officers with Compensation over ¥100 Million (Fiscal 2020) Name Total Consolidated Compensation (Millions of yen) Noriyuki Inoue Masanori Togawa Ken Tayano Masatsugu Minaka Jiro Tomita Kanwal Jeet Jawa 421 284 167 139 156 108 Total Consolidated Compensation by Type (Millions of yen) Position Company Fixed compensation Stock Options Director Daikin Industries, Ltd. Director Daikin Industries, Ltd. Director Daikin Industries, Ltd. Chairman Consolidated Subsidiary, Daikin (China) Investment Co., Ltd. Director Daikin Industries, Ltd. Director Consolidated Subsidiary, Daikin Europe N.V. Director Daikin Industries, Ltd. Director Daikin Industries, Ltd. Director Consolidated Subsidiary Daikin Airconditioning India Pvt. Ltd. 189 123 85 11 5 73 59 12 54 38 38 19 — 19 — 19 10 — Performance linked compen- sation 193 123 51 — 34 6 77 — 31 Accounting Auditor Compensation (Fiscal 2020) Auditing expenses 246 million yen Group-Wide Governance To meet governance needs on a Group-wide basis, including com- panies acquired through M&A, Daikin holds meetings of the Group Steering Meeting to ensure the thorough sharing of important management policies and basic strategies. Moreover, Daikin aims for corporate action based on unified Group objectives by promot- ing and strengthening support for the resolution of challenges of Group companies. 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 governance and Group manage- ment as a multinational company, Daikin has appointed a Chief Global Group Officer, who works to further improve the Group’s cohesiveness. Corporate Officers Corporate Officers As of end of June 2020 Directors Noriyuki Inoue Chairman of the Board and Chief Global Group Officer Masanori Togawa Representative Director, President and CEO Date of Birth March 17, 1935 Number of the Company shares owned (Thousands of shares) March 1957 Entered the Company February 1979 Director of the Company February 1985 Managing Director of the Company June June May June June June 1989 Senior Managing Director of the Company 1994 President, Representative Director of the Company 1995 Chairman of the Board and President, Representative Director of the Company 1996 President, Representative Director of the Company 2002 Representative Director, Chairman of the Board and CEO of the Company 2014 Chairman of the Board and Chief Global Group Officer of the Company (Current position) 67 Significant Concurrent Posts External Director of Hankyu Hanshin Holdings, Inc. Chairman of The Daikin Foundation for Contemporary Arts Chairman of Specified Nonprofit Corporation of Kansai Philharmonic Orchestra Date of Birth January 11, 1949 Number of the Company shares owned (Thousands of shares) 10 Responsibilities and Assigned Items Chairman of the Internal Control Committee April June June July June June 1973 Entered the Company 2002 Director of the Company 2004 Director and Senior Executive Officer of the Company 2006 Member of the HRM and Compensation Advisory Committee of the Company (Current position) 2007 Director and Senior Executive Officer of the Company 2011 Representative Director, President and COO of the Company June 2014 Representative Director, President and CEO of the Company (Current position) July 2016 Chairman of the Internal Control Committee of the Company (Current position) Date of Birth January 8, 1947 Number of the Company shares owned (Thousands of shares) June June June July 1976 Founded Art Hikkoshi Center 2 1977 Established Art Hikkoshi Center Co., Ltd. Significant Concurrent Posts (Currently, Art Corporation), became a President and Representative Director of the above company 2002 Director of the Company (Current position) 2006 Chairman of the HRM and Compensation Advisory Committee of the Company (Current position) President and Representative Director of Art Group Holdings Honorary Chairman of Art Corporation Chairman and Representative Director of Art Childcare Corporation April 2018 President and Representative Director of Art Group Holdings (Current position) December 2019 Honorary Chairman of Art Corporation (Current position) Chiyono Terada Member of the Board (External) Date of Birth January 27, 1940 Number of the Company shares owned (Thousands of shares) March 1962 Entered Fukui Seiren Kako Co., Ltd. (Currently, — Seiren Co., Ltd.) August 1981 Director of the above company August 1985 Managing Director of the above company August 1987 President of the above company June 2003 President and COO of the above company October 2005 President, CEO and COO of the above company June 2011 Chairman, President, CEO and COO of the above company June 2014 Chairman and CEO of the above company Significant Concurrent Posts Chairman and CEO of Seiren Co., Ltd. External Director of Hokuriku Electric Power Company External Audit & Supervisory Board Member of Hokuhoku Financial Group, Inc. External Director of FUJIFILM Holdings Corporation Tatsuo Kawada Member of the Board (External) June July (Current position) 2016 Director of the Company (Current position) 2016 Member of the HRM and Compensation Advisory Committee of the Company (Current position) Annual Report 2020 33 Corporate Officers Corporate Officers Date of Birth September 14, 1941 Number of the Company shares owned (Thousands of shares) March 1965 Entered Iwatani Corporation 2 June June June June April June June June July 1988 Director of the above company 1990 Executive Director of the above company 1994 Senior Executive Director of the above company 1998 Executive Vice President of the above company 2000 President of the above company 2004 President and Executive Officer of the above company 2012 Chairman, CEO and Executive Officer of the above company 2016 Director of the Company (Current position) 2016 Member of the HRM and Compensation Advisory Committee of the Company (Current position) April 2019 Chairman and CEO of Iwatani Corporation (Current position) Akiji Makino Member of the Board (External) Significant Concurrent Posts Chairman and CEO of Iwatani Corporation Chairman of the Board of Iwatani Industrial Gases Corporation Date of Birth January 18, 1953 Number of the Company shares owned (Thousands of shares) April June 1980 Entered ITOCHU Corporation 1 1983 Entered Suntory Limited (Currently, Suntory Significant Concurrent Posts April June June June May June June Holdings Limited) March 1992 Director of the above company March 1999 Managing Director of the above company March 2001 Representative Director and Senior Managing Executive Officer of the above company March 2003 Representative Director and Executive Vice President of the above company October 2014 Representative Director and Vice Chairman of the Board of the above company (Current position) June 2020 Director of the Company (Current position) Date of Birth January 12, 1947 1970 Entered the Company 2000 Associate Officer of the Company Representative Director and Vice Chairman of the Board of Suntory Holdings Limited External Director of ROHTO Pharmaceutical Co., Ltd. External Director of Zojirushi Corporation December 2014 Chairman of the Board of Daikin Fluorochemicals (China) Co., Ltd. (Current position) Number of the Company shares owned (Thousands of shares) 2002 Senior Associate Officer of the Company 2004 Senior Executive Officer of the Company, 5 Representative of China business of the Company (Current position), Member of Global Air- Conditioning Committee of the Company (Current position) 2009 Chairman of the Board and President of Daikin (China) Investment Co., Ltd. (Current position) 2011 Director and Senior Executive Officer of the Company 2013 In charge of air conditioning business in Japan of the Company (Current position) Responsibilities and Assigned Items Responsible for Domestic Air-Conditioning Business, Representative of China Region, Chairman of the Board and President of Daikin (China) Investment Co., Ltd., Chairman of the Board of Daikin Fluorochemicals (China) Co., Ltd., and Member of Global Air-Conditioning Committee June 2014 Representative Director and Senior Executive Officer of the Company (Current position) Date of Birth July 9, 1953 October 1983 Entered the Company Number of the Company shares owned (Thousands of shares) 8 July 2005 Director and President of Daikin Europe N.V. Responsibilities and Assigned Items (Current position) June 2007 Associate Officer of the Company, Member of Global Air-Conditioning Committee of the Company (Current position) June June June 2008 Executive Officer of the Company 2010 Senior Executive Officer of the Company 2011 Director and Senior Executive Officer (Current position), Representative of air conditioning in Europe, the Middle East and Africa of the Company (Current position) Representative of Air-Conditioning Operations in the Europe/ Middle East/Africa Region (excluding East Africa), Director and President of Daikin Europe N.V., and Member of Global Air- Conditioning Committee Shingo Torii Member of the Board (External) Ken Tayano Representative Director, Senior Executive Officer Masatsugu Minaka Member of the Board, Senior Executive Officer 34 Date of Birth August 7, 1949 April June 1970 Entered the Company 2008 Associate Officer of the Company November 2009 Director and Vice President of Daikin Europe N.V. 2010 Executive Officer of the Company September 2019 Chairman of the Board (non-resident) of Goodman Global Group, Inc. (Current position) Number of the Company shares owned (Thousands of shares) 5 2010 Director and Senior Executive Officer of the Company Responsibilities and Assigned Items 2011 Director and Senior Executive Officer of the Company 2015 In charge of Global Operation Division of the Company (Current position), In charge of Production Engineering of the Company (Current position) Responsible for Global Operations Division, Production Engineering and PD Affiliation Alliance Promotion, Chairman of the Board (non-resident) of Goodman Global Group, Inc. May June June June Jiro Tomita Member of the Board, Senior Executive Officer June 2016 Director and Senior Executive Officer of the Company (Current position) June 2017 In charge of PD Affiliation Alliance Promotion of the Company (Current position) Date of Birth December 23, 1958 April June June June June June 1982 Entered the Company 2004 Executive Officer of the Company 2008 Director and Senior Executive Officer of the Company 2010 Senior Executive Officer of the Company 2012 Director and Senior Executive Officer of the Company 2015 In charge of R&D in North America (including applied solutions, commercial & industrial refrigeration, filter and dust collection) of the Company June June June 2018 Senior Executive Officer of the Company, In charge of Applied Solution Business of the Company (Current position), In charge of Daikin Open Innovation Lab Silicon Valley of the Company (Current position) 2019 Senior Executive Officer of the Company 2020 Director and Senior Executive Officer of the Company (Current position) Number of the Company shares owned (Thousands of shares) June 2017 In charge of R&D in North America of the 8 Company (Current position), In charge of Applied R&D Center of the Company (Current position), General Manager of Silicon Valley Technology Office of the Company Responsibilities and Assigned Items Responsible for Applied Solution Business, R&D in North America, Applied R&D Center, Responsibility of Daikin Open Innovation Lab Silicon Valley Date of Birth November 10, 1959 Number of the Company shares owned (Thousands of shares) 1997 Regional Director (Asia Pacific) of Carrier Aircon Limited — 2001 Regional Vice President (North&East) of Voltas Limited Responsibilities and Assigned Items Takashi Matsuzaki Member of the Board, Senior Executive Officer 2005 Senior Vice President of the above company 2006 Managing Director of Uniflair India Pvt. Ltd. May 2010 Deputy Managing Director & COO of Daikin Airconditioning India Pvt. Ltd. September 2010 Managing Director & COO of the above company July 2017 Managing Director & CEO of the above company (Current position) June 2018 Member of the Board and Associate Officer of the Company June 2019 Member of the Board and Senior Associate Officer of the Company (Current position) Kanwal Jeet Jawa Member of the Board and Senior Associate Officer Regional General Manager of Air-Conditioning Business in India/ East Africa, Managing Director & CEO of Daikin Airconditioning India Pvt. Ltd. Annual Report 2020 35 Corporate Officers Corporate Officers Audit & Supervisory Board Members Date of Birth April 21, 1940 June 2020 Chief Advisor of the above company (Current April 1963 Entered Sumitomo Forestry Co., Ltd. December 1988 Director of the above company June June 1992 Managing Director of the above company 1995 Representative Director and Senior Managing position) Number of the Company shares owned (Thousands of shares) — Director of the above company Significant Concurrent Posts April 1999 Representative Director and President of the above company June 2002 Representative Director and Executive Officer of the above company April 2010 Representative Director and Chairman of the Board of the above company June 2013 Audit & Supervisory Board member of the Company (Current position) April 2020 Director and Corporate Advisor of Sumitomo Forestry Co., Ltd. Ryu Yano Audit & Supervisory Board Member (External) Chief Advisor of Sumitomo Forestry Co., Ltd. Date of Birth January 2, 1943 Number of the Company shares owned (Thousands of shares) April June June 1965 Entered Teijin Limited 2000 Director of the above company 2001 Managing Director of the above company November 2001 President & Representative Director COO of the above company June 2002 President & Representative Director CEO of the above company June April June June 2008 Chairman of the Board of the above company 2013 Director & Advisor of the above company 2013 Senior Advisor of the above company 2016 Audit & Supervisory Board member of the Company (Current position) April 2018 Honorary Advisor of Teijin Limited (Current position) Date of Birth January 21, 1952 February 1982 Entered the Company June 2002 Director, General Manager of Global Operations Division of the Company, General Manager of DT Alliance Promotion Secretariat of the same division of the Company June 2004 Executive Officer, Member of Global Air- Conditioning Committee of the Company September 2004 Chairman and Member of the Board of Daikin U.S. Corporation June 2007 Senior Executive Officer of the Company, General Manager of New York Office of the Company, President and Member of the Board of Daikin Holdings (USA), Inc., President and Member of the Board of Daikin U.S. Corporation Date of Birth July 31, 1960 August 1989 Entered the Company July 2011 Department Manager of Accounting Group of Finance and Accounting Division of the Company, Director and President of Daikin Accounting Solutions Co., Ltd. June June 2016 Associate Officer of the Company 2019 Audit & Supervisory Board member of the Company (Current position) — Significant Concurrent Posts Honorary Advisor of Teijin Limited June 2015 Audit & Supervisory Board member of the Company (Current position) Number of the Company shares owned (Thousands of shares) 8 Number of the Company shares owned (Thousands of shares) 1 Toru Nagashima Audit & Supervisory Board Member (External) Kosei Uematsu Audit & Supervisory Board member (Standing) Hisao Tamori Audit & Supervisory Board member (Standing) 36 Executive Officers Position (s) Name Responsibilities and Assigned Items 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 Human Resources, and General Affairs Senior Executive Officer Yasushi Yamada Responsible for Safety Executive Officer Katsuyuki Sawai Responsible for CSR, Global Environment Affairs, Public Relations, General Manager of Public Relations Tokyo Office, Chairman of CSR Committee Executive Officer Hitoshi Jinno General Manager of Filter Division Executive Officer Kota Miyazumi Responsible for Marketing, Corporate Communication, General Manager of Marketing Research Division, Director of Planning Group in Marketing Research Division, and Chairman of Information Disclosure Committee Executive Officer Tsutomu Morimoto Responsible for Goodman Group Business, Executive Secretarial Department Executive Officer Yuji Yoneda Responsible for Air-Conditioning Product Development (including Applied Solution Business and Refrigeration Business) and General Manager of Technology and Innovation Center Executive Officer Masaki Saji General Manager of Human Resources Division and Department Manager of Diversity Promotion Group in Human Resources Division Executive Officer Masafumi Yamamoto Responsible for Corporate Ethics, Compliance, Legal Affairs, Information Security, General Manager of the Legal Affairs, Compliance and Intellectual Property Center Chairman of Corporate Ethics and Risk Management Committee Executive Officer Akira Murai Responsible for Defense systems business, SCM, Logistics, Co-Creation Projects member of Technology and Innovation Center, and General Manager of Yodogawa plant Executive Officer Makio Takeuchi Responsible for Global Procurement Executive Officer Yoshiyuki Hiraga Responsible for Chemical Business and Chemical Environment/Safety Executive Officer Toshio Ashida Responsible for Corporate Planning, electronics business, Strategy office of Technology and Innovation Center Executive Officer Hideki Maruoka Responsible for Oil Hydraulics business 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 Executive Officers Katsumi Kawahara Deputy General Manager of Technology and Innovation Center (Responsible for promoting industry, government and academia collaboration) Executive Officers Shoji Uehara Deputy General Manager of Global Operations Division Executive Officers Hiroaki Ueda General Manager of Corporate Planning Annual Report 2020 37 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. 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 Biodiversity protection Measures against atmospheric pollution Response to climate change Most Important Respect for human rights Stakeholder engagement Communities Effective use of resources and energy New value creation Product quality and safety Management of chemical substances Customer satisfaction Anti-corruption Occupational safety and health Human resource development Free competition and fair business dealings Labor-management relations Workplace diversity Supply chain management Corporate governance Information security Important Waste and water-use reduction Importance to Daikin 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. P Environment P New Value Creation P Customer Satisfaction P Human Resources We are responding to societal demands for greater transpar- ency and more open business practices. P Corporate Governance P Respect for Human Rights P Supply Chain Management P Stakeholder Engagement P Communities 38 MaterialityNine Key CSR Themes CSR Action Plan 2020 Key CSR Themes FY2021 Target FY2020 Result Introduce state-of-the-art technologies to the market in order to address environmental and energy issue • Reduced emissions of greenhouse gas by 60 million tons of CO2 through the distribution of environmentally conscious products globally • Reduced emissions of greenhouse gas resulting from the manufacturing process across the entire Group by 70% from fiscal 2006 levels • Implementing and expanding environmental activities in coordination with stakeholders We measure our contribution to reducing emissions of greenhouse gas based on the distribution of envi- ronmentally conscious products and our reduction in greenhouse gas resulting from the manufacturing process. Daikin reduced greenhouse gas by 68 million tons of CO2, representing a reduction of greenhouse gas emissions of 76% from fiscal 2006 levels. Share dreams and ambitions inside and out- side Daikin to realize a healthy, comfortable lifestyle through air • Connecting society and customers via IoT and AI and creating new value through open innovation The amount of investment to create new value is measured based on the amount of new technology created. Research and Development expenses reached ¥68.0 billion and the number of patent applications were 957 in Japan and 513 overseas in fiscal 2018 on a unconsolidated basis. Provide peace of mind and reliability through a focus on customer orientation, experience, performance, and advanced technologies • Build a service network encompassing the entire globe • Building product development capabilities that can sat- isfy the needs of customers worldwide • Maintaining optimum levels of quality We measure satisfaction through the after-sales ser- vice customer satisfaction rating. With the customer satisfaction rating in the last fiscal year taken as 1, the customer satisfaction ratings were: Japan 1.14 (compared to fiscal 2016); Singapore 1.00 (compared to fiscal 2016); Indonesia 1.03 (compared to fiscal 2018); India 1.13 (compared to fiscal 2017); and Spain 1.12 (compared to 2017). E Environmental Environment New Value Creation Customer Satisfaction Human Resources Respect for Human Rights 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 S Social Respect individual personalities and values, and maximize the potential of each employee so that they can benefit Daikin and society as a whole • Achieve a ratio of excellent or advanced skilled engi- neers in manufacturing of four to one • Increase the ratio of local presidents • Reducing the frequency of industrial accidents to zero Thoroughness of respect for human rights Supply Chain Management Conduct CSR procurement Stakeholder Engagement Engage in dialogue with stakeholders and reflect this dia- logue into management Communities Contribution to environmental conservation, education support, and cooperation with the local community 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) As a means of fostering our human resources, we measure the number of personnel that are at a level to provide guidance in monozukuri (creating things), maintain diversity and move toward appointing more presidents at local overseas production facilities. In the area of occupational, health and safety, we mea- sure the safety of operations at production facilities. We achieved a ratio of excellent or advanced skilled engineers in manufacturing of 3.2 to one (unconsoli- dated), a ratio of local presidents of 47% (overseas Group companies) and frequency rate of industrial accidents throughout the Group of 1.26. We measure how thoroughly respect for human rights has been adopted by our employees through the completion rate for the self-assessment. The com- pletion rate for the self-assessment was 99%. To measure the level of implementation of the CSR by suppliers, we created a questionnaire for suppliers. We began running this survey of CSR through the procurement process in fiscal 2019. The CSR procure- ment ratio in fiscal 2020 was 97%. 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 provides an opportunity for dialogue between experts in air con- ditioning. The Air Conditioner Forum was held six times across five different regions worldwide (125 participants from 31 countries participated 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 ¥1.5 billion. We measure the status of our efforts in corporate governance compliance through the completion rate by employees of the self-assessment. The completion rate for the self-assessment was 99%. We also have an eleven-member Board of Directors, including four external directors, one female member, and one non-Japanese member. (Unconsolidated) Annual Report 2020 39 CSR (Corporate Social Responsibility) CSR (Corporate Social Responsibility) Environment Materiality of Environmental Measures While air conditioners, the main product of the Daikin Group, sup- port the enhancement of economic growth and quality of life in hot regions, they consume a lot of electricity during use and also have an impact on climate change through the fluorocarbon used as a refrigerant. In recognition of this, the Daikin Group strives to contribute to the sustainable growth of global society as the only comprehensive air-conditioner manufacturer that develops and manufactures both air conditioners and refrigerants. The Daikin Group focuses on the spread of environmentally conscious prod- ucts using inverter technology, refrigerants with lower global warming potential worldwide and its services solution business. Daikin’s Initiatives • Promotion of Eco-Friendly Technologies and Products The Daikin Group develops and distributes environmentally con- scious 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 poten- tial of a third or less compared to conventional refrigerants. In fiscal 2020, the percentage of sales of environmentally con- scious products related to residential air conditioners was 97%, representing a reduction in emissions of greenhouse gases* of 68 million tons of CO2. As a measure to reduce CO2 emissions result- ing from the energy consumption of air conditioners, Daikin is working to broaden the global distribution of inverter units. For example, in Southeast Asia, Daikin has developed low-cost inverter units targeting regions requiring cooling-only air conditioners, and, due to a rising energy-conservation consciousness along with strengthened regulations and steeply rising electricity prices, these low-cost inverter units are flourishing. Also, in Latin America and the Middle East, Daikin is cooperating with government and industry bodies to support the establishment of energy efficiency assessment standards, through the introduction of indicators, standards, and an improved energy labelling system. * Difference between emissions from the total sales by Daikin of environmentally conscious products and a baseline of emissions from air conditioners using non-inverter units and con- ventional refrigerants, combustion-type heating, and hot water heaters. • Supporting the Rollout of R32 Refrigerant in Emerging Economies Daikin is supporting the conversion of refrigerants even in emerg- ing countries to expand the use of R-32. In addition, in 2011 we offered free access to 93 patents for the application of R-32 equip- ment and in 2019 we offered free access to about 180 patents, so that air conditioning manufacturers around the world can develop equipment using R-32. As of December 2019, Daikin has sold approximately 23 million units of R-32 residential air conditioner and heat pump, while the total market including other manufac- turers is estimated to exceed 100 million units. • Target Achieved: GHG Emissions Reduced by 76% Compared with Fiscal 2006 The greenhouse gases (GHGs) emitted by Daikin in its development and production processes are roughly categorized into CO2 due to energy use and fluorocarbons. With a view to reducing CO2 emis- sions by 75% in fiscal 2026 compared with fiscal 2006, the Company set a 70% reduction target for fiscal 2021. In fiscal 2020, for example, Daikin Device Czech Republic s.r.o. switched all the power used to green power, and Daikin Malaysia Sdn. Bhd. added a 1MW solar power system. In addition, although production volume in fiscal 2020 was almost unchanged compared with that of the previous year, the Company was able to reduce CO2 emissions from energy by 1% on a year-on-year basis. As a result, GHG emissions in fiscal 2020 were 1.28 million tons-CO2 (a 76% reduction from fiscal 2006). • Solidarity with TCFD Recommendations In May 2019, Daikin announced its support and agreement with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). As a comprehensive air conditioning manufacturer, Daikin has endeavored to mitigate the environmental impact of air condition- ers—for example by promoting the widespread adoption of ener- gy-saving inverter technology and the low global warming potential refrigerant R32—in the belief that “a company cannot grow its business unless it contributes to solving environmental problems.” We will analyze the risks and opportunities that climate change presents to our business and reflect them in our manage- ment strategies and risk management. At the same time, we will also disclose our progress in this area in an appropriate manner and aim for further growth while contributing to the decarboniza- tion of society as a whole. New Value, New Solutions & Growth New Service Aimed at Refrigerant Circular Economy Amid the progress being made in Europe with fluorinated greenhouse gas (F-gas) regulations* on the total consumption of hydrofluorocarbon (HFC) refrigerants, Daikin launched a service that enables the circular use of refrigerant. Previously reclaimed and destroyed when air conditioners are discarded, refrigerant can now be reused repeatedly by removing any impurities and reclaimed. Daikin has established a new refrigerant recla- mation facility in Germany by leveraging its strengths of having both an air conditioning business and a chemical business, and has also estab- lished a channel in cooperation with UK-based company A-Gas, which recovers and reclaims refrigerant. In June 2019, Daikin launched the “VRV L∞P” commercial-use, multi-type air conditioner that uses recycled refrigerant and sold 14,000 units in 10 months. The Company has reduced the amount of new refrigerant contained in commercial use, multi-type air conditioners sold in Europe by approximately 40%. To further promote the recycling of refrigerant, we are proposing a package service that combines refrigerant collection with the sale of VRV L∞P as the replacement when an air conditioner is being discarded. We are working to provide peace of mind to customers who are concerned about future refrigerant shortages by temporarily holding the recovered refrigerant and guaranteeing the stock of necessary refrigerant during maintenance. * Under the European F-gas regulations, the total consumption of HFCs ([production + amount imported – amount exported] converted to global warming impact) is being gradually reduced. 40 Environmental Vision 2050 In the Paris Agreement adopted in 2015, the declared goals were to reduce greenhouse gas emissions to zero in the second half of this century and to keep the global average temperature rise below 2°C compared with before the Industrial Revolution. To demon- strate 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-efficient 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 2030 2050 Offset Use of energy management to carry out efficient operation of buildings with centralized systems for energy efficiency 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 office 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 elec- tricity 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 exam- ple, 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 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, esti- mates are for air conditioning demand to rise rapidly and for energy demand for space cooling to triple by 2050. Worldwide air conditioner stock (number of units) and electricity demand (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 2020 41 CSR (Corporate Social Responsibility) CSR (Corporate Social Responsibility) New Value Creation Materiality of New Value Creation Daikin Group believes that to achieve sustainable growth in an environment where change and progress in both globalization and technology are accelerating remarkably, it is important to provide unparalleled new value. Making use of IoT and AI technology, we aim to integrate cutting-edge technologies from different fields through open innovation. We will pursue new value to make peo- ple and indoor spaces healthy and comfortable through technolo- gies and products that contribute to the resolution of social issues such as energy, the environment, and health. Daikin’s Initiative • Aiming for Innovation in Field Work with Remote Work Support Solution In November 2019, Daikin and Fairy Devices Inc., a venture compa- ny with links to The University of Tokyo, jointly started efforts to bring about improvements in work efficiency and work quality by creating connected workers1 in service operations, such as the maintenance and repair of air conditioners. This is an effort to jointly solve problems in service operations by linking the voice rec- ognition, Edge AI, and data analysis technologies that Fairy Devices possesses with the frontline knowledge that Daikin has been culti- vating on a global scale. Specifically, our two companies have developed a remote work support solution, which combines the Fairy Devices-developed THINKLETTM wearable smart devices and a technology stack2 with a Daikin-developed business support web app and enables skilled service engineers to support and train remote workers. With this solution, we will improve the technical prowess and judgment of each and every worker not only in Japan but throughout the world and realize high-efficiency, high-quality field work without the need for any reworking while aiming for the early development of excellent service engineers. 1 A collective term for field workers who can obtain a variety of information and receive vari- ous kinds of support by wearing wearable devices and sensors. 2 A platform, such as an API or AI engine, capable of bringing together a variety of technolo- gies and making them function individually or in an integrated manner in a digital product. • Co-creation toward “Comfortable, Healthy Spaces” In 2016, Daikin teamed up with RIKEN, Japan’s only comprehensive research institution dedicated to the natural sciences, to launch the RIKEN-DAIKIN Wellness Life Collaboration Program. The program also engages in research to extend healthy life expectancy under the theme of “comfortable, healthy spaces.” In 2019, an agreement was signed with RIKEN subsidiary RIKEN Innovation Co., Ltd. with the aim of implementing the results of R&D and creating innovation. • Comprehensive Collaboration Aims to Realize Co-created Innovation In 2016, we established the Daikin Collaborative Research Institute at Osaka University and in 2017, as a new initiative in the field of information science, launched the Daikin Information Science Research Unit (Di-CHiLD), a program in which Osaka University researchers and Daikin engineers work together to realize co-creat- ed innovation. In fiscal 2020, we put out an open call for research themes covering all the faculties, including not only chemistry, engineering, and information science but also pharmaceutical sci- ences and the humanities. Meanwhile, from the research themes we have been conducting so far, we have established the technol- ogy in six themes and are moving to the demonstration phase on the way to commercialization. In March 2020, Daikin entered into comprehensive collaborative cooperation with Doshisha University in Kyoto aimed at practical R&D on the theme of environmental issues. Toward reducing GHG emissions, a theme that Daikin addresses through its business, the Company will utilize Doshisha University’s unique knowledge of environmental technologies and related fields aiming to return the academic results to society as well as the university’s practical aca- demic research capabilities that are aiming for practical use in the real world. Both parties will work on the practical application of CO2 capture, decomposition, and reuse technologies, and further increase the efficiency of air conditioners. They will also foster col- laborative innovation human resources through joint research. New Value, New Solutions & Growth Ideathon for African Start-up Companies Held In December 2019, Daikin and Samurai Incubate Inc. held the “AirTech BootCamp Africa” ideathon that targeted start-up companies across Africa. Aiming to expand its business in Africa, where significant economic growth is expected in the years to come, the Company held this event for the purpose of creating innovative ideas that would bring about the more widespread adoption of air conditioning products. Of the 160 companies that had applied, the nine companies that made it through the selection process partici- pated in this event, and lively discussions and presentations of various ideas were conducted. In the same way as previous global devel- opment strategies, in Africa the Company aims to develop local human resources, build strong sales and service networks, and expand its business with a lineup of high-quality products with excellent energy efficiency. In the meantime, along with companies that pro- posed good ideas at this event, Daikin is also looking into the possibilities of expanding its business by building new business models and considering the verification of ideas locally. 42 Customer Satisfaction Materiality of Customer Satisfaction Daikin is developing business in over 150 countries around the world. To provide maximum satisfaction to customers in each individual country, Daikin takes into consideration climate, culture, and regula- tions 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 cus- tomer-oriented business activities and regularly addresses the frank opinions of customers worldwide, making use of their views in areas such as product development. Daikin’s Initiatives • Implementing Global Quality Guidelines In its Global Quality Guarantee Rules, the Daikin Group has 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 moni- toring and correction. We have acquired ISO9001 certification at all production facilities, and, through our quality management sys- tem, we thoroughly implement quality maintenance and manage- ment 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, evalu- ation, 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 consultations, and purchasing information 24 hours a day, 365 days a year, from cus- tomers in Japan. In fiscal 2020, a video manual was newly added to the customer support page of the website so that it is possible to check operat- ing conditions that are difficult to determine using the instruction manual alone. Overseas also, we respond to the various demands in each coun- try and region by establishing an after-sales service network under the slogan “fast, accurate and friendly.” We are working to improve customer satisfaction by establishing a call center and pro- viding technical information on our website. • 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 satisfac- tion. In Japan, we conduct our fureiai surveys (relationship surveys), and, in fiscal 2020, the overall satisfaction score was 4.63 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 “enhanc- ing technical capabilities” and “improving our response to custom- ers” as well as a focus on “speed from reception to completion” and “repairs completed in one visit.” Customer feedback is also utilized in product development. The Company opened its DAIKIN LAUNCH X online platform in November 2019, via which product release information, including for products still under development, is publicized and the pros and cons of sales as well as specifications are decided based on user evaluations and opinions. The “Carrime” portable air condi- tioner arose from feedback that said “I want to spend time com- fortably in places where it is difficult to install air conditioners,” which garnered a lot of support through crowdfunding and led to its commercialization. • 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. Positioned as the second mother R&D center in response to the theme of a distribution base in each region of the world and focus- ing key technology that was previously managed by Japan and allo- cating it to fields of excellence in each region such as for India where outside temperatures are very high and for heating in Europe. New Value, New Solutions & Growth Developing Products That Support Digital Society through Co-creation with Customers Due to the rapid spread of information and telecommunications networks, there is a demand for technology that can send large amounts of data quickly and compactly. Daikin is taking on the challenge of value creation in cooperation with customers in order to contribute to the evo- lution of the information and communications field by taking advantage of the characteristics of fluorine. In addition to satisfying the costs and ease of processing required by our direct component processing manufacturers and manufacturing equipment manufacturers in the semicon- ductor field, where higher degrees of miniaturization and integration are being investigated, Daikin has in recent years focused on activities developing innovation proposals as a development partner. We are working together to solve the technical issues of end-user semiconductor device manufacturers. For example, the integration rate of semiconductors has increased more than 10-fold in the last 10 years. Daikin’s etching agent also contributes to the miniaturization of semiconductor circuits, which have played a part in technological innovation. We will engage in the proposal of solutions that utilize fluorine chemical technology, which contributes to the development of society, in the years to come. Annual Report 2020 43 CSR (Corporate Social Responsibility) CSR (Corporate Social Responsibility) • Grand Prize at Contact Center Awards 2019 Daikin Contact Center won the Grand Prize, the highest award in the operation category at the Contact Center Awards 2019 event sponsored by RIC Telecom Co., Ltd. Daikin’s unique operator recruitment efforts and AI-based system construction were among those factors that were highly rated. Human Resources Importance of Initiatives Related to Human Resources In response to the expectations of our various stakeholders and for the Daikin Group to realize on a global level its strengths in the “environment”, “new value creation” and “customer satisfaction”, the personnel who can take on the responsibility to perform these activities are critical. Therefore, Daikin has positioned “People- Centered Management” as its foundation and to respect individuals and their values we are promoting the creation of an organization that can maximize the power that each individual possesses. Daikin’s Initiative • 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-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 2020, the number of qualified personnel in Japan was one in 3.2 people. In conjunction with the expansion of our business overseas, we are also strengthening our global training. Meanwhile, we are working to enhance training opportunities that includes Off-JT such as: the Daikin Leadership Development Program, which fosters the executives who can play an active role on the front line of our global business; overseas 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. In fiscal 2020, the ratio of local presidents at overseas bases was 47%, and the ratio of directors was 49%. • Promoting Achievements of Non-Japanese National Employees Having 93 non-Japanese national employees working in Japan as of March 31, 2020, Daikin is working to create environments in which employees are able to fully harness their abilities regardless of nationality. In fiscal 2020, we held Japanese classes, set up a consultation desk, held workshops to facilitate non-Japanese national employee networking, and conducted cross-cultural com- munication seminars to learn tips on how to demonstrate their abilities at a Japanese company. We also created a guidebook that provides tips on how to work together geared toward the work- places where non-Japanese national employees are assigned. • Management System Established to Reduce Workplace Related Accidents to Zero To ensure operational and employee safety at its production facili- ties in each region worldwide, the Group has created occupational health and safety management systems (OHSAS) at 59 facilities and is acquiring certification for international standards, such as OHSAS 18001. Chaired by the director in charge of safety, the Global Safety Meeting is held twice a year with the aim of improving safety levels of the entire group. With the aim of achieving zero workplace acci- dents, the Company is implementing safety education and training and undertaking safety patrols at each site in Japan and overseas. In fiscal 2020, the frequency rate of industrial accidents through- out the Group was 1.26, an improvement of 0.12 from fiscal 2019. New Value, New Solutions & Growth Developing IoT/AI Human Resources That Create Innovation By fiscal 2022, Daikin plans to conduct training for about 1,000 people, including existing and new employees, to ensure they can use IoT/AI. With the cooperation of Osaka University, with which Daikin had signed a comprehensive cooperation agreement centering on the field of information science, we started the in-house Daikin Information and Communications Technology College course in 2017. In addition to lec- tures from professors of Osaka University to learn the basic knowledge of AI and how to use AI technology, the course develops experts who can use IoT/AI in business development and technology development. This is supported by incorporating Project-Based Learning (PBL), which draws on actual issues from each department. Since fiscal 2019, we have also been conducting IoT/AI human resource development courses for new employees. Not only demonstrating knowledge and skills, they are expected to play an active role as “bridge people” who promote the use of IoT/AI on a Companywide basis and create connections between inside and outside the Company and between Company depart- ments. We are also working to improve internal literacy so that these human resources can play an active role. 44 • 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 man- ner 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 2020, Daikin Industries made efforts toward key themes such as “Natural disaster risk,” “Product liability and quality risk,” “Intellectual property risk,” “Control of information leaks,” and “Overseas crisis management.” Corporate Ethics and Risk 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 • Launch of Educational Program to Maximize the Talents of Women Daikin commenced two educational programs with Osaka University in October 2019. Under the Leadership Development Program for Female Engineers, our young female engineers learn their own unique style of leadership with female graduate stu- dents. Under the Childcare Leave Career Advancement Support Program, Daikin employees take classes at Osaka University during childcare leave. These are pioneering examples of educational programs jointly conducted by a university and a company, which are leading to the advancement of women’s careers and skills. CSR Management/ Compliance Risk Management 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 exe- cution of those activities and promotes comprehensive and Groupwide CSR. Compliance Risk Management • Taking an Integrated Approach to Promoting Compliance and Risk Management At the Daikin Group, the Internal Control Committee, chaired by the President, checks and confirms that internal controls, including risk management, are functioning properly Groupwide. Chaired by the officer in charge of corporate ethics and compliance, the Corporate Ethics and Risk Management Committee is held twice a year in Japan as a general rule and comprises each department head and the presidents of major Group companies to ensure the management of operational risk and thorough compliance. Overseas Group companies formulate and develop comprehen- sive common rules to tackle compliance and risk management. The issues faced by each company and the progress toward resolution are reported to the Corporate Ethics and Risk Management Committee. In fiscal 2020, 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 Conduct Guidelines The Daikin Group established its Group Conduct Guidelines that clearly outlines required conduct for individual officers and employ- ees and, to ensure thorough compliance, appointed a Compliance and Risk Management Leader (CRL) for each division and for each of the main Group companies in Japan and overseas. CRLs encour- age adherence to the Group Conduct Guidelines, while regularly checking the status of compliance and risk management and shar- ing information, and they are focused on fostering a “culture free of compliance violations” and to elevating “mechanisms to ensure that there are no compliance violations.” Annual Report 2020 45 CSR (Corporate Social Responsibility) CSR (Corporate Social Responsibility) Human Resources Based on the laws and ordinances of countries and regions around the world, the Daikin Group respects basic human rights in accor- dance with the various international norms. The Daikin Group partic- ipates in the United Nations Global Compact for supporting, and putting into practice, universally accepted principles relating to such matters as human rights and labor. We respect human rights, diverse values, and the individual’s sense of work, and have stipulated in Group Conduct Guidelines 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 Group Conduct Guidelines 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 compli- ance with the Group Conduct Guidelines, 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. In fiscal 2020, on the basis of the tightening of regulations and the development of laws in each country—including the General Data Protection Regulation (GDPR), which is the regulation covering all EU residents—we worked to improve the systems of local subsidiaries and establish internal rules, not only in Europe and North America, where traditionally strict measures have been required, but also in China, Southeast Asia, and Latin America. • Regular Human Rights Awareness and Education Daikin conducts human rights education and awareness activities each year for all of its directors, new employees, including those of affiliates, and newly appointed managers. In addition, we publish a series of human rights articles in the Company newsletter to raise awareness of human rights. In fiscal 2020, the Company held training for executives under the theme of “Perspectives Required by Companies in the Development of Action Plans Based on the Guiding Principles on Business and Human Rights” by outside experts. This training deepened officers’ knowledge on human rights. • Establishment of Help-Line for Corporate Ethics Daikin Industries has established a help-line for corporate ethics that gives consultations and receives opinions on general corporate ethics from employees. We also conduct harassment training geared toward department heads and managers, including 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 recurrence follow- 46 ing discussions with the department in charge. To make the existence of the help-line for corporate ethics com- mon 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 compli- ance 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 2020, a CSR survey was conducted targeting domestic and overseas suppliers, which account for 80% of the total pro- curement amount. The CSR procurement implementation rate in Japan was 97%. We are also working to instill an understanding within the Company of CSR procurement. In Japan, we conducted CSR pro- curement education for all procurement buyers in fiscal 2019. Overseas, we had held CSR procurement briefing sessions for CSR procurement managers at 14 locations in the United States, Canada, Mexico, and China by fiscal 2020. • Enhancing Quality from Suppliers and Supporting the Development of Human Resources For the Daikin Group to provide products that satisfy the trust of customers, cooperation from suppliers is vital. Therefore, while working hard within a strong relationship of trust with all suppliers, the Daikin Group endeavors to continue to meet its mutual expec- tations as well as to build relationships in which we can both grow and develop. Both in Japan and overseas the Daikin Group conducts regular inspections of product quality at the local manufacturing facilities of our suppliers, and through dialogue in relation to improved quality, we support the enhancement of technological capabilities along with the efforts to enhance quality in coordination with sup- pliers. Moreover, the Group supports efforts to prevent work- place-related accidents through measures such as holding regular meetings on safety. Daikin Malaysia Sdn. Bhd. regularly visits its suppliers to support their quality improvements. By providing guidance on how to ana- lyze the factors in the event of a quality problem, Daikin Malaysia is supporting suppliers to enable them to conduct appropriate investigations, analyses, and countermeasures to improve quality. Engineers from Daikin in Japan accompany local staff and offer guidance. This assistance is useful not only for our business part- ners but also for improving the quality improvement skills of engi- neers at Daikin Malaysia. Stakeholder Engagement Regional Society Stakeholder Engagement The Daikin Group’s main stakeholders are the customers to whom we provide products and services, the shareholders and investors who have a direct impact on our business, our suppliers, our employees, and everyone in the regional societies that our business evolution affects. In addition, the spread of air-conditioning tech- nologies and the enhancement of the environmental friendliness of our products and services involve national and local governments and industry associations. The Daikin Group believes that it is important to understand the concerns and expectations of these stakeholders through proactive dialogue, so management can use this information in our business. • Continuing Exchange of Opinions with Experts Since 1995, the Daikin Group has held the Air Conditioner Forum (Konwakai) in Japan where it can exchange opinions relating to the “future of air conditioning” with experts in the field. In addition, in light of the rapid global development of our business, since fiscal 2008, we have expanded the extent of these events to five regions and held forums in Europe, China, the United States, Asia/Oceania, and Central America/South America. Exchanging opinions with experts from each region about environmental and energy issues, we use that information in our technology as well as product and business development. In fiscal 2020, we held a total of six events in five regions at which 125 people from a total of 31 countries participated. At the fiscal 2020 Latin American Air Conditioner Forum, which was held for the first time in Brazil, the largest market in the region, 24 experts from the Brazilian and Japanese governments and international organizations participated under the theme of air conditioning solutions to realize a sustainable society. • 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 lev- els of its trade receivables and inventories. Furthermore, Daikin works to stably maintain its consolidated ratio of dividends on equity (DOE) at 3.0%. Every year, we hold a Sustainability Briefing at which we explain the Company’s sustainability efforts and seek opinions. In fiscal 2020, more than 70 analysts and institutional investors participated, and we explained how we contribute to the sustainable develop- ment goals (SDGs) through our business and exchanged 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. The Daikin Group is made up of 313 consolidated subsidiaries worldwide and is expanding business in over 150 countries. The expansion of this global business is accelerating in line with the growth in demand for air conditioners, particularly in emerging countries and regions such as China, India, and Latin America. The basic policy for overseas operations is to develop a strong bond with regions through respect for their local cultural and historical backgrounds and is premised on increasing employment in the local region and cooperation with local companies. With our employees taking the initiative, we carry out social activities mainly in the areas of “environmental conservation,” “education sup- port,” and “cooperation with the local community” and are con- tributing 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 through- out the world, the Daikin Group is working to preserve biodiversity through its efforts to conserve forests and other natural assets such as the oceans and rivers. For example, Daikin Industries participates in the Osaka Prefectural Government’s “Adopt a Forest System” and has been conducting activities to improve the prefecture’s ecosystems by re-establishing satoyama (a forested natural area forming the bor- der between the mountains and the habited regions). In fiscal 2020, 130 people participated in the activity. Daikin Compressor Industries, Ltd. (Thailand) also conducts conservation activities for mangrove forests. This contributes to conservation of biodiversity and protects the lives of people engaged in traditional fishing. • Supporting the Regional Revitalization of Okinawa Since 1988, Daikin Industries has held the “Daikin Orchid Ladies Golf Tournament,” and, through promoting sports, we are helping to revitalize Okinawa and encourage economic exchange with the local area. In conjunction with this tournament, we solicit dona- tions 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.In 2020, the pro-am tournament and the main tournament, along with all the official pre-tournament evening events, were canceled due to the spread of COVID-19. However, with the support of those who had been planning to participate in the official pre-tournament evening events and the pro-am tournament, we were able to present the Orchid Bounty. Annual Report 2020 47 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 flow Cash dividends Ratios (%): Gross profit margin Operating income margin EBITDA margin Return on shareholders’ equity (ROE) Shareholders’ equity ratio 2010 2010 2011 2011 2012 2012 2013 2013 2014 2014 2015 2015 2016 2016 2017 2017 2018 2018 20192019 ¥1,023,964 ¥1,160,331 ¥1,218,701 ¥1,290,903 ¥1,787,679 ¥1,915,014 ¥2,043,691 ¥2,043,969 ¥2,290,561 ¥2,481,109 ¥2,550,305 319,301 275,263 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) 388,046 299,419 33,569 88,627 140,151 43,585 ¥103,161 (218,386) (115,225) 143,520 568,323 411,786 40,177 156,537 235,439 92,787 649,902 459,314 42,892 190,588 268,354 119,675 ¥179,713 ¥160,423 (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) Millions of Yen 20202020 884,898 619,385 67,968 265,513 393,999 170,731 ¥302,167 (156,187) 145,980 (169,934) ¥1,139,656 ¥1,132,507 ¥1,160,564 ¥1,735,836 ¥2,011,870 ¥2,263,990 ¥2,191,105 ¥2,356,149 ¥2,475,708 ¥2,700,891 ¥2,667,513 399,313 496,179 372,481 487,876 389,891 502,309 705,871 618,118 693,944 801,854 662,413 1,024,725 608,981 1,014,409 609,430 1,111,636 554,371 1,296,553 585,642 1,416,075 553,807 1,434,968 ¥ 66.44 1,701.29 306 32.00 ¥ 68.14 1,672.74 189 36.00 ¥ 141.37 1,725.64 (62) 36.00 ¥ 149.73 2,123.10 (396) 36.00 ¥ 318.33 2,748.08 339 50.00 ¥ 410.19 3,511.34 285 100.00 ¥ 469.23 3,473.54 413 120.00 ¥ 526.81 3,802.10 475 130.00 ¥ 646.53 4,433.62 329 140.00 ¥ 646.39 4,841.15 288 160.00 ¥ 583.61 4,904.46 499 160.00 31.19% 31.17% 30.52% 30.06% 31.79% 33.94% 34.82% 35.76% 34.87% 35.02% 34.70% 4.30 9.42 4.01 43.54 6.50 10.96 4.04 43.08 6.66 10.81 8.30 43.28 6.87 10.86 7.78 35.61 8.76 13.17 13.07 39.86 9.95 14.01 13.10 45.26 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 10.41 15.45 11.98 53.79 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 Operating Income (¥ billion) 2,500 2,000 1,500 1,000 500 0 10 11 12 13 14 15 16 17 18 19 20 48 (¥ billion) 300 250 200 150 100 50 0 10 11 12 13 14 15 16 17 18 19 20 Net Income Attributable to Owners of the Parent (¥ billion) 200 150 100 50 0 10 11 12 13 14 15 16 17 18 19 20 Operating Results (for the year): Net sales Gross profit Selling, general and administrative expenses Research and development expenses (Note 1) Operating income EBITDA (Note 2) Net income attributable to owners of the parent Cash Flows (for the year): Net cash provided by operating activities Net cash used in investing activities Free cash flow (Note 3) Net cash provided by (used in) financing activities Financial Position (at year-end): Total assets Total interest-bearing liabilities Total shareholders’ equity Per Share Data (yen): Net income (basic) Shareholders’ equity Free cash flow Cash dividends Ratios (%): Gross profit margin Operating income margin EBITDA margin Return on shareholders’ equity (ROE) Shareholders’ equity ratio 2010 2010 20112011 20122012 2013 2013 20142014 20152015 20162016 2017 2017 2018 2018 2019 2019 Millions of Yen 2020 2020 ¥1,023,964 ¥1,160,331 ¥1,218,701 ¥1,290,903 ¥1,787,679 ¥1,915,014 ¥2,043,691 ¥2,043,969 ¥2,290,561 ¥2,481,109 ¥2,550,305 319,301 275,263 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) 388,046 299,419 33,569 88,627 140,151 43,585 ¥103,161 (218,386) (115,225) 143,520 568,323 411,786 40,177 156,537 235,439 92,787 649,902 459,314 42,892 190,588 268,354 119,675 ¥179,713 ¥160,423 (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) 884,898 619,385 67,968 265,513 393,999 170,731 ¥302,167 (156,187) 145,980 (169,934) ¥1,139,656 ¥1,132,507 ¥1,160,564 ¥1,735,836 ¥2,011,870 ¥2,263,990 ¥2,191,105 ¥2,356,149 ¥2,475,708 ¥2,700,891 ¥2,667,513 399,313 496,179 372,481 487,876 389,891 502,309 705,871 618,118 693,944 801,854 662,413 1,024,725 608,981 1,014,409 609,430 1,111,636 554,371 1,296,553 585,642 1,416,075 553,807 1,434,968 ¥ 66.44 1,701.29 306 32.00 ¥ 68.14 1,672.74 189 36.00 ¥ 141.37 1,725.64 (62) 36.00 ¥ 149.73 2,123.10 (396) 36.00 ¥ 318.33 2,748.08 339 50.00 ¥ 410.19 3,511.34 285 100.00 ¥ 469.23 3,473.54 413 120.00 ¥ 526.81 3,802.10 475 130.00 ¥ 646.53 4,433.62 329 140.00 ¥ 646.39 4,841.15 288 160.00 ¥ 583.61 4,904.46 499 160.00 31.19% 31.17% 30.52% 30.06% 31.79% 33.94% 34.82% 35.76% 34.87% 35.02% 34.70% 4.30 9.42 4.01 43.54 6.50 10.96 4.04 43.08 6.66 10.81 8.30 43.28 6.87 10.86 7.78 35.61 8.76 13.17 13.07 39.86 9.95 14.01 13.10 45.26 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 10.41 15.45 11.98 53.79 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. Research and Development Expenses Shareholders’ Equity Total Assets (¥ billion) 75 60 45 30 15 0 10 11 12 13 14 15 16 17 18 19 20 (¥ billion) 1,500 1,200 900 600 300 0 10 11 12 13 14 15 16 17 18 19 20 (¥ billion) 3,000 2,500 2,000 1,500 1,000 500 0 10 11 12 13 14 15 16 17 18 19 20 Annual Report 2020 49 Financial Review Financial Review Summary of the Period Performance by Business Segment During the fiscal year ended March 31, 2020, the overall world economy expanded moderately in the first half of the period. In the fourth quarter, however, the global economy slowed sharply due to the COVID-19 pandemic. The U.S. economy experi- enced a slowdown in personal consumption and negative growth from January to March 2020. The European economy was also hit by a serious economic downturn, particularly in the automobile industry. The Chinese economy stalled due to trade friction with the United States and the impact of COVID-19. The economies of Asia and emerging countries, which are highly dependent on China, also faced a significant slowdown. The Japanese economy has entered a recessionary phase since last autumn as consumer and investment sentiment cooled due to the impact of the spread of COVID-19, in addition to the consumption tax rate hike against a backdrop of an increasingly slowing economy. In response to the spread of COVID-19, the Daikin Group worked to minimize the impact on its business and management including sales, produc- tion, and procurement. Amid this environment, consolidated net sales rose to ¥2,550.4 billion (a year on year increase of 2.8%) due in part to the Daikin Group’s solid performance up to the third quarter. As for profits, consolidated operating income fell to ¥265.5 billion (a decline of 3.9% from the previous fiscal year) due partly to COVID-19 and other factors. Net income attributable to owners of the parent decreased 9.7%, to ¥170.7 billion partly due to the effect of recording of an impairment loss despite a gain on sales of invest- ment securities. Air-Conditioning and Refrigeration Equipment Total sales of the Air-Conditioning and Refrigeration Equipment segment increased 3.9% from the previous fiscal year, to ¥2,309.1 billion. Operating income edged down 0.6% year on year, to ¥236.2 billion. • Japan In the Japanese commercial air-conditioning equipment market, activity within the industry rose year on year due to firm demand for the installation of air conditioning at public elementary and middle schools. In the market for stores and offices, the Daikin Group worked to strengthen sales through such measures as expanding indoor unit variation in the “SkyAir” series and strengthening proposals for the “machi Multi” series, multi-split type air conditioners that feature individual operation and a slim design. In the market for buildings and facilities, observing an increase in the need for work environment improvements, the Group increased sales of proposal-based products to meet user applications, including the “VRV” series, which has high ener- gy-saving performance and installation flexibility, and “MULTI CUBE,” which realizes comfortable individual air conditioning in large spaces such as factories. As a result, net sales of commercial air-conditioning systems exceeded that of the previous fiscal year. In the Japanese residential air-conditioning equipment market, industry demand fell short of the previous fiscal year as a result of a drop in demand due to the rebound from the rush in demand prompted by the consumption tax hike in September as well as the warm winter. Against this demand background, the Group marked the 20th anniversary of the launch of the “Ururu Sarara” series, which features the Group’s unique water supply-free humidifica- tion technology, by expanding its product lineup with the launch of “Urusara X,” which uses this technology to improve cleanliness, “Urusara mini,” which is suitable for bedrooms and children’s rooms, and “Ururu air purifier.” Furthermore, the Group improved the value and promotion of products, including expanding the product lineup of “risora,” an air conditioner combining design Domestic and Overseas Sales Operating Income and Operating Income Margin Net Income Attributable to Owners of the Parent (¥ billion) 2,500 2,000 1,500 1,000 500 0 2016 2017 2018 2019 2020 (¥ billion) 280 (%) 12 (¥ billion) 200 210 140 70 0 2016 2016 2017 2017 2018 2018 2019 2019 2020 2020 9 6 3 0 150 100 50 0 2016 2017 2018 2019 2020 Domestic Overseas sales Operating income Operating income margin 50 "2016" 5022 15414.5 "2017" 5184 15255 "2018" 5427 17478 "2019" 5851 18960 "2020" 5969 19533 with functionality. Nonetheless, net sales of residential air-condi- tioning systems were flat year on year. • Americas Region In the Americas, although the spread of COVID-19 had an impact in March, the effects on the entire year was limited, and net sales increased year on year as a whole due to the success of sales strat- egies in addition to strong demand. Net sales of residential air-con- ditioning systems rose year on year as a result of new product launches such as a mini-split in a low-cost model and “FIT,” the industry’s first unitary product with a side discharge inverter, and efforts to develop a new sales network and to increase selling pric- es. In the market for large buildings (Applied Systems), net sales increased year on year as reinforcement of the sales network and enhancement of the product lineup underpinned by strong market growth led to an increase in sales for systems mainly for rooftops and also to the expansion of the after sales service business. • China In China, sales were higher than the previous fiscal year up to the third quarter thanks to the development of product and sales strat- egies in response to rapid changes in the market environment to take advantage of the effects of softening raw material market conditions, and the promotion of cost reductions as the expansion of in-house production. However, in the fourth quarter, production and sales were suspended in February due to the spread of COVID- 19, and sales declined in March due to market disruption despite a recovery in production. As a result, net sales decreased from the previous fiscal year. In the residential-use market, in order to respond to changes, the Group strengthened its “PROSHOP” spe- cialty shops by shifting sales resources mainly to the regional cities where growth is anticipated. In addition, the Group worked to expand sales of residential multi-split type air conditioners by enhancing its product lineup for the general residential market in addition to the “New Life Multi” series aimed at the mid-range and high-end residential market. In the commercial-use market, while there was a decline in large-scale real estate investment, the Group responded to steady demand for retail properties such as restaurants and renovations of small and medium-sized properties and captured renewal demand through the introduction of “Intelligent VRV systems” that use the Internet to connect with customers in the mature markets of big cities. In the Applied Systems air-conditioning equipment market, the Group promoted proposal-based sales in fields with growing demand, such as the field for data centers. • Asia/Oceania Region In Asia and Oceania, net sales for March fell year on year due to the suspension or restriction of business activities in Malaysia, the Philippines, India, and other countries as a result of governmental decrees in response to the spread of COVID-19. Meanwhile, throughout the year, the Group worked to develop independent dealer networks covering urban and regional areas and implement measures aimed at differentiating the Group from its competitors by improving its service technology strengths. As a result, net sales increased year on year for the entire region. • Europe/The Middle and Near East/Africa In Europe, net sales increased year on year as a whole. Net sales of residential air-conditioning systems increased year on year due to strong sales in the northern European regions including northern France, Belgium, the Netherlands, and Germany as a result of the summer heat wave and reinforcement of the Group’s sales capabil- ities. Net sales of residential heating systems increased significantly year on year, boosted by various countries promoting heat pump hot water heating systems that are effective at reducing CO2 emis- sions. Net sales of commercial air-conditioning systems also grew year on year due to the expansion of sales to stores, offices, and hotels by visiting contractors and architectural firms in each coun- try, reinforcing ‘spec-in’ activities, strengthening project manage- ment of inquiries, and further promoting differentiated products using environmentally-conscious, recycled refrigerant and air condi- tioners using R32 refrigerant. However, net sales for March fell year on year as a result of restrictions on economic activity due to the announcement of state of emergency declarations and border closures in various countries in response to the spread of COVID-19 Selling, General and Administrative Expenses (¥ billion) 640 480 320 160 0 2016 2017 2018 2019 2020 Sales by Segment Segment Profit (¥ billion) 2,500 2,000 1,500 1,000 500 0 2016 2017 2018 2019 2020 (¥ billion) 300 200 100 0 2016 2017 2018 2019 2020 Air conditioning Chemicals Other Air conditioning Chemicals Other Annual Report 2020 51 Financial Review Financial Review in Italy and throughout Europe. In the Middle and Near East and Africa, amid the economic slowdown in Dubai, which is a major market, net sales in local cur- rencies were at the same level as the previous fiscal year, led by Egypt and Saudi Arabia, which had strengthened their own sales systems. However, net sales after translation into yen decreased from the previous fiscal year due to the effect of exchange rates. In Turkey, although demand for air-conditioning systems has been sluggish due to the economic downturn following the plunge of the Turkish lira in August 2018, net sales in the local currency increased year on year due to strong sales of heating equipment. However, yen-equivalent net sales decreased year on year due to the impact of the sharp depreciation of the Turkish lira. In the marine vessels business, net sales rose year on year due to lation of distribution inventory was significant in the European market, which was affected by the rebound following the rush demand in the previous fiscal year. As a result, overall sales of gas decreased substantially year on year. Other Operations Overall sales of the “Others” segment increased 5.4% compared to the previous fiscal year to ¥61.3 billion. Operating income decreased 8.5% year on year to ¥5.5 billion. Sales of oil hydraulic equipment for industrial machinery fell year on year due to stagnant demand in the Japanese, Asian, European, and U.S. markets. On the other hand, sales of oil hydraulic equip- ment for construction machinery and vehicles were up year on year due to robust sales to key customers in Japan. an increase in unit sales of marine container refrigeration units. In defense systems-related products, sales of ammunition to the Ministry of Defense rose. As a result, net sales increased year on year. Net sales of home oxygen equipment were also up year on year due to robust sales of oxygen concentrators. In the electronics business, net sales grew year on year, as a result of strong sales of “SpaceFinder,” a database system for the design and development sectors in line with customer needs such as solu- tions for quality issues, shortened design and development periods, and support for cost reductions, as well as favorable sales of the related new product “Smart Innovator” and CG creation systems. Chemicals Overall sales of the Chemicals segment decreased 10.4% from the previous fiscal year, to ¥179.9 billion and operating income fell 26.9% year on year, to ¥23.8 billion. The general conditions for overall sales of fluorochemical products was harsh and affected by the decline in demand worldwide, mainly in the semiconductor and automotive fields and the downturn in the gas market in Europe, and this combined with the impact of the spread of COVID-19 from the fourth quarter. Despite relatively strong LAN cable-related demand, net sales of fluoropolymers decreased year on year due to declining demand for semiconductor and automo- tive-related applications worldwide. Net sales of fluoroelastomers also decreased year on year due to the impact of falling demand in the automotive field mainly in the U.S., European, and Chinese markets. Among specialty chemicals, net sales of anti-fouling sur- face coating agents fell year on year due to sluggish sales, mainly in Asia. With regard to oil and water repellents, net sales fell year on year due to stagnant demand in China and the United States. As a result of these factors, overall sales of specialty chemicals were down compared to the previous fiscal year. As for fluorocar- bon gas, the impact of the drop in sales mainly due to the accumu- Cash Dividends per Share Total Assets Working Capital and Current Ratio (¥) 200 150 100 50 0 52 2016 2017 2018 2019 2020 (¥ billion) 3,000 2,000 1,000 0 2016 2017 2018 2019 2020 (¥ billion) 600 400 200 0 2016 2016 2017 2017 2018 2018 2019 2019 2020 2020 Working capital Current ratio (%) 240 160 80 0 Currency Exchange Rates In foreign currency markets, the yen’s average annual exchange rate was ¥2 higher against the U.S. dollar and ¥7 higher against the euro compared to the previous fiscal year. The average rates for the fiscal year under review were US$1=¥109 and ¢1=¥121. Fluctuations in currency exchange rates resulted in a decrease of ¥75.0 billion in sales and ¥20.0 billion in operating income below what they would have been in the absence of fluctuations. Yen-U.S. dollar rate Yen-euro rate 2019 ¥111 ¥128 2020 ¥109 ¥121 SG&A Expenses and Operating Income As a result of increases in personnel costs and other factors, SG&A expenses rose 4.5% over the previous fiscal year, to ¥619.4 billion. Consolidated operating income declined 3.9% year on year, to ¥265.5 billion, while the operating income margin came in at 10.4%. Assets, Liabilities, and Total Equity Assets At the end of fiscal 2020, consolidated total assets amounted to ¥2,667.5 billion, down ¥33.4 billion from the previous fiscal year-end. Current assets were down ¥13.2 billion from the end of the previ- ous fiscal year, to ¥1,304.4 billion, because of a decrease in trade notes receivable and other factors. Noncurrent assets decreased ¥20.2 billion from the previous fiscal year-end, to ¥1,363.1 billion, due mainly to a decline in investment securities resulting from sales. Liabilities and Net Assets Consolidated total liabilities decreased ¥49.1 billion compared to the end of the previous fiscal year, to ¥1,204.9 billion. This was largely due to the decline in short-term borrowings and other fac- tors. Net assets grew ¥15.7 billion from the previous fiscal year- end, to ¥1,462.6 billion, due to net income attributable to owners of the parent and other factors. As a result of the aforementioned, the shareholders’ equity ratio climbed from 52.4% as of the end of the previous fiscal year, to 53.8%. Net assets per share improved to ¥4,904.46 from ¥4,841.15 for the previous fiscal year. Total interest-bearing liabilities stood at ¥553.9 billion as of March 31, 2020, down ¥31.8 billion compared to the end of the previous fiscal year. This mainly reflected the decrease in short- term borrowings and other factors. The interest-bearing liability ratio (interest-bearing liabilities / total assets) decreased from 21.7% to 20.8%. Cash Flows During the fiscal year under review, net cash provided by operating activities was ¥302.2 billion, an increase of ¥52.2 billion from the previous fiscal year, principally due to a decrease in the amount of increase in trade receivables. Net cash used in investing activities was ¥156.2 billion, a decrease of ¥9.6 billion from the previous fis- cal year, primarily due to a decrease in expenditures for the acquisi- tion of consolidated subsidiaries. Net cash used in financing activities was ¥169.9 billion, an increase of ¥101.2 billion from the previous fiscal year, mainly due to a decrease in short-term borrow- ings. After including the effect of foreign exchange rate change to these results, net decrease in cash and cash equivalents for the fis- cal year under review, amounted to ¥46.0 billion, a decrease of ¥56.2 billion from the previous fiscal year. Capital Investment Adhering to the basic strategy of “Focusing Management Resources on More Profitable Areas,” the Daikin Group’s capital expenditures were mainly allocated to the Air-Conditioning and Refrigeration Equipment and Chemicals segments, with the total amounting to ¥132.0 billion. In the air-conditioning and refrigera- tion equipment field, Daikin invested ¥11.1 billion, centered on 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 (¥ billion) 150 40 100 20 50 2016 2016 2017 2017 2018 2018 2019 2019 2020 2020 0 0 0 2016 2017 2018 2019 2020 Shareholders’ equity Shareholders’ equity ratio (¥ billion) 150 100 50 0 2016 2017 2018 2019 2020 Capital investment Depreciation and amortization (excluding amortization of goodwill) Annual Report 2020 53 Financial Review Financial Review research and development as well as the rationalization of room air conditioners and package air conditioners. At Goodman Global Group, Inc., investments of ¥17.7 billion were made primarily to increase capacity and to attain rationalization objectives. In the chemicals field, Daikin invested ¥9.3 billion, mainly to increase capacity and meet rationalization objectives. In addition, Daikin Fluorochemicals (China) Co., Ltd. made investments of ¥8.5 billion for increasing capacity. The main sources of funds for these investments were bank bor- rowings and retained earnings. Note that the Daikin Group did not make any major disacquisitions of equipment or facilities during the fiscal year under review. Building on the wealth of data gained from open spaces, in 2019 the Company established “point 0 marunouchi,” a member- ship-type workspace being field trialed to realize the “office of the future,” which is the first project of “CRESNECT,” a co-creation platform for spatial data, in a bid to generate new value and ser- vices while harnessing the know-how inherent within each partici- pating partner. Through this initiative, positive steps will be taken to substantial- ly increase the efficiency and pace of research and development, and to create differentiated products in each region worldwide. In fiscal 2020, R&D expenses included in Groupwide SG&A expenses as well as the cost of goods sold came to ¥68.0 billion. R&D Expenses In view of the rising concern about global warming on a worldwide scale and issues related to energy, the Daikin Group working mainly through its Technology and Innovation Center (TIC) engages in lead- ing-edge technology research and development programs designed to proactively contribute to the resolution of global environmental issues, while also expanding the Group’s business operations. In 2018, Daikin concluded an “academia-industry collaboration agree- ment” with the University of Tokyo. Through this comprehensive col- laboration, both organizations are going beyond joint research and development to create a vision for the future, conducting reciprocal personnel exchange and working together on venture companies related to the University of Tokyo, among other endeavors, in what will become a far-ranging relationship. In addition, Daikin has already formed collaborative ties with a number of other tertiary institutions including Kyoto University and a comprehensive collabo- ration contract with Osaka University to train human resources in the utilization of AI focusing on the information sciences field, and Tsinghua University and Peking University in China in efforts to pro- mote academia-industry collaboration. The Company is also pursu- ing opportunities through cooperation with the corporate sector. By actively advancing collaborative ties, Daikin is endeavoring to gener- ate innovation, help resolve a wide range of complex social issues, and create new businesses. Air-Conditioning and Refrigeration Equipment R&D expenses for air-conditioning and refrigeration operations totaled ¥59.1 billion. Daikin has newly launched the “Ururu Sarara” series brand line of air-conditioning products for residential and commercial air condi- tioners with superior humidity control technology, which is essential for creating healthy and comfortable spaces. From November 2019, the Company also conducted a steady stream of launches with the wall-mounted room air conditioners “Urusara X” and “Urusara mini,” the dehumidifying streamer air purifier “Ururu Sarara air puri- fier” and “Ururu Sarara ZEAS,” a store and office air conditioner. Daikin was quick off the mark to discern the importance of humidity in air and space, and in 1999 we launched “Ururu Sarara,” the world’s first room air conditioner loaded with humidity control technology. Marking its 20th anniversary, the development of this brand has heightened an awareness of humidity among consumers, and is providing support through the creation of healthy and comfortable spaces throughout the year in a variety of environments, whether they be living rooms or bedrooms, chil- dren’s rooms, offices or stores, hospitals or whatever spaces in which people live. In “Urusara X,” Daikin has put to use a humidity control technology to regulate humidification and dehumidifica- tion, and has developed a technology to clean heat exchangers in room air conditioners. This means that indoor units will maintain their cleanliness throughout the year, whether it be in summer or Research and Development Expenses (¥ billion) 80 60 40 20 00 0 54 2016 2017 2018 2019 2020 ROE (%) 16 12 8 4 0 2016 2017 2018 2019 2020 ROA (%) 8 6 4 2 0 2016 2017 2018 2019 2020 air-conditioning equipment design, through installation to test run- ning. By having customers utilize “DK-BIM” (Daikin BIM – building information modeling), which supports the design of air-condition- ing systems by using the cloud to automate calculation and assign- ment of air-conditioning burden, and create materials, or other applications such as “air conditioning delivery specification creation support (provisional name).” Daikin aims to substantially reduce manhours at every point along the process, until the completion of air-conditioning equipment. To improve upon conventional equipment in terms of energy conservation, installation tasks and low-maintenance features, Daikin developed a “beltless type” of air-conditioning system for facilities such as plants and warehouses characterized by large spaces. Conventional air conditioners for facilities requires adjust- ments and maintenance by seasoned technicians, and incurs costs and manhours as well. However, by adopting a “direct-drive meth- od” that directly connects the fan and motor, this product enables major reductions to these drawbacks. Moreover, even with opera- tions to replace the existing equipment, which accounts for a majority of the market, being equipped with a function that auto- matically adjusts air volume means that installation time is drasti- cally shortened. Labor shortages in connection with installation and maintenance have in recent times become an issue shared throughout the air-conditioning industry. Going forward, as an air-conditioning equipment manufacturer, Daikin will continue to generate products that work to solve this problem. In Applied Systems, Daikin released to the North American mar- ket new medium- and large-sized rooftop units that offer enhanced efficiency and customization in September 2019. In addition, Daikin launched air cooled chillers equipped with a free-cooling function that offers high-energy saving performance making its design optimal for the rapidly growing data center cool- ing market in March 2020. In Europe, against a backdrop of increasingly stringent control of fluorine gas, Daikin first sent to market a turbo chiller that adopts R513A refrigerant in December 2019, and then in quick succession in January 2020, a scroll heat pump chiller that adopts R32 refrigerant. Continuing on from the previous year, Daikin expanded adoption of low-GWP refrigerants. In China, Daikin released large-scale turbo chillers that expand the range of use from general air conditioning units equipped with new compressors to high-temperature heat pumps and ice storage in December 2019. In November 2019, Daikin also launched mag- netic bearings for turbo chillers that adopt low-pressure refrigerant with a low environmental impact, which is in demand in South East Asia and other overseas markets. winter. Air supply systems also come equipped with a ventilation function, making for a comfortable interior environment with room air conditioning that brings air in from outside. While “Urusara mini” has a humidifying function on par with that of “Urusara X,” it has a thin-type indoor unit design. The Company is developing this as an Ururu Sarara entry model for bedrooms and small rooms. “Ururu Sarara air purifier” features humidification, dehumidifica- tion, air purifying and deodorizing functions. Moreover, Daikin has newly developed an interlocking function for its wall-mounted air conditioners, and even those units not equipped with humidity regulating technology are able to dehumidify or humidify. In addition, residential air-conditioning equipment includes the “risora,” a wall-mounted air conditioner that pursues harmony with interior settings and comes with a front panel that is available in the customer’s preferred color, while in June 2019 the Company jointly made plans with Sangetsu Co., Ltd. to offer “risora custom style,” a fee-based service that replicates the textured surfaces of wood, marble, leather or other materials. Customers can enjoy selecting combinations of wallpaper and room air conditioners in tune with their image of what the interior should be, which con- tributes to a space that only they themselves could create. In commercial air-conditioning equipment, Daikin launched the “FIVE STAR ZEAS” series and the “Eco-ZEAS” series as new models in the “SkyAir” lineup of air conditioners for stores and offices to realize greater cleanliness and energy conservation in April 2020. The new products are equipped with “mold proof with water” function, and when the cooling and dehumidifying cooling modes are turned off, dust in the heat exchanger is washed away by condensed water and the air conditioner’s interior is cleansed with blower operation and heating that dries the interior portion. In consideration of creating healthy, clean spaces, Daikin combines this with “Streamer Internal Cleaning,” which it launched in April 2018 to suppress the growth of mold, a cause of unpleasant odors inside indoor units. The high-capacity type (8-10 horsepower) is the first in the industry to adopt R32 refrigerant, which has a low impact on global warming, raising environmental performance. With an energy-saving performance of approximately 20% higher than conventional equipment, and at a compact 19kg (8 horse- power), burden is alleviated not just for users, but for builders as well. Daikin released “VRV X” series models in April 2020 for use in medium- to large-scale buildings. Natural disasters such as extreme heat and typhoons have increased in recent years, and with an eye toward the increasingly harsh conditions in which outdoor units are placed, we have reinforced the frame structure of this model so that it can better stand up to earthquakes and windy conditions. In tests it successfully cleared a seismic intensity of seven and wind speeds up to 60m/s. In addition, being equipped with a high-effi- ciency microchannel heat exchanger it can maintain its rated cool- ant capacity in exterior temperatures up to 41ºc, providing a stable cooling function even in environments of intense heat. In response to the shortages of equipment installers in recent years, Daikin has reduced the installation workload by adopting the “gradient-free method” for both “VRV X” and “Skyair.” This method simplifies the drain piping work that had been a large bur- den when installing indoor units. Moreover, Daikin’s aim is to enhance operational efficiencies from the process of developing Annual Report 2020 55 Financial Review Financial Review Chemicals R&D expenses for Chemicals operations totaled ¥6.7 billion. Daikin conducts R&D for new products and new applications based on its rich experience in fluorine products and fluorochemi- cal technology. In the fluoropolymer resin and fluoroelastomer fields, fluorochemicals exhibit good heat resistance, low drug reac- tivity, and dielectric properties. Using these properties, Daikin is developing new differentiated products for automotive, semicon- ductor, wire and cable (IT field), and other applications. Daikin also develops coatings based on the non-adhesive and chemical resis- tant properties of fluoride-based substances, and develops textile treatment materials and carpet treatment materials based on the water and oil repellent properties. In addition, Daikin engages in a wide range of fluoride-related R&D, including the development of liquid crystal related materials based on the functionality of fluo- rine-containing compounds and the provision of contracted syn- thesis research for pharmaceutical intermediates. In the coolants field, Daikin is accelerating the development of next-generation coolants that utilize artificial intelligence and that comply with environmental regulations. In addition to these developments, as part of R&D in peripheral areas aimed at developing new tech- niques and applications, Daikin is working on the development of film process products and multilayered materials and conducts advanced materials research related to the medical, optical, envi- ronmental, electric power battery, and energy areas. Through these initiatives, Daikin is endeavoring to further secure the global No. 1 position and become the sole provider of fluorochemical solutions. Especially, in the automotive battery field, Daikin is making concert- ed efforts to grow its ties globally and further expand its markets. By furthering and accelerating its R&D, the TIC, which has the mission of new product development in Daikin’s Chemicals busi- ness, is seeking to develop technologies that will lead on next-gen- eration themes. Other Operations R&D expenses for the Other operations totaled ¥2.1 billion. In oil hydraulics, Daikin is drawing on the special features of its hybrid oil hydraulic systems technology, which combines oil hydraulic technology and inverter technology to realize energy conservation and high functionality that could not be realized with previously existing hydraulic systems. In addition, besides the medi- um- to low- and small-volume markets, where Daikin is working to expand the adoption in Japan and overseas, the Group is also developing units for high-pressure and high-volume applications. In the industrial press and other industrial machinery applications, Daikin’s “Super Unit” has won high acclaim for its low electric power consumption. It also contributes to improvement in the workplace environment and reduction in environmental impact because of its lower noise, reduced heat emission, and smaller tank size. Moreover, Daikin has launched a large-scale extruder sys- tem that equals electric power as a motive force for its responsive- ness and energy conservation. By expanding the lineup of units in this series to meet the special needs of countries in Asia and other regions for handling multiple voltages and other features, Daikin will promote the adoption of this system for presses and other machines and move forward with sales expansion globally. Also, Daikin is proceeding with the development of an energy 56 conservation system for use on special vehicles. One of these units, a hydraulic hybrid system for use on vehicles, has already been adopted. In addition to conventional hydraulic systems, Daikin is proceeding with the development of advanced environmentally responsive products and technology that go beyond existing frameworks and will find applications globally. In defense systems, Daikin mainly conducts R&D related to artil- lery shell and guided missiles components, for Japan’s Ministry of Defense, as well as equipment used in home oxygen therapy. Dividend Policy and Dividends Applicable to the Fiscal Year The Company will continue to focus on expanding its businesses while investing its assets strategically and improving its financial structure by such means as proceeding with the reduction of over- all costs and enhancing its 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. Specifically, by striving to maintain a consolidated ratio of divi- dend to net assets (Dividend on Equity, DOE) of 3.0% while at the same time aiming for an even higher consolidated dividend payout ratio, we will introduce initiatives to further increase returns to our shareholders with the core goal of stable and continuous dividends. In addition, internal reserves will be applied to strategic invest- ments to expand business and increase competitiveness such as reinforcing management structure, promoting global businesses, and accelerating eco-conscious product development. For the fiscal year ended March 31, 2020, the Company has pro- posed an annual cash dividend of ¥160 (¥80 for the interim divi- dend and ¥80 for the year-end dividend). For the fiscal year ending March 31, 2021, the Company’s annu- al cash dividend plans are pending. Outlook for Fiscal 2021 Upon entering March, the World Health Organization (WHO) issued a declaration to the effect that COVID-19 had become a pandemic, and its spread in and outside of Japan continues unabated. Amidst limitations on outdoor and commercial activities, and restrictions on moving between countries that are growing stricter worldwide, depressed sentiment toward consumption, fragmentation of supply chains and other issues have led to a rapid contraction of overall economic activities. Given ominous signs that the impact of COVID-19 will be prolonged, it appears that the future of the world economy will continue to be severe. However, Daikin is focusing its efforts on the business operation front, such as with production, procurement, and sales, so as to minimize impact on the Group and to swiftly recover when the pandemic has abated. The Group will also be making efforts to discover new markets and opportunities in order to further contribute to the world as a manufacturer of air conditioners. On top of this, for this year (2020), the Daikin Group aims to generate results by setting “Accelerating Our 3 Structures of Collaborative Innovation, Let Us Win in this Era of Change!” (Three Structures: customer, internal and external) as the Group’s New Year’s slogan. The Group will work together to continue to refine its efforts to strengthen sales and marketing capabilities, improve product development, production, procurement, and quality capa- bilities, enhance the capabilities of its human resources, and reduce both fixed and variable costs in each region around the world. Furthermore, the Daikin Group will respond to the changes in the structure of the economy and society brought about by escalating global competition and advances in the digital economy. The Group will do this by creating new products and services through mutual communication with customers, engaging in academic-in- dustrial collaboration in technology development, and collaborat- ing with other members of industry, including venture capital companies, to acquire differentiated technologies and build new business segments. In addition, the International Energy Agency (IEA) foresees demand for air conditioning more than tripling by 2050, from today’s levels, in line with the development of emerging countries. While this represents a huge opportunity for the Daikin Group with its main business in air conditioning, there is the worldwide issue of global warming and along with that, climate change. Amidst grow- ing demand for decarbonization, issues such as curbing energy con- sumption associated with air conditioning, lowering the use of fossil fuels, and preventing leaks of refrigerants that cause greenhouse effects. Conversely, if no action were to be taken to control green- house gas emissions, these could become a risk for the Group. Daikin aims to respond to these risks by reducing its environmental impact by, for example, developing and spreading the use of refrig- erants with lower global warming potential, developing and spread- ing the use of high-efficiency air conditioners, and creating solutions for buildings that utilize energy efficiently throughout the entire facility. In 2018, the Daikin Group formulated its “Environmental Vision 2050” to aim for zero greenhouse gas emissions in 2050, while offering a safe and healthy air environment. Daikin announced its support and agreement with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) in May 2019. An important issue is the impact climate change will exert on busi- ness continuity, and as such, Daikin analyzes the risks and opportuni- ties it will have on business, and together with reflecting that to management strategy, the Group contributes to solutions to climate change and other social problems while also aiming for further growth. For the fiscal year ending March 31, 2021, Daikin forecasts an 8.6% decrease in consolidated net sales, to ¥2,330.0 billion, with operating income expected to fall 43.5% year on year, to ¥150.0 billion, and net income attributable to owners of the parent con- tracting 41.4%, to ¥100.0 billion. The estimated exchange rates for the fiscal year are ¥108 to the US dollar and ¥120 to the euro. Principal Risks Associated with the Daikin Group’s Operations Management recognizes the following principal risks that may influence decisions made by investors given their significant impact on business conditions as stated in the securities report, and among matters pertaining to accounting status, consolidated companies’ financial status and business performance, as well as cash flows. The following have been determined as of the end of the con- solidated fiscal year under review. (1) Risks related to the market environment  Risks related to changes in the market environment The Group develops, procures, manufactures, and sells goods and services in each of its business domains, chiefly air conditioning, as it grows its business globally. In principal countries and regions throughout the world, the Group strives to raise market share by strengthening its sales network, offer competitive products and services, and to cut fixed costs in order to expand its business and enhance profitability. Nonetheless, in the event of rising instability in the political situa- tion, economic contraction, inclement weather, sweeping pandem- ic or other cause of deteriorating market conditions, there is a possibility that demand will decline in countries and regions in which the Group has operations, or also for its products, and that business expansion and increases in profitability will not progress as planned. As a result, there is a possibility of an impact on the Group’s financial situation and management performance.  Risks related to fluctuations in currency exchange rates and funds procurement environment Overseas sales accounted for a high ratio of the Daikin Group’s consolidated net sales in fiscal 2020. The acceleration of global business development going forward is expected to further elevate this overseas sales ratio. Consolidated financial statements are pre- pared by translating local currency-denominated items for Group operations in each global region, including sales, expenses, and assets. Accordingly, depending on currency exchange rates at the time of the currency translation, there may be an impact on yen translation values even when there has been no change in local currency-denominated figures. In addition, because the Group engages in foreign currency-denominated transactions in raw materials and parts procurement and in the sale of goods and ser- vices, there is a possibility that fluctuations in currency exchange rates could impact manufacturing costs and sales performance. To avoid such currency exchange rate-related risks, the Group under- takes short-term risk hedging via forward exchange contracts and similar instruments. Daikin also undertakes medium- to long-term measures to continuously adjust procurement and manufacturing operations and optimize them for changing currency exchange- rate trends, and to balance imports and exports in each currency. Through this, the Group works to realize a business structure that is not greatly impacted by fluctuations in currency exchange rates. In addition, the Daikin Group procures funds necessary for its business activities through loans from financial institutions, or by using commercial paper or bonds. When the economic environ- ment fluctuates, the lending posture of financial institutions and the situation in funds procurement markets will change, and there is the risk that necessary funds cannot be procured, or that the funding rate will rise. In response to such risks, we set commitment lines, and use interest swaps and other measures to fix the interest rate, among other efforts. However, there is a possibility that fund procurement costs will rise, and that there will be an impact on the Group’s financial situation and management performance. Annual Report 2020 57 Financial Review Financial Review  Risk related to fluctuation in market value of securities The Daikin Group takes a strategic approach to holding corporate stock that can be anticipated to enhance Company value. However, stock market trends could cause a decline in the value of these stocks , and potentially impact the Group’s financial situation and management performance. (2) Risks related to business activities  Risks related to technology, products, and services The Daikin Group aims to generate customer value and social value, and makes concerted efforts to develop the technology, products, and services that will consistently lead to customer satis- faction. However, the emergence of new technology, products or services that differ from those anticipated by the Group, or abrupt changes to the market such as rapidly escalating competition, including from new market entrants, may lead to the necessity to amend or transform technology or product strategy. result of a deteriorated brand image, there is a possibility of an adverse impact on the Group’s financial situation and management performance.  Risks related to procurement In the event management conditions at suppliers deteriorates, or if natural disasters or accidents occur, the Daikin Group makes efforts to ensure that raw materials, parts, and other items are supplied in a stable and timely manner, and at reasonable prices. This can be achieved by diversifying its suppliers and dispersing sourcing geo- graphically, as well as by creating parts commonalities and stan- dardization, among other efforts. However, in the short term, it may be difficult to take the measures described above, and in the event of an unforeseen situation, the Group could experience shortages of raw materials and parts, delays in delivery, and other problems. In this case, there is a possibility that this may have an impact on the Group’s business. In that event, delays in bringing about new products or services, In addition, the Daikin Group and its suppliers set prices of raw or launching new businesses, will cause the Group to lose its advantageous position against competitors or new market entrants. As a result, this may impact the Group’s financial situa- tion and management performance.  Risks related to acquisitions and alliances with other companies The Daikin Group has in the past utilized corporate acquisitions, in addition to organic growth leveraging existing management resources in order to grow its business globally and to strengthen its product lineup and sales structure. Going forward, to expand its business domains and accelerate the transformation of its business structure, it will aggressively undertake alliances, collaboration, and M&A activities. In the project evaluation stage, the Group not only assessed strategy toward business expansion but also considered the risk in terms of business operation, and following project exe- cution, will strive to ensure that business integration occurs smoothly. Nonetheless, after a project is executed, there is a possi- bility that integration will not proceed according to plan due to a deteriorating market environment, the inability to fully utilize the management resources of the target company, and the lack of smooth cooperation with the target company, or other reason. As a result, there is a possibility that there will be an impact on the Group’s financial situation and management performance.  Product and service quality and responsibility The Daikin Group operates in over 150 countries worldwide, and endeavors to provide products and services that are in tune with local needs. In addition, it undertakes strict design overviews and quality audits for each respective region, and does its utmost to assure quality and safety. However, by any chance that a problem with regard to safety arises, it gives first consideration to the safety of the customer. To prevent reoccurrence or expansion of the acci- dent, the Group will repair or exchange, and will through newspa- pers or other means notify and disclose information to sales vendors and other relevant third parties, fulfilling its responsibilities based on the Product Liability Law. As these countermeasures may incur large expense, we have enrolled in product liability insurance, however, in the event that expenses exceed the limit of compensation or if sales decline as a materials and parts in accordance with a contract. The Group strives to enable procurement at stable prices through long-term contracts and other means, although abrupt changes in the supply and demand environment or fluctuations in exchange rates may make sharp rises in procurement prices unavoidable. In such an event, there is a possibility that there will be an impact on the Group’s financial situation and management performance.  Legal regulations The Daikin Group, which operates in over 150 countries world- wide, is subject to laws and regulations covering competition, the prevention of bribery, labor and safety, the environment, and other areas in all nations and regions around the world. In each country the introduction of ever more severe laws and regulations and changes in the legal interpretations and operating guidelines of local authorities may lead to limitations of the Group’s business activities. The Group conducts an array of training sessions with the aim of thorough compliance, along with the introduction of an annual “self-check” to confirm whether or not daily business is being performed in adherence to laws and regulations. Together with raising a consciousness of compliance, the Group conducts audits and confirms the status of adherence. Nonetheless, in the event that violations of the law occur, there is a possibility that the Group will face administrative action for the payment of monetary penalties. In addition, a decline in brand image has the potential to impact the Group’s financial situation and management performance.  Information security In the course of carrying out its business, the Daikin Group obtains confidential information from third parties and personal informa- tion from customers, in addition, the Group also handles its own proprietary confidential information. For that reason, there is a possibility of unauthorized access by hackers or being the subject of a cyber-attack that causes external leaks of personal or confi- dential information, which could halt production lines at each loca- tion or logistics systems, and exert a serious impact on business. To prevent any of these situations from arising, the Group is put- ting into place countermeasures that include strengthening infor- 58 earthquakes, tsunamis, typhoons, torrential rain, and other natural disasters. In preparation for such natural disasters, the Company takes measures to reinforce each business site against earthquakes, and also acts to put in place countermeasures against tsunamis, significant rainfall, flooding, and other disasters. In addition, it also formulates disaster prevention regulations pertaining to natural disasters, and periodically conducts disaster prevention training in efforts to minimize the impact of natural disasters. Nonetheless, there is a possibility that a major natural disaster will significantly impact business activities, and that harm will come to the Group’s employees, production facilities, systems, and other assets. At overseas locations as well, in addition to various types of natural disasters, terrorism, riots, wars, and other incidents could conceiv- ably cause harm not only to the Group’s business bases, but also to supply chains and customers. This holds a possibility of hindering the Group’s business activities and causing delays. Furthermore, an enormous risk for the Daikin Group’s business has become the spread of contagious disease. This year the Group has been buffeted by the worldwide spread of COVID-19, and among the things that have had a major impact have been the sus- pension of operations at certain plants located outside of Japan, product warehouses that have gone into lockdown, delayed logis- tics, and fallen sales. When the pandemic will abate remains unclear, and it is also difficult to predict to what extent the impact will be on the Group’s business activities. However, the Group has made securing the health and safety of its employees the top prior- ity, and has promoted working from home while pressing forward with efforts to bolster health management at work sites. Along with this, the Group has put in place various measures to minimize impact of the spread of the pandemic, and in line with dissipation, intends to swiftly recover business activities. In the event the Group should be hit with the aforementioned natural disasters or the spread of contagious disease, there is a possibility of an impact on the Group’s financial situation or man- agement performance. mation security systems, thoroughly controlling confidential notifications, restricting external access, maintaining internal regu- lations, and conducting education and training. However, in the event such situations were to occur, there may be requirements to pay large-scale damages or fines. Moreover, the payment of enor- mous countermeasure costs has the potential to impact the Group’s financial situation and management performance. (3) Risks related to climate change and other environmental issues Based on the Group Philosophy to “Be a Company that Leads in Applying Environmentally Friendly Practices,” the Daikin Group develops and spreads energy-conserving, high-efficiency air condi- tioners and refrigerants with lower global warming potential, and generates solutions for the efficient use of energy throughout entire buildings. In this way it is taking aggressive action to curb green- house gas (CO2, fluorocarbons) emissions, and to protect the global environment. However, given deepening global environmental prob- lems, in the event that regulations covering use and emissions of greenhouse effect-causing refrigerant gas, and regulations pertain- ing to energy conservation become more stringent, there is a possi- bility of increased costs necessary to adhere to such regulations. In addition, in the event that taking a sufficient response to these regu- lations is difficult and delays occur, product sales may be hindered, and there may be an impact on smooth business operations. In addition, The Daikin Group takes every possible measure to prevent environmental pollution from our business activities, including not only compliance with regulations but also the estab- lishment of even stricter voluntary standards. However, in the event that chemical substances released by the Group effectively give rise to environmental problems, it will be necessary to respond by undertaking purification treatment, paying damages, and other measures, and it is possible that costs will be incurred to address such situations. The emergence of such risks entails a possibility of an impact on the Group’s financial situation and management performance. (4) Others  Impairment of long-lived assets The Daikin Group records various tangible and intangible long-lived assets, including assets used in operations and goodwill arising from acquisitions. These assets are assessed for any indication of impairment loss. If there is an indication of impairment, steps are taken to estimate the total amount of undiscounted future cash flows to determine the existence of loss. The undiscounted future cash flows required to make these determinations are based on management plans and are estimated after factoring in future uncertainties. If an impairment loss is recognized in the future due to fluctuations in business performance or other factors, the finan- cial position and results of operations of the Group may be affect- ed. Meanwhile, the Group monitors its performance on an ongoing basis and strives to take action before it becomes difficult to recover investments.  Natural disasters, etc. The Daikin Group possesses R&D, manufacturing, sales, and service bases around the world. In recent years, Japan has experienced Annual Report 2020 59 Consolidated Balance Sheet Consolidated Balance Sheet Daikin Industries, Ltd. and Consolidated Subsidiaries Daikin Industries, Ltd. and Consolidated Subsidiaries March 31, 2020 March 31, 2020 ASSETS 2020 2019 LIABILITIES AND EQUITY 2020 2019 LIABILITIES AND EQUITY 2020 2019 Millions of Yen Millions of Yen Millions of Yen CURRENT ASSETS: CURRENT LIABILITIES: CURRENT LIABILITIES: PROPERTY, PLANT AND EQUIPMENT: PROPERTY, PLANT AND EQUIPMENT: Total current liabilities Total current liabilities 693,958 768,816 693,958 768,816 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 Land Buildings and structures Machinery and equipment Furniture and fixtures Lease assets (Note 15) Construction in progress Total Accumulated depreciation INVESTMENTS AND OTHER ASSETS: Investment securities (Notes 5, 8 and 16) 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 ¥ 367,189 592 ¥ 321,152 Cash and cash equivalents (Notes 8 and 16) 49,641 Short-term investments (Note 16) Trade receivables (Notes 7, 8 and 16): 48,613 Notes 392,142 Accounts (10,562 ) Allowance for doubtful receivables 433,783 69,658 Inventories (Note 3) Prepaid expenses and other current assets 58,725 389,106 (9,148 ) 436,358 74,783 1,304,427 Total current assets 1,317,605 Short-term borrowings (Notes 8 and 16) ¥ 321,152 Current portion of long-term debt (Notes 8 and 16) 49,641 Current portion of long-term lease obligations (Note 15) Trade payables (Note 16): ¥ 367,189 592 Notes Accounts 48,613 392,142 (10,562 ) Income taxes payable (Note 16) 433,783 Provision for product warranties 69,658 Accrued expenses (Note 7) Other current liabilities (Note 7) 1,304,427 58,725 389,106 (9,148 ) 436,358 74,783 1,317,605 56,891 Land 444,781 Buildings and structures 631,138 Machinery and equipment 193,840 Furniture and fixtures Lease assets (Note 15) 3,614 Construction in progress 46,120 Total 1,376,384 (796,403 ) Accumulated depreciation 43,492 374,356 582,500 200,912 3,427 34,824 1,239,511 (756,548 ) 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 56,891 444,781 631,138 193,840 3,614 46,120 1,376,384 (796,403 ) 43,492 374,356 582,500 200,912 3,427 34,824 1,239,511 (756,548 ) 157,329 EQUITY (Notes 10, 11 and 21): 157,329 17,439 companies 281,969 Goodwill (Note 6) Customer relationships 169,766 90,921 Other intangible assets 26,794 Deferred tax assets (Notes 2 and 12) Assets for retirement benefits (Note 9) 12,885 26,002 Other assets 198,698 Investment securities (Notes 5, 8 and 16) Common stock - authorized 500,000,000 shares; issued 293,113,973 shares Investments in and advances to unconsolidated subsidiaries and associated Capital surplus 24,647 24,647 17,439 Stock acquisition rights 322,319 322,319 281,969 Retained earnings 189,365 189,365 169,766 Treasury stock, at cost: 529,837 shares in 2020 and 605,740 shares in 2019 106,457 106,457 90,921 Accumulated other comprehensive income (loss): 25,057 25,057 26,794 Unrealized gains on available-for-sale securities 14,510 14,510 12,885 Deferred gains on derivatives under hedge accounting 19,270 19,270 26,002 Foreign currency translation adjustments Remeasurements of defined benefit plans 900,323 783,105 783,105 Total investments and other assets 900,323 198,698 ¥ 48,938 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): ¥ 146,066 105,900 92,386 17,301 1,242 Notes Accounts 10,007 179,837 19,894 Income taxes payable (Note 16) Provision for product warranties Accrued expenses (Note 7) Other current liabilities (Note 7) 117,162 142,069 52,850 14,541 189,994 25,576 52,602 135,180 111,229 Millions of Yen 2020 2019 ¥ 48,938 105,900 17,301 ¥ 146,066 92,386 1,242 10,007 179,837 19,894 52,850 142,069 117,162 323,185 58,483 13,219 90,087 25,990 85,032 83,899 1,887 29,765 (2,797 ) (5,052 ) (7,687 ) 14,541 189,994 25,576 52,602 135,180 111,229 335,989 9,959 11,098 101,956 26,223 85,032 83,650 1,721 57,686 619 63,808 (5,232 ) 1,254,073 1,133,101 (2,265 ) (2,589 ) 1,254,073 1,133,101 (2,265 ) (2,589 ) 85,032 83,899 1,887 29,765 (2,797 ) (5,052 ) (7,687 ) 85,032 83,650 1,721 57,686 619 63,808 (5,232 ) Common stock - authorized 500,000,000 shares; issued 293,113,973 shares Capital surplus Stock acquisition rights Retained earnings Treasury stock, at cost: 529,837 shares in 2020 and 605,740 shares in 2019 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 LONG-TERM LIABILITIES: 323,185 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 90,087 58,483 13,219 25,990 335,989 101,956 26,223 11,098 9,959 EQUITY (Notes 10, 11 and 21): Net property, plant and equipment 579,981 Net property, plant and equipment 482,963 Total long-term liabilities 579,981 482,963 Total long-term liabilities 510,964 485,225 510,964 485,225 COMMITMENTS AND CONTINGENT LIABILITIES (Notes 15 and 17) COMMITMENTS AND CONTINGENT LIABILITIES (Notes 15 and 17) INVESTMENTS AND OTHER ASSETS: Investments in and advances to unconsolidated subsidiaries and associated TOTAL TOTAL ¥ 2,667,513 ¥ 2,700,891 TOTAL ¥ 2,667,513 ¥ 2,700,891 TOTAL ¥ 2,667,513 ¥ 2,700,891 ¥ 2,667,513 ¥ 2,700,891 Subtotal Noncontrolling interests Total equity 1,436,855 Subtotal 1,417,796 Noncontrolling interests 25,736 29,054 1,462,591 Total equity 1,446,850 1,436,855 1,417,796 25,736 29,054 1,462,591 1,446,850 See notes to consolidated financial statements. See notes to consolidated financial statements. - 4 - - 4 - 60 PROPERTY, PLANT AND EQUIPMENT: PROPERTY, PLANT AND EQUIPMENT: Total current liabilities 693,958 768,816 Total current liabilities 693,958 768,816 Daikin Industries, Ltd. and Consolidated Subsidiaries Daikin Industries, Ltd. and Consolidated Subsidiaries March 31, 2020 Millions of Yen 2020 ASSETS 2019 LIABILITIES AND EQUITY 2020 2019 2020 LIABILITIES AND EQUITY 2019 Millions of Yen Millions of Yen CURRENT ASSETS: CURRENT LIABILITIES: ¥ 321,152 Cash and cash equivalents (Notes 8 and 16) ¥ 367,189 Short-term borrowings (Notes 8 and 16) ¥ 321,152 ¥ 367,189 ¥ 49,641 Short-term investments (Note 16) 592 Current portion of long-term debt (Notes 8 and 16) 49,641 592 Trade receivables (Notes 7, 8 and 16): Current portion of long-term lease obligations (Note 15) 48,613 392,142 (10,562 ) 433,783 69,658 Notes 58,725 Accounts 389,106 Trade payables (Note 16): Notes Allowance for doubtful receivables (9,148 ) Accounts Inventories (Note 3) 436,358 Income taxes payable (Note 16) Prepaid expenses and other current assets Provision for product warranties 74,783 Accrued expenses (Note 7) 48,613 392,142 (10,562 ) 433,783 69,658 58,725 389,106 (9,148 ) 436,358 74,783 Total current assets 1,304,427 1,317,605 Total current assets Other current liabilities (Note 7) 1,304,427 1,317,605 March 31, 2020 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 Land Buildings and structures Machinery and equipment Furniture and fixtures Lease assets (Note 15) Construction in progress Total Accumulated depreciation INVESTMENTS AND OTHER ASSETS: Investment securities (Notes 5, 8 and 16) companies Goodwill (Note 6) Customer relationships Other intangible assets Deferred tax assets (Notes 2 and 12) Assets for retirement benefits (Note 9) Other assets 56,891 444,781 631,138 193,840 3,614 46,120 Land 43,492 Buildings and structures 374,356 LONG-TERM LIABILITIES: Machinery and equipment 582,500 Long-term debt (Notes 8 and 16) Furniture and fixtures 200,912 Lease assets (Note 15) 3,427 Construction in progress 34,824 Long-term lease obligations (Note 15) Liabilities for retirement benefits (Note 9) Deferred tax liabilities (Notes 2 and 12) Other long-term liabilities 1,376,384 1,239,511 Total (796,403 ) Accumulated depreciation (756,548 ) 56,891 444,781 631,138 193,840 3,614 46,120 43,492 374,356 582,500 200,912 3,427 34,824 1,376,384 1,239,511 (796,403 ) (756,548 ) Investments in and advances to unconsolidated subsidiaries and associated Investments in and advances to unconsolidated subsidiaries and associated Total investments and other assets 783,105 900,323 Total investments and other assets Remeasurements of defined benefit plans 783,105 900,323 17,439 281,969 169,766 90,921 26,794 12,885 26,002 companies 24,647 Goodwill (Note 6) 322,319 Customer relationships 189,365 Other intangible assets 106,457 Capital surplus Stock acquisition rights Retained earnings Treasury stock, at cost: 529,837 shares in 2020 and 605,740 shares in 2019 106,457 90,921 Deferred tax assets (Notes 2 and 12) 25,057 Accumulated other comprehensive income (loss): 26,794 Assets for retirement benefits (Note 9) 14,510 Unrealized gains on available-for-sale securities 12,885 Other assets 19,270 Deferred gains on derivatives under hedge accounting 26,002 Foreign currency translation adjustments 17,439 281,969 169,766 24,647 322,319 189,365 25,057 14,510 19,270 Subtotal Noncontrolling interests Total equity TOTAL ¥ 2,667,513 TOTAL ¥ 2,700,891 TOTAL ¥ 2,667,513 ¥ 2,700,891 See notes to consolidated financial statements. See notes to consolidated financial statements. Common stock - authorized 500,000,000 shares; issued 293,113,973 shares 48,938 105,900 17,301 CURRENT LIABILITIES: ¥ 146,066 92,386 1,242 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): 10,007 179,837 19,894 52,850 142,069 117,162 Notes Accounts 14,541 189,994 25,576 52,602 135,180 111,229 Income taxes payable (Note 16) Provision for product warranties Accrued expenses (Note 7) Other current liabilities (Note 7) Millions of Yen 2020 2019 ¥ 48,938 105,900 17,301 ¥ 146,066 92,386 1,242 10,007 179,837 19,894 52,850 142,069 117,162 14,541 189,994 25,576 52,602 135,180 111,229 323,185 58,483 13,219 90,087 25,990 LONG-TERM LIABILITIES: 335,989 9,959 11,098 101,956 26,223 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 323,185 58,483 13,219 90,087 25,990 335,989 9,959 11,098 101,956 26,223 85,032 83,899 1,887 1,254,073 (2,265 ) 29,765 (2,797 ) (5,052 ) (7,687 ) 1,436,855 25,736 1,462,591 85,032 Common stock - authorized 500,000,000 shares; issued 293,113,973 shares 83,650 Capital surplus Stock acquisition rights 1,721 Retained earnings 1,133,101 Treasury stock, at cost: 529,837 shares in 2020 and 605,740 shares in 2019 (2,589 ) Accumulated other comprehensive income (loss): 85,032 83,899 1,887 1,254,073 (2,265 ) Unrealized gains on available-for-sale securities Deferred gains on derivatives under hedge accounting Foreign currency translation adjustments Remeasurements of defined benefit plans 57,686 619 63,808 (5,232 ) Subtotal 1,417,796 Noncontrolling interests 29,054 1,446,850 Total equity 29,765 (2,797 ) (5,052 ) (7,687 ) 1,436,855 25,736 1,462,591 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 ¥ 2,667,513 TOTAL ¥ 2,700,891 Net property, plant and equipment 579,981 482,963 Net property, plant and equipment 579,981 482,963 Total long-term liabilities 510,964 485,225 Total long-term liabilities 510,964 485,225 INVESTMENTS AND OTHER ASSETS: 157,329 Investment securities (Notes 5, 8 and 16) 198,698 EQUITY (Notes 10, 11 and 21): 157,329 198,698 EQUITY (Notes 10, 11 and 21): COMMITMENTS AND CONTINGENT LIABILITIES (Notes 15 and 17) COMMITMENTS AND CONTINGENT LIABILITIES (Notes 15 and 17) - 4 - - 4 - ¥ 2,667,513 ¥ 2,700,891 Annual Report 2020 61 Consolidated Statement of Income Consolidated Statement of Income Daikin Industries, Ltd. and Consolidated Subsidiaries Year Ended March 31, 2020 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 gains (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 Losses on impairment of long-lived assets (Note 4) Gains on sales of investment securities (Note 5) Impairment losses on investment securities (Notes 5 and 16) Gains on reversal of stock acquisition rights Gains on insurance claims Losses from natural disasters Other – net Other expenses – net Millions of Yen 2020 2019 ¥ 2,550,305 ¥ 2,481,109 1,665,407 1,612,186 884,898 868,923 619,385 592,668 265,513 276,255 13,114 (11,008 ) 166 461 3,239 658 (454 ) (23,555 ) 10,810 (579 ) 25 255 (2,465 ) (9,333 ) 12,249 (11,852 ) 2,119 (4,848 ) 2,570 0 (803 ) (7 ) 40 (315 ) (679 ) 582 (944 ) INCOME BEFORE INCOME TAXES 256,180 275,311 INCOME TAXES (Note 12): Current Deferred Total income taxes NET INCOME NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS 81,132 (2,150 ) 77,607 2,039 78,982 79,646 177,198 195,665 (6,467 ) (6,616 ) NET INCOME ATTRIBUTABLE TO OWNERS OF THE PARENT ¥ 170,731 ¥ 189,049 AMOUNTS PER COMMON SHARE (Note 19): Basic net income Diluted net income Cash dividends applicable to the year See notes to consolidated financial statements. - 5 - 62 Yen ¥583.61 583.22 160.00 ¥646.39 645.95 160.00 Consolidated Statement of Comprehensive Income Consolidated Statement of Comprehensive Income Daikin Industries, Ltd. and Consolidated Subsidiaries Year Ended March 31, 2020 NET INCOME OTHER COMPREHENSIVE LOSS (Note 18): Unrealized losses on available-for-sale securities Deferred losses on derivatives under hedge accounting Foreign currency translation adjustments Remeasurements of defined benefit plans Share of other comprehensive loss in affiliates accounted for using the equity method Total other comprehensive loss COMPREHENSIVE INCOME TOTAL COMPREHENSIVE INCOME ATTRIBUTABLE TO: Owners of the parent Noncontrolling interests See notes to consolidated financial statements. Millions of Yen 2020 2019 ¥ 177,198 ¥ 195,665 (27,921 ) (3,416 ) (69,587 ) (2,457 ) (16,899 ) (109 ) (8,109 ) 448 (495 ) (103,876 ) (1,167 ) (25,836 ) ¥ 73,322 ¥ 169,829 ¥68,079 5,243 ¥163,451 6,378 - 6 - Annual Report 2020 63 Consolidated Statement of Changes in Equity Consolidated Statement of Changes in Equity Daikin Industries, Ltd. and Consolidated Subsidiaries Daikin Industries, Ltd. and Consolidated Subsidiaries Year Ended March 31, 2020 Year Ended March 31, 2020 Outstanding Number of Common Shares Issued Common Stock Capital Surplus Outstanding Number of Stock Common Acquisition Shares Issued Rights Retained Common Stock Earnings Treasury Capital Surplus Stock Unrealized Stock Gains on Available-for- Acquisition Rights Sale Securities Foreign Unrealized Currency Gains on Remeasurements Derivatives Remeasurements Foreign Currency Retained under Hedge Treasury Translation Available-for- of Defined Benefit under Hedge Translation Noncontrolling of Defined Benefit Noncontrolling Earnings Accounting Stock Adjustments Sale Securities Plans Accounting Total Adjustments Interests Plans Total Equity Total Interests Total Equity Accumulated Other Comprehensive Income (Loss) Accumulated Other Comprehensive Income (Loss) Millions of Yen Deferred Gains (Losses) on BALANCE, APRIL 1, 2018 BALANCE, APRIL 1, 2018 292,436,934 ¥ 85,032 ¥ 84,389 ¥ 1,511 292,436,934 ¥ 987,547 ¥ 85,032 ¥ (2,894 ) ¥ 84,389 ¥ 1,511 ¥ 74,586 ¥ 987,547 ¥ 728 ¥ (2,894 ) ¥ 72,834 ¥ 74,586 ¥ (5,669 ) ¥ 728 ¥ 1,298,064 ¥ 72,834 ¥ 26,258 ¥ (5,669 ) ¥ 1,324,322 ¥ 1,298,064 ¥ 26,258 ¥ 1,324,322 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 BALANCE, MARCH 31, 2019 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 BALANCE, MARCH 31, 2020 Net income Cash dividends, ¥160 per share Effect of change of the fiscal year-end of certain consolidated subsidiaries (Note 2.a) (201 ) 71,500 Repurchase of treasury stock Disposal of treasury stock Change in parent's ownership interest 178 due to transactions with noncontrolling interests (917 ) 189,049 (42,407 ) (1,088 ) (201 ) 71,500 (2 ) 178 307 (917 ) Net change in the year 210 210 (16,900 ) (109 ) (9,026 ) (16,900 ) 437 (109 ) (25,388 ) (9,026 ) 2,796 437 (22,592 ) (25,388 ) 2,796 BALANCE, MARCH 31, 2019 292,508,233 85,032 83,650 292,508,233 1,721 1,133,101 85,032 (2,589 ) 83,650 1,721 57,686 1,133,101 619 (2,589 ) 63,808 57,686 (5,232 ) 619 1,417,796 63,808 29,054 (5,232 ) 1,446,850 1,417,796 29,054 1,446,850 Net income Cash dividends, ¥160 per share Effect of change of the fiscal year-end of certain consolidated subsidiaries (Note 2.a) (97 ) 76,000 Repurchase of treasury stock Disposal of treasury stock Change in parent's ownership interest 287 due to transactions with noncontrolling interests (38 ) 170,731 (49,731 ) (28 ) (97 ) 76,000 (2 ) 287 326 (38 ) Net change in the year 166 166 (27,921 ) (3,416 ) (68,860 ) (27,921 ) (2,455 ) (3,416 ) (102,486 ) (68,860 ) (3,318 ) (2,455 ) (105,804 ) (102,486 ) (3,318 ) BALANCE, MARCH 31, 2020 292,584,136 ¥ 85,032 ¥ 83,899 ¥ 1,887 292,584,136 ¥ 1,254,073 ¥ 85,032 ¥ (2,265 ) ¥ 83,899 ¥ 1,887 ¥ 29,765 ¥ 1,254,073 ¥ (2,797 ) ¥ (2,265 ) ¥ (5,052 ) ¥ 29,765 ¥ (7,687 ) ¥ (2,797 ) ¥ 1,436,855 ¥ (5,052 ) ¥ 25,736 ¥ (7,687 ) ¥ 1,462,591 ¥ 1,436,855 ¥ 25,736 ¥ 1,462,591 Millions of Yen Deferred Gains (Losses) on Derivatives 189,049 (42,407 ) (1,088 ) 170,731 (49,731 ) (28 ) (2 ) 307 (2 ) 326 189,049 (42,407 ) (1,088 ) (2 ) 485 (917 ) (28 ) (2 ) 613 (38 ) 189,049 189,049 (42,407 ) (42,407 ) (1,088 ) (1,088 ) (2 ) 485 (2 ) 485 (917 ) (917 ) (28 ) (2 ) 613 (28 ) (2 ) 613 (38 ) (38 ) 170,731 (49,731 ) 170,731 170,731 (49,731 ) (49,731 ) 189,049 (42,407 ) (1,088 ) (2 ) 485 (917 ) (22,592 ) 170,731 (49,731 ) (28 ) (2 ) 613 (38 ) (105,804 ) See notes to consolidated financial statements. See notes to consolidated financial statements. 64 - 7 - - 7 - Daikin Industries, Ltd. and Consolidated Subsidiaries Daikin Industries, Ltd. and Consolidated Subsidiaries Year Ended March 31, 2020 Year Ended March 31, 2020 Outstanding Outstanding Number of Number of Stock Stock Common Common Common Common Capital Capital Acquisition Acquisition Shares Issued Shares Issued Stock Stock Surplus Surplus Rights Rights Retained Earnings Retained Earnings Treasury Treasury Stock Stock Millions of Yen Millions of Yen Accumulated Other Comprehensive Income (Loss) Accumulated Other Comprehensive Income (Loss) Unrealized Unrealized Gains on Gains on Available-for- Available-for- Sale Securities Sale Securities Deferred Gains Deferred Gains (Losses) on (Losses) on Derivatives Derivatives under Hedge under Hedge Accounting Accounting Foreign Foreign Currency Currency Translation Translation Adjustments Adjustments Remeasurements of Defined Benefit Plans Remeasurements of Defined Benefit Plans Total Total Noncontrolling Noncontrolling Interests Interests Total Equity Total Equity BALANCE, APRIL 1, 2018 BALANCE, APRIL 1, 2018 292,436,934 292,436,934 ¥ 85,032 ¥ 85,032 ¥ 84,389 ¥ 84,389 ¥ 1,511 ¥ 1,511 BALANCE, MARCH 31, 2019 BALANCE, MARCH 31, 2019 292,508,233 292,508,233 85,032 85,032 83,650 83,650 1,721 1,721 Net income Net income Cash dividends, ¥160 per share Cash dividends, ¥160 per share Effect of change of the fiscal year-end Effect of change of the fiscal year-end of certain consolidated subsidiaries of certain consolidated subsidiaries (Note 2.a) (Note 2.a) Repurchase of treasury stock Repurchase of treasury stock Disposal of treasury stock Disposal of treasury stock Change in parent's ownership interest Change in parent's ownership interest due to transactions with due to transactions with noncontrolling interests noncontrolling interests Net change in the year Net change in the year Net income Net income Cash dividends, ¥160 per share Cash dividends, ¥160 per share Effect of change of the fiscal year-end Effect of change of the fiscal year-end of certain consolidated subsidiaries of certain consolidated subsidiaries (Note 2.a) (Note 2.a) Repurchase of treasury stock Repurchase of treasury stock Disposal of treasury stock Disposal of treasury stock Change in parent's ownership interest Change in parent's ownership interest due to transactions with due to transactions with noncontrolling interests noncontrolling interests Net change in the year Net change in the year (201 ) (201 ) 71,500 71,500 (97 ) (97 ) 76,000 76,000 178 178 (917 ) (917 ) 287 287 (38 ) (38 ) BALANCE, MARCH 31, 2020 BALANCE, MARCH 31, 2020 292,584,136 292,584,136 ¥ 85,032 ¥ 85,032 ¥ 83,899 ¥ 83,899 ¥ 1,887 ¥ 1,887 See notes to consolidated financial statements. See notes to consolidated financial statements. ¥ 987,547 ¥ 987,547 ¥ (2,894 ) ¥ (2,894 ) ¥ 74,586 ¥ 74,586 ¥ 728 ¥ 728 ¥ 72,834 ¥ 72,834 ¥ (5,669 ) ¥ (5,669 ) ¥ 1,298,064 ¥ 1,298,064 ¥ 26,258 ¥ 26,258 ¥ 1,324,322 ¥ 1,324,322 189,049 189,049 (42,407 ) (42,407 ) (1,088 ) (1,088 ) (2 ) (2 ) 307 307 189,049 189,049 (42,407 ) (42,407 ) (1,088 ) (1,088 ) (2 ) (2 ) 485 485 189,049 (42,407 ) 189,049 (42,407 ) (1,088 ) (1,088 ) (2 ) (2 ) 485 485 210 210 (16,900 ) (16,900 ) (109 ) (109 ) (9,026 ) (9,026 ) 437 437 (917 ) (917 ) (25,388 ) (25,388 ) 2,796 2,796 (917 ) (917 ) (22,592 ) (22,592 ) 1,133,101 1,133,101 (2,589 ) (2,589 ) 170,731 170,731 (49,731 ) (49,731 ) (28 ) (28 ) (2 ) (2 ) 326 326 57,686 57,686 619 619 63,808 63,808 (5,232 ) (5,232 ) 1,417,796 1,417,796 29,054 29,054 1,446,850 1,446,850 170,731 170,731 (49,731 ) (49,731 ) 170,731 (49,731 ) 170,731 (49,731 ) (28 ) (2 ) (28 ) (2 ) 613 613 (28 ) (28 ) (2 ) (2 ) 613 613 166 166 (27,921 ) (27,921 ) (3,416 ) (3,416 ) (68,860 ) (68,860 ) (2,455 ) (2,455 ) (38 ) (38 ) (102,486 ) (102,486 ) (3,318 ) (3,318 ) (38 ) (38 ) (105,804 ) (105,804 ) ¥ 1,254,073 ¥ 1,254,073 ¥ (2,265 ) ¥ (2,265 ) ¥ 29,765 ¥ 29,765 ¥ (2,797 ) ¥ (2,797 ) ¥ (5,052 ) ¥ (5,052 ) ¥ (7,687 ) ¥ (7,687 ) ¥ 1,436,855 ¥ 1,436,855 ¥ 25,736 ¥ 25,736 ¥ 1,462,591 ¥ 1,462,591 - 7 - - 7 - Annual Report 2020 65 Consolidated Statement of Cash Flows Consolidated Statement of Cash Flows Daikin Industries, Ltd. and Consolidated Subsidiaries Year Ended March 31, 2020 OPERATING ACTIVITIES: Income before income taxes Adjustments for: Income taxes – paid Depreciation and amortization Losses on impairment of long-lived assets Gains on sales of investment securities Impairment losses on investment securities Losses on disposals of property, plant and equipment and other intangible assets Equity in earnings of 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 Payments for transfer of business Payments for acquisition of investment securities Proceeds from sales of investment securities (Note 5) Net increase in time deposits Other – net Net cash used in investing activities FINANCING ACTIVITIES: Net (decrease) increase 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 Repayments of lease obligations Other – net Net cash used in financing activities EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR DECREASE IN CASH AND CASH EQUIVALENTS RESULTING FROM EXCLUSION OF SUBSIDIARIES FROM CONSOLIDATION 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. - 8 - Millions of Yen 2020 2019 ¥ 256,180 ¥ 275,311 (87,360 ) 128,486 23,555 (10,810 ) 579 454 (166 ) 591 (14,315 ) (1,624 ) 1,695 (6,365 ) 11,347 6,223 2,606 (8,909 ) 45,987 302,167 (98,095 ) 3,963 (13,190 ) (99 ) (1,595 ) 22,585 (52,908 ) (16,848 ) (156,187 ) (93,943 ) 102,562 (98,196 ) (49,731 ) (9,859 ) (20,919 ) 152 (169,934 ) (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 (85,487 ) 1,822 (67,932 ) 21 48 (80 ) (6,161 ) (1,444 ) 47 (592 ) (6,015 ) (165,773 ) 100,640 (118,172 ) (42,407 ) (4,414 ) (1,520 ) (2,848 ) (68,721 ) (22,029 ) (5,286 ) (45,983 ) 10,229 367,189 357,027 (47 ) (7 ) (67 ) ¥ 321,152 ¥ 367,189 66 Notes to Consolidated Financial Statements Notes to Consolidated Financial Statements Daikin Industries, Ltd. and Consolidated Subsidiaries Year Ended March 31, 2020 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 2019 consolidated financial statements to conform to the classifications used in 2020. 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 313 (291 in 2019) 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 20 (19 in 2019) 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 9 (10 in 2019) subsidiaries and 9 (9 in 2019) 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, 2020, Tewis Smart Systems, S.L. changed its fiscal year-end from December 31 to March 31. The Company included the subsidiary's 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 subsidiary. 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. - 9 - Annual Report 2020 67 Notes to Consolidated Financial Statements 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; (d) cancellation of the fair value model of accounting for property, plant and equipment and investment properties and incorporation of the cost model of accounting; and (e) recording a gain or loss through profit or loss on the sale of an investment in an equity instrument for the difference between the acquisition cost and selling price, and recording impairment loss through profit or loss for other-than-temporary declines in the fair value of an investment in an equity instrument, where a foreign subsidiary elects to present in other comprehensive income subsequent changes in the fair value of an investment in an equity instrument. 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; (d) cancellation of the fair value model of accounting for property, plant and equipment and investment properties and incorporation of the cost model of accounting; and (e) recording a gain or loss through profit or loss on the sale of an investment in an equity instrument for the difference between the acquisition cost and selling price, and recording impairment loss through profit or loss for other- than-temporary declines in the fair value of an investment in an equity instrument, where a foreign associate elects to present in other comprehensive income subsequent changes in the fair value of an investment in an equity instrument. 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. - 10 - 68 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 – Non-ownership finance lease transactions and right-of-use assets within the scope of IFRS 16 "Leases" and Accounting Standards Update (ASU) 2016-02 "Leases" are capitalized by recognizing lease assets and lease obligations in the consolidated balance sheet. All other leases are accounted for as operating leases. - 11 - Annual Report 2020 69 Notes to Consolidated Financial Statements From the beginning of the fiscal year ended March 31, 2020, the foreign consolidated subsidiaries have applied "Leases" (IFRS 16, January 13, 2016; ASU 2016-02, February 25, 2016). Following the application of these accounting standards, as of March 31, 2020, "property, plant and equipment" increased by ¥63,099 million, "current portion of long-term lease obligations" under "current liabilities" increased by ¥15,951 million, and "long-term lease obligations" under "non-current liabilities" increased by ¥48,129 million. In addition, ¥12,257 million of leasehold interests in land hitherto included in "other intangible assets" under "intangible assets" have been included in "land" under "property, plant and equipment" from fiscal year under review. l. Investment Securities – All marketable securities held by the Group are classified as available-for-sale securities and are reported at fair value, with unrealized gains and losses, net of applicable taxes, reported in a separate component of equity. The cost of securities sold is principally determined based on the moving-average method. Non-marketable available-for-sale securities are stated at cost, principally determined by the moving-average method. For other-than-temporary declines in fair value, available-for-sale securities are reduced to net realizable value by charging such losses to income. m. Goodwill and Intangible Assets – Goodwill and intangible assets arise principally from business combinations. Goodwill represents the excess of the purchase price over the fair value of the identifiable net assets acquired. Goodwill is amortized over a period of 6 to 20 years. Intangible assets primarily include customer relationships. Customer relationships are amortized using the straight-line method over the estimated useful lives (mainly 30 years). n. Provision for Product Warranties – The Group repairs or exchanges certain products without charge under specific circumstances. The provision for product warranties is stated in amounts considered to be appropriate based on 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. - 12 - 70 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. With regard to the items for which a review of the non-consolidated taxation system was made in accordance with the transition to the group tax sharing system established under the "Act for Partial Revision of the Income Tax Act, etc." (Act No. 8 of 2020) and the transition to the group tax sharing system, pursuant to the treatment of Paragraph 3 of "Practical Solution on the Treatment of Tax Effect Accounting for the Transition from the Consolidated Taxation System to the Group Tax Sharing System" (PITF No. 39, March 31, 2020), the provisions of Paragraph 44 of "Implementation Guidance on Tax Effect Accounting" (ASBJ Guidance No. 28, February 16, 2018) do not apply to the Company and some domestic subsidiaries, and the amounts of deferred tax assets and deferred tax liabilities are based on the provisions of the tax law before amendment. 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 income per share 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). - 13 - Annual Report 2020 71 Notes to Consolidated Financial Statements 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. Fair Value Measurement – On July 4, 2019, the ASBJ issued ASBJ Statement No. 30, "Accounting Standard for Fair Value Measurement" and ASBJ Guidance No. 31, "Implementation Guidance on Accounting Standard for Fair Value Measurement," and revised related ASBJ Statements and ASBJ Guidance (the "New Accounting Standards"). Under the New Accounting Standards, non-marketable available-for-sale equity securities are stated at fair value, while under the current accounting standards, non-marketable available-for-sale securities are stated at cost. The Group expects to apply the New Accounting Standards for annual periods beginning on April 1, 2021, and is in the process of measuring the effects of applying the Standards in future applicable periods. x. Additional Information Decline in demand due to worldwide expansion of new coronavirus (COVID-19) infectious disease and effects of regulations on economic activity have now manifested. It is unclear when the spread of infection will end and when demand will recover after it ends. Although it is difficult to predict the extent of the impact on our Group's business activities, the Company made accounting estimates such as impairment of long-lived assets based on the assumption that the impact of COVID-19 will generally continue into the first half of the following fiscal year. 3. INVENTORIES Inventories at March 31, 2020 and 2019 consisted of the following: Finished products and merchandise Semi-finished products and work in process Raw materials and supplies Total Millions of Yen 2020 2019 ¥ 292,580 49,686 91,517 ¥ 293,446 50,746 92,166 ¥ 433,783 ¥ 436,358 - 14 - 72 4. LONG-LIVED ASSETS The Group recognized impairment losses for the year ended March 31, 2020. The details were as follows: March 31, 2020 Use Location Asset Category Millions of Yen Other Business use North Carolina, United States Goodwill Customer relationships ¥ 12,965 10,590 Total ¥ 23,555 At Flanders Holdings LLC, a consolidated subsidiary engaged in the manufacture and sale of filter and clean equipment, goodwill and customer relationships were recorded upon the acquisition of equity interest based on anticipated excess earnings. However, the business conducted by the subsidiary is under-performing compared with the business plan established at the time of the acquisition despite the subsidiary's efforts to strengthen its production and sales structure. As a result of the conservative review of its medium-term business plan, the book value has been reduced to the recoverable value, and the amount of such reduction has been recognized as impairment losses. The recoverable amounts of these assets were measured by value in use, and the discount rate used to determine the present value of future cash flows was 8.8%. No impairment loss was recognized for the year ended March 31, 2019. 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, 2020 and 2019 were as follows: Securities classified as available-for-sale: Equity securities Debt securities Millions of Yen 2020 Cost Unrealized Gains Unrealized Losses Fair Value ¥ 98,394 300 ¥ 46,087 ¥ (6,299 ) ¥ 138,182 300 Total ¥ 98,694 ¥ 46,087 ¥ (6,299 ) ¥ 138,482 Securities classified as available-for-sale: Equity securities Debt securities Millions of Yen 2019 Cost Unrealized Gains Unrealized Losses Fair Value ¥ 110,707 300 ¥ 79,198 ¥ (2,340 ) ¥ 187,565 300 Total ¥ 111,007 ¥ 79,198 ¥ (2,340 ) ¥ 187,865 - 15 - Annual Report 2020 73 Marketable available-for-sale securities that were sold during the year ended March 31, 2020 were as follows: Marketable available-for-sale securities that were sold during the year ended March 31, 2020 were as follows: Millions of Yen March 31, 2020 March 31, 2020 Available-for-sale: Equity securities Available-for-sale: Realized Realized Proceeds Millions of Yen Gains Losses Proceeds ¥22,585 Realized Gains ¥10,810 Realized Losses There were no marketable available-for-sale securities that were sold during the year ended March 31, 2019. Equity securities ¥10,810 ¥22,585 Notes to Consolidated Financial Statements Marketable available-for-sale securities that were sold during the year ended March 31, 2020 were as follows: Marketable available-for-sale securities that were sold during the year ended March 31, 2020 were as follows: March 31, 2020 Proceeds Marketable available-for-sale securities that were sold during the year ended March 31, 2020 were as follows: March 31, 2020 Available-for-sale: Millions of Yen Realized Millions of Yen Gains Realized Gains ¥10,810 Millions of Yen ¥10,810 Realized Gains Realized Losses Realized Losses Realized Losses Proceeds ¥22,585 ¥22,585 Proceeds There were no marketable available-for-sale securities that were sold during the year ended March 31, 2019. Equity securities Equity securities Available-for-sale: March 31, 2020 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, 2020 and 2019 were ¥579 million and ¥44 million, respectively. 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, 2020 and 2019 were ¥579 million and ¥44 million, respectively. Available-for-sale: 6. GOODWILL The impairment losses on marketable available-for-sale securities for the years ended March 31, 2020 and 2019 were ¥579 million and ¥44 million, respectively. Equity securities ¥10,810 ¥22,585 The impairment losses on marketable available-for-sale securities for the years ended March 31, 2020 and 2019 were ¥579 million and ¥44 million, respectively. 6. GOODWILL There were no marketable available-for-sale securities that were sold during the year ended March 31, 2019. Amortization expenses for goodwill were ¥30,684 million and ¥26,992 million for the years ended March 31, 2020 and 2019, respectively, which were included in selling, general and administrative expenses. Amortization expenses for goodwill were ¥30,684 million and ¥26,992 million for the years ended March 31, 2020 and 2019, respectively, which were included in selling, general and administrative expenses. 7. RELATED PARTY TRANSACTIONS Amortization expenses for goodwill were ¥30,684 million and ¥26,992 million for the years ended March 31, 2020 and 2019, respectively, which were included in selling, general and administrative expenses. The impairment losses on marketable available-for-sale securities for the years ended March 31, 2020 and 2019 were ¥579 million and ¥44 million, respectively. Amortization expenses for goodwill were ¥30,684 million and ¥26,992 million for the years ended March 31, 2020 and 2019, respectively, which were included in selling, general and administrative expenses. 7. RELATED PARTY TRANSACTIONS 6. GOODWILL Material transactions and balances with related parties for the years ended March 31, 2020 and 2019 were as follows: 7. RELATED PARTY TRANSACTIONS Material transactions and balances with related parties for the years ended March 31, 2020 and 2019 were as follows: Material transactions and balances with related parties for the years ended March 31, 2020 and 2019 were as follows: (1) 2020 Material transactions and balances with related parties for the years ended March 31, 2020 and 2019 were as follows: Amortization expenses for goodwill were ¥30,684 million and ¥26,992 million for the years ended March 31, 2020 and 2019, respectively, which were included in selling, general and administrative expenses. (1) 2020 7. RELATED PARTY TRANSACTIONS (a) The Company (1) 2020 Material transactions and balances with related parties for the years ended March 31, 2020 and 2019 were as follows: (a) The Company Representative Director of Art Group delivery business Representative Director of Art Group delivery business (b) The Company's consolidated subsidiaries Name Millions of Yen Ownership of the Company (%) Ownership of the Transactions Description of Transaction Transactions (1) 2020 Transactions Name Description of Transaction Millions of Yen 2020 (a) The Company Name Chiyono Terada Transactions Commissions for moving business and Description of Transaction 2020 Chiyono Terada Commissions for moving business and Description of Post Resulting Account Balances Account Description of Post External Director/President and Resulting Account Balances Representative Director of Art Group Account ¥466 Accrued expenses and other External Director/President and Holdings, Co., Ltd. current liabilities Representative Director of Art Group ¥466 Accrued expenses and other Holdings, Co., Ltd. Description of Post current liabilities 2020 2020 ¥39 (b) The Company's consolidated subsidiaries External Director/President and Chiyono Terada Transactions Name Millions of Yen Description of Transaction Millions of Yen 2020 (b) The Company's consolidated subsidiaries Name Chiyono Terada Transactions Representative Director of Art Group Holdings, Co., Ltd. Description of Post Resulting Account Balances Account Description of Post External Director/President and Resulting Account Balances Representative Director of Art Group Account Accrued expenses and other Holdings, Co., Ltd. current liabilities Representative Director of Art Group Accrued expenses and other Holdings, Co., Ltd. Description of Post Accounts receivable current liabilities External Director/President and 2020 2020 ¥ 8 ¥ 8 44 Commissions for moving business and Description of Transaction 2020 ¥ 74 Chiyono Terada Commissions for moving business and Sales of products delivery business ¥ 74 332 Company (%) 0.00 Commissions for moving business and Description of Transaction 2020 ¥466 Accrued expenses and other Account 2020 ¥39 0.00 Commissions for moving business and delivery business Millions of Yen ¥466 Accrued expenses and other ¥39 current liabilities ¥39 Ownership of the delivery business Transactions current liabilities Resulting Account Balances Company (%) Description of Transaction 2020 Account 2020 0.00 Commissions for moving business and Millions of Yen ¥466 Accrued expenses and other ¥39 Ownership of the delivery business Transactions Company (%) Ownership of the Description of Transaction Transactions Company (%) 0.00 Commissions for moving business and Description of Transaction 2020 ¥ 74 Accrued expenses and other Account 2020 ¥ 8 delivery business 0.00 Ownership of the Commissions for moving business and Sales of products delivery business Transactions Millions of Yen Millions of Yen 2020 Resulting Account Balances Account 2020 Resulting Account Balances Millions of Yen 2020 current liabilities Resulting Account Balances Account 2020 Resulting Account Balances current liabilities Millions of Yen ¥ 74 Accrued expenses and other ¥ 8 332 Accounts receivable current liabilities Resulting Account Balances 44 2020 Account 332 Accounts receivable ¥ 74 Accrued expenses and other current liabilities 2020 44 ¥ 8 Representative Director of Art Group delivery business 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. Sales of products 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. Name Company (%) 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. 0.00 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. Sales of products Commissions for moving business and Description of Transaction Chiyono Terada 44 delivery business (2) 2019 External Director/President and Accounts receivable 332 Representative Director of Art Group Holdings, Co., Ltd. (2) 2019 (a) The Company Sales of products 332 Accounts receivable 44 6. GOODWILL 6. GOODWILL 7. RELATED PARTY TRANSACTIONS (1) 2020 (a) The Company (a) The Company Name Description of Post Chiyono Terada Name External Director/President and Description of Post Ownership of the Company (%) Ownership of the Company (%) 0.00 Chiyono Terada External Director/President and Holdings, Co., Ltd. 0.00 (b) The Company's consolidated subsidiaries Holdings, Co., Ltd. (b) The Company's consolidated subsidiaries Name Description of Post Chiyono Terada Name External Director/President and Description of Post Ownership of the Company (%) Ownership of the Company (%) 0.00 Chiyono Terada External Director/President and Holdings, Co., Ltd. 0.00 Representative Director of Art Group Holdings, Co., Ltd. (2) 2019 (2) 2019 (a) The Company (a) The Company Name Description of Post Chiyono Terada Name External Director/Chief Executive Officer Description of Post Company (%) 0.00 Chiyono Terada External Director/Chief Executive Officer 0.00 Ownership of the Company (%) Ownership of the (a) The Company 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. Millions of Yen Millions of Yen Ownership of the (2) 2019 Transactions Name Description of Transaction Millions of Yen 2019 (a) The Company Name Chiyono Terada Transactions Commissions for moving business and Description of Transaction 2019 Commissions for moving business and Chiyono Terada Name Description of Post Resulting Account Balances Account Description of Post External Director/Chief Executive Officer Resulting Account Balances (CEO) and President of Art Corporation Account ¥524 Accrued expenses and other External Director/Chief Executive Officer current liabilities ¥524 Accrued expenses and other (CEO) and President of Art Corporation Description of Post current liabilities 2019 2019 ¥47 Company (%) Ownership of the Transactions Description of Transaction Transactions Millions of Yen 2019 Resulting Account Balances Account 2019 Resulting Account Balances Company (%) 0.00 Commissions for moving business and Description of Transaction 2019 ¥524 Accrued expenses and other Account 2019 ¥47 0.00 Commissions for moving business and delivery business Millions of Yen ¥524 Accrued expenses and other ¥47 current liabilities ¥47 Ownership of the delivery business Transactions current liabilities Resulting Account Balances Company (%) Description of Transaction 2019 Account 2019 (CEO) and President of Art Corporation delivery business (CEO) and President of Art Corporation delivery business - 16 - - 16 - 74 Chiyono Terada External Director/Chief Executive Officer 0.00 Commissions for moving business and ¥524 Accrued expenses and other ¥47 (CEO) and President of Art Corporation delivery business - 16 - current liabilities - 16 - - 16 - Marketable available-for-sale securities that were sold during the year ended March 31, 2020 were as follows: Marketable available-for-sale securities that were sold during the year ended March 31, 2020 were as follows: Marketable available-for-sale securities that were sold during the year ended March 31, 2020 were as follows: March 31, 2020 March 31, 2020 March 31, 2020 Proceeds Gains Proceeds Proceeds Losses Gains Gains Millions of Yen Millions of Yen Millions of Yen Realized Realized Realized Realized Realized Realized Losses Losses Available-for-sale: Available-for-sale: Available-for-sale: Equity securities Equity securities Equity securities ¥22,585 ¥10,810 ¥22,585 ¥22,585 ¥10,810 ¥10,810 There were no marketable available-for-sale securities that were sold during the year ended March 31, 2019. There were no marketable available-for-sale securities that were sold during the year ended March 31, 2019. 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, 2020 and 2019 were ¥579 million and ¥44 million, respectively. The impairment losses on marketable available-for-sale securities for the years ended March 31, 2020 and 2019 were ¥579 million and ¥44 million, respectively. The impairment losses on marketable available-for-sale securities for the years ended March 31, 2020 and 2019 were ¥579 million and ¥44 million, respectively. Amortization expenses for goodwill were ¥30,684 million and ¥26,992 million for the years ended March 31, 2020 and 2019, respectively, which were included in selling, general and administrative expenses. Amortization expenses for goodwill were ¥30,684 million and ¥26,992 million for the years ended March 31, 2020 and 2019, respectively, which were included in selling, general and administrative expenses. Amortization expenses for goodwill were ¥30,684 million and ¥26,992 million for the years ended March 31, 2020 and 2019, respectively, which were included in selling, general and administrative expenses. Material transactions and balances with related parties for the years ended March 31, 2020 and 2019 were as follows: Material transactions and balances with related parties for the years ended March 31, 2020 and 2019 were as follows: Material transactions and balances with related parties for the years ended March 31, 2020 and 2019 were as follows: 6. GOODWILL 6. GOODWILL 6. GOODWILL 7. RELATED PARTY TRANSACTIONS 7. RELATED PARTY TRANSACTIONS 7. RELATED PARTY TRANSACTIONS (1) 2020 (1) 2020 (1) 2020 (a) The Company (a) The Company (a) The Company Millions of Yen Millions of Yen Millions of Yen Ownership of the Ownership of the Ownership of the Company (%) Company (%) Description of Transaction Transactions Transactions Transactions 2020 Description of Transaction Description of Transaction Resulting Account Balances 2020 2020 Account Account Account 2020 Resulting Account Balances Resulting Account Balances Commissions for moving business and delivery business delivery business 0.00 0.00 delivery business Commissions for moving business and Commissions for moving business and ¥466 Accrued expenses and other ¥466 Accrued expenses and other ¥466 Accrued expenses and other ¥39 current liabilities current liabilities current liabilities Millions of Yen Millions of Yen Millions of Yen Ownership of the Ownership of the Ownership of the Company (%) Company (%) Description of Transaction Transactions Transactions Transactions 2020 Description of Transaction Description of Transaction Resulting Account Balances 2020 2020 Account Account Account 2020 Resulting Account Balances Resulting Account Balances Name Name Name Description of Post Description of Post Description of Post Company (%) Chiyono Terada Chiyono Terada Chiyono Terada External Director/President and External Director/President and External Director/President and 0.00 Representative Director of Art Group Representative Director of Art Group Representative Director of Art Group Holdings, Co., Ltd. Holdings, Co., Ltd. Holdings, Co., Ltd. (b) The Company's consolidated subsidiaries (b) The Company's consolidated subsidiaries (b) The Company's consolidated subsidiaries Name Name Name Description of Post Description of Post Description of Post Company (%) Chiyono Terada Chiyono Terada Chiyono Terada External Director/President and External Director/President and External Director/President and 0.00 Representative Director of Art Group Representative Director of Art Group Representative Director of Art Group Holdings, Co., Ltd. Holdings, Co., Ltd. Holdings, Co., Ltd. (2) 2019 (2) 2019 (2) 2019 (a) The Company (a) The Company (a) The Company Name Name Name Description of Post Description of Post Description of Post Company (%) Chiyono Terada Chiyono Terada Chiyono Terada External Director/Chief Executive Officer External Director/Chief Executive Officer External Director/Chief Executive Officer 0.00 (CEO) and President of Art Corporation (CEO) and President of Art Corporation (CEO) and President of Art Corporation Commissions for moving business and delivery business delivery business 0.00 0.00 delivery business Commissions for moving business and Commissions for moving business and ¥ 74 Accrued expenses and other Accrued expenses and other Accrued expenses and other ¥ 74 ¥ 74 current liabilities ¥ 8 current liabilities current liabilities 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. 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. 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. Millions of Yen Millions of Yen Millions of Yen Sales of products Sales of products Sales of products 332 Accounts receivable 332 332 44 Accounts receivable Accounts receivable Ownership of the Ownership of the Ownership of the Company (%) Company (%) Description of Transaction Transactions Transactions Transactions 2019 Description of Transaction Description of Transaction Resulting Account Balances 2019 2019 Account Account Account 2019 Resulting Account Balances Resulting Account Balances 2020 2020 ¥39 ¥39 2020 2020 ¥ 8 ¥ 8 44 44 Commissions for moving business and delivery business delivery business 0.00 0.00 delivery business Commissions for moving business and Commissions for moving business and ¥524 Accrued expenses and other ¥524 Accrued expenses and other ¥524 Accrued expenses and other ¥47 current liabilities current liabilities current liabilities - 16 - - 16 - - 16 - 2019 2019 ¥47 ¥47 Annual Report 2020 75 (b) The Company's consolidated subsidiaries Name Description of Post Ownership of the Company (%) Chiyono Terada External Director/CEO and President of Art 0.00 Corporation Millions of Yen 2020 2019 ¥ 48,938 ¥ 136,066 10,000 ¥ 48,938 ¥ 146,066 Millions of Yen 2020 2019 ¥ 10,000 30,000 10,000 10,000 15,000 15,000 ¥ 40,000 10,000 10,000 30,000 10,000 10,000 6,400 Bank overdrafts and notes to banks Commercial paper Total average interest rate of commercial paper at March 31, 2019 was (0.01)%. Long-term debt at March 31, 2020 and 2019 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 0.13% unsecured bonds, due 2026 0.18% unsecured bonds, due 2029 Unsecured loans from government-sponsored banks, with interest of 1.75%, due through 2019 Unsecured loans from banks and others, payable in foreign currencies, with interest ranging from 0.00% to 4.50% (2020) and from 0.00% to 3.75% (2019), due through 2026 214,083 171,971 Unsecured loans from banks and others with interest ranging from 0.17% to 3.49% (2020) and from 0.17% to 3.69% (2019), due through 2023 Total Less current portion 125,002 429,085 (105,900 ) 140,004 428,375 (92,386 ) Long-term debt, less current portion ¥ 323,185 ¥ 335,989 Notes to Consolidated Financial Statements (b) The Company's consolidated subsidiaries (b) The Company's consolidated subsidiaries Millions of Yen Description of Transaction 2019 Transactions Name Name Chiyono Terada Chiyono Terada Commissions for moving business and ¥ 69 delivery business Sales of products Resulting Account Balances Description of Post Account Description of Post 2019 External Director/CEO and President of Art Corporation Accrued expenses and other External Director/CEO and President of Art current liabilities Corporation Accounts receivable 247 ¥ 6 30 Ownership of the Ownership of the Company (%) Company (%) 0.00 0.00 Transactions Transactions Description of Transaction Description of Transaction Millions of Yen Millions of Yen 2019 2019 Resulting Account Balances Resulting Account Balances Account 2019 Account 2019 Commissions for moving business and Commissions for moving business and Sales of products Sales of products delivery business delivery business ¥ 69 Accrued expenses and other ¥ 69 Accrued expenses and other current liabilities 247 247 Accounts receivable current liabilities Accounts receivable ¥ 6 ¥ 6 30 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. 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. 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, 2020 and 2019 consisted of the following: 8. SHORT-TERM BORROWINGS AND LONG-TERM DEBT 8. SHORT-TERM BORROWINGS AND LONG-TERM DEBT Short-term borrowings of the Group at March 31, 2020 and 2019 consisted of the following: Short-term borrowings of the Group at March 31, 2020 and 2019 consisted of the following: Bank overdrafts and notes to banks Commercial paper Bank overdrafts and notes to banks Commercial paper Total Total Millions of Yen Millions of Yen 2020 2020 ¥ 48,938 ¥ 48,938 ¥ 48,938 ¥ 48,938 2019 2019 ¥ 136,066 10,000 ¥ 136,066 10,000 ¥ 146,066 ¥ 146,066 Unused short-term bank credit lines were ¥204,415 million at March 31, 2020. The weighted-average interest rates of bank overdrafts and notes to banks at March 31, 2020 and 2019 were 1.02% and 0.49%, respectively. The weighted- Unused short-term bank credit lines were ¥204,415 million at March 31, 2020. The weighted-average interest rates of bank overdrafts and notes to banks at March 31, 2020 and 2019 were 1.02% and 0.49%, respectively. The weighted- average interest rate of commercial paper at March 31, 2019 was (0.01)%. Unused short-term bank credit lines were ¥204,415 million at March 31, 2020. The weighted-average interest rates of bank overdrafts and notes to banks at March 31, 2020 and 2019 were 1.02% and 0.49%, respectively. The weighted- average interest rate of commercial paper at March 31, 2019 was (0.01)%. Long-term debt at March 31, 2020 and 2019 consisted of the following: Long-term debt at March 31, 2020 and 2019 consisted of the following: Millions of Yen Millions of Yen 2020 2020 1.86% unsecured bonds, due 2019 0.72% unsecured bonds, due 2019 1.86% unsecured bonds, due 2019 0.38% unsecured bonds, due 2021 0.72% unsecured bonds, due 2019 1.20% unsecured bonds, due 2022 0.38% unsecured bonds, due 2021 0.68% unsecured bonds, due 2024 1.20% unsecured bonds, due 2022 0.21% unsecured bonds, due 2026 0.68% unsecured bonds, due 2024 0.13% unsecured bonds, due 2026 0.21% unsecured bonds, due 2026 0.18% unsecured bonds, due 2029 0.13% unsecured bonds, due 2026 Unsecured loans from government-sponsored banks, with 0.18% unsecured bonds, due 2029 interest of 1.75%, due through 2019 Unsecured loans from government-sponsored banks, with Unsecured loans from banks and others, payable in foreign interest of 1.75%, due through 2019 currencies, with interest ranging from 0.00% to 4.50% (2020) Unsecured loans from banks and others, payable in foreign and from 0.00% to 3.75% (2019), due through 2026 currencies, with interest ranging from 0.00% to 4.50% (2020) Unsecured loans from banks and others with interest ranging and from 0.00% to 3.75% (2019), due through 2026 from 0.17% to 3.49% (2020) and from 0.17% to 3.69% Unsecured loans from banks and others with interest ranging (2019), due through 2023 from 0.17% to 3.49% (2020) and from 0.17% to 3.69% Total (2019), due through 2023 Less current portion Total Less current portion Long-term debt, less current portion Long-term debt, less current portion ¥ 10,000 30,000 ¥ 10,000 10,000 30,000 10,000 10,000 15,000 10,000 15,000 15,000 15,000 214,083 214,083 125,002 429,085 125,002 (105,900 ) 429,085 (105,900 ) ¥ 323,185 ¥ 323,185 2019 2019 ¥ 40,000 10,000 ¥ 40,000 10,000 10,000 30,000 10,000 10,000 30,000 10,000 10,000 10,000 6,400 6,400 171,971 171,971 140,004 428,375 140,004 (92,386 ) 428,375 (92,386 ) ¥ 335,989 ¥ 335,989 - 17 - 76 - 17 - - 17 - (b) The Company's consolidated subsidiaries (b) The Company's consolidated subsidiaries Ownership of the Ownership of the Name Name Description of Post Description of Post Company (%) Chiyono Terada Chiyono Terada External Director/CEO and President of Art External Director/CEO and President of Art 0.00 Corporation Corporation Company (%) Description of Transaction Transactions Transactions 2019 Description of Transaction Resulting Account Balances 2019 Account Account 2019 Resulting Account Balances Millions of Yen Millions of Yen Commissions for moving business and Commissions for moving business and ¥ 69 0.00 delivery business delivery business Sales of products Sales of products 247 Accrued expenses and other ¥ 69 current liabilities Accounts receivable ¥ 6 current liabilities 30 Accounts receivable 247 Accrued expenses and other 2019 ¥ 6 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. 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 8. SHORT-TERM BORROWINGS AND LONG-TERM DEBT Short-term borrowings of the Group at March 31, 2020 and 2019 consisted of the following: Short-term borrowings of the Group at March 31, 2020 and 2019 consisted of the following: Bank overdrafts and notes to banks Bank overdrafts and notes to banks ¥ 48,938 ¥ 136,066 ¥ 48,938 Commercial paper Commercial paper 10,000 ¥ 136,066 10,000 Total Total ¥ 48,938 ¥ 146,066 ¥ 48,938 ¥ 146,066 Millions of Yen Millions of Yen 2020 2019 2020 2019 Unused short-term bank credit lines were ¥204,415 million at March 31, 2020. The weighted-average interest rates of bank overdrafts and notes to banks at March 31, 2020 and 2019 were 1.02% and 0.49%, respectively. The weighted- Unused short-term bank credit lines were ¥204,415 million at March 31, 2020. The weighted-average interest rates of bank overdrafts and notes to banks at March 31, 2020 and 2019 were 1.02% and 0.49%, respectively. The weighted- average interest rate of commercial paper at March 31, 2019 was (0.01)%. average interest rate of commercial paper at March 31, 2019 was (0.01)%. Long-term debt at March 31, 2020 and 2019 consisted of the following: Long-term debt at March 31, 2020 and 2019 consisted of the following: 1.86% unsecured bonds, due 2019 1.86% unsecured bonds, due 2019 0.72% unsecured bonds, due 2019 0.72% unsecured bonds, due 2019 0.38% unsecured bonds, due 2021 0.38% unsecured bonds, due 2021 1.20% unsecured bonds, due 2022 1.20% unsecured bonds, due 2022 0.68% unsecured bonds, due 2024 0.68% unsecured bonds, due 2024 0.21% unsecured bonds, due 2026 0.21% unsecured bonds, due 2026 0.13% unsecured bonds, due 2026 0.13% unsecured bonds, due 2026 0.18% unsecured bonds, due 2029 0.18% unsecured bonds, due 2029 Millions of Yen Millions of Yen 2020 2019 2020 2019 ¥ 40,000 10,000 10,000 ¥ 10,000 30,000 30,000 10,000 10,000 10,000 10,000 15,000 15,000 ¥ 40,000 10,000 10,000 30,000 10,000 10,000 ¥ 10,000 30,000 10,000 10,000 15,000 15,000 Unsecured loans from government-sponsored banks, with Unsecured loans from government-sponsored banks, with interest of 1.75%, due through 2019 interest of 1.75%, due through 2019 6,400 6,400 Unsecured loans from banks and others, payable in foreign Unsecured loans from banks and others, payable in foreign currencies, with interest ranging from 0.00% to 4.50% (2020) currencies, with interest ranging from 0.00% to 4.50% (2020) and from 0.00% to 3.75% (2019), due through 2026 and from 0.00% to 3.75% (2019), due through 2026 214,083 171,971 214,083 171,971 Unsecured loans from banks and others with interest ranging Unsecured loans from banks and others with interest ranging from 0.17% to 3.49% (2020) and from 0.17% to 3.69% from 0.17% to 3.49% (2020) and from 0.17% to 3.69% (2019), due through 2023 (2019), due through 2023 Total Total Less current portion Less current portion 125,002 429,085 (105,900 ) 140,004 125,002 428,375 429,085 (92,386 ) (105,900 ) 140,004 428,375 (92,386 ) Long-term debt, less current portion Long-term debt, less current portion ¥ 323,185 ¥ 335,989 ¥ 323,185 ¥ 335,989 - 17 - - 17 - Annual Report 2020 77 Notes to Consolidated Financial Statements Annual maturities of long-term debt outstanding at March 31, 2020 were as follows: 2021 2022 2023 2024 2025 2026 and thereafter Total Millions of Yen ¥ 105,900 74,816 152,222 16,031 26,015 54,101 ¥ 429,085 The assets pledged as collateral at March 31, 2020 and 2019 were as follows: Time deposits Note receivables Debt corresponding to the above: Note payables Millions of Yen 2020 2019 ¥ 368 1,279 ¥ 677 2,246 2,685 4,033 In addition, investment securities pledged as collateral for the investee's borrowings from financial institutions at March 31, 2020 and 2019 were as follows: Investment securities Millions of Yen 2020 ¥800 2019 ¥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. 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. - 18 - 78 1. Defined benefit plans (1) The changes in defined benefit obligations for the years ended March 31, 2020 and 2019 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 Millions of Yen 2020 2019 ¥ 110,871 5,961 1,424 2,300 (5 ) (6,576 ) 199 (2,800 ) 96 ¥ 107,786 5,330 1,326 6 771 (4,456 ) 837 (15 ) (723 ) 9 Balance at end of year ¥ 111,470 ¥ 110,871 (2) The changes in plan assets for the years ended March 31, 2020 and 2019 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 Contributions from the employer Benefits paid Foreign currency translation adjustments Others Millions of Yen 2020 2019 ¥ 116,790 3,522 (2,022 ) 3,888 (6,046 ) (2,222 ) (16 ) ¥ 114,476 3,568 (410 ) 3,620 (3,938 ) (582 ) 56 Balance at end of year ¥ 113,894 ¥ 116,790 (3) The changes in defined benefit obligation for the years ended March 31, 2020 and 2019 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 2020 2019 ¥ 2,507 972 (719 ) ¥ 2,506 832 (831 ) ¥ 2,760 ¥ 2,507 - 19 - Annual Report 2020 79 Notes to Consolidated Financial Statements (4) Reconciliations between the liabilities recorded in the consolidated balance sheet and the balances of defined benefit obligation and plan assets at March 31, 2020 and 2019 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 2020 2019 ¥ (105,617 ) 113,894 8,277 (8,611 ) ¥ (106,176 ) 116,790 10,614 (7,202 ) Net amount of liabilities and assets recorded in the consolidated balance sheet ¥ (334 ) ¥ 3,412 Liabilities for retirement benefits Assets for retirement benefits ¥ (13,219 ) 12,885 ¥ (11,098 ) 14,510 Net amount of liabilities and assets recorded in the consolidated balance sheet ¥ (334 ) ¥ 3,412 (5) The components of net periodic benefit costs for the years ended March 31, 2020 and 2019 were as follows: Millions of Yen 2020 2019 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 ¥ 5,961 1,424 (3,522 ) 266 (65 ) 972 152 ¥ 5,330 1,326 (3,568 ) 1,286 (127 ) 831 88 Total ¥ 5,188 ¥ 5,166 (6) Amounts recognized in other comprehensive income (before income tax effect) in respect of defined benefit plans for the years ended March 31, 2020 and 2019 were as follows: Past service cost Net actuarial gains (losses) Total Millions of Yen 2020 2019 ¥ 308 3,160 ¥ 873 (1,476 ) ¥ 3,468 ¥ (603 ) (7) Amounts recognized in accumulated other comprehensive income (before income tax effect) in respect of defined benefit plans for the years ended March 31, 2020 and 2019 were as follows: Millions of Yen 2020 2019 ¥ 631 9,579 ¥ 323 6,419 ¥ 10,210 ¥ 6,742 Unrecognized past service cost Unrecognized net actuarial gains Total - 20 - 80 (8) Plan assets (a) Components of plan assets Plan assets at March 31, 2020 and 2019, 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 2020 2019 1 % 0 38 16 18 1 26 2 % 2 35 18 19 5 19 Total 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, 2020 and 2019 were as follows: Discount rate Expected rate of return on plan assets Expected rate of future salary increases Mainly 0.3% Mainly 2.5% Mainly 3.5% Mainly 0.3% Mainly 2.5% Mainly 3.5% 2020 2019 2. Defined contribution plan The amounts of contribution required for the defined contribution plan paid by the Group were ¥5,976 million and ¥5,913 million for the years ended March 31, 2020 and 2019, 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. - 21 - Annual Report 2020 81 Notes to Consolidated Financial Statements (b) Increases/Decreases and Transfer of Common Stock, Reserve and Surplus The Companies Act requires that an amount equal to 10% of dividends must be appropriated as a legal reserve (a component of retained earnings) or as additional paid-in capital (a component of capital surplus), depending on the equity account that was charged upon the payment of such dividends, until the aggregate amount of legal reserve and additional paid-in capital equals 25% of the common stock. Under the Companies Act, the total amount of additional paid-in capital and legal reserve may be reversed without limitation. The Companies Act also provides that common stock, legal reserve, additional paid-in capital, other capital surplus and retained earnings can be transferred among the accounts within equity under certain conditions upon resolution of the shareholders. (c) Treasury Stock and Treasury Stock Acquisition Rights The Companies Act also provides for companies to purchase treasury stock and dispose of such treasury stock by resolution of the Board of Directors. The amount of treasury stock purchased cannot exceed the amount available for distribution to the shareholders which is determined by a specific formula. Under the Companies Act, stock acquisition rights are presented as a separate component of equity. The Companies Act also provides that companies can purchase both treasury stock acquisition rights and treasury stock. 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, 2020, were as follows: Stock Option Persons Granted Number of Options Granted Date of Grant Exercise Price Exercise Period 2014 Stock Option 9 directors 310,000 shares 2014.7.14 ¥6,715 From July 15, 2016 45 employees 2015 Stock Option 9 directors 53,200 shares 2015.7.13 46 employees 2016 Stock Option 8 directors 58,100 shares 2016.7.14 53 employees 2017 Stock Option 8 directors 48,800 shares 2017.7.14 53 employees 2018 Stock Option 7 directors 42,700 shares 2018.7.13 59 employees 2019 Stock Option 7 directors 46,100 shares 2019.7.12 54 employees to July 14, 2020 ¥1 From July 14, 2018 to July 13, 2030 ¥1 From July 15, 2019 to July 14, 2031 ¥1 From July 15, 2020 to July 14, 2032 ¥1 From July 14, 2021 to July 13, 2033 ¥1 From July 13, 2022 to July 12, 2034 - 22 - 82 The stock option activity was as follows: The stock option activity was as follows: 2012 Stock Option 2013 Stock Option 2012 Stock 2014 Stock Option Option 2013 Stock 2015 Stock Option Option 2014 Stock 2016 Stock Option Option 2015 Stock 2017 Stock Option Option 2016 Stock 2018 Stock Option Option 2017 Stock 2019 Stock Option Option 2018 Stock Option 2019 Stock Option Shares Shares Year Ended March 31, 2019 Year Ended March 31, 2019 Vested Vested April 1, 2018 - Outstanding April 1, 2018 - Outstanding 4,000 27,000 4,000 50,000 27,000 53,200 50,000 58,100 53,200 48,800 Granted Exercised Canceled Granted Exercised Canceled (4,000 ) (27,000 ) (4,000 ) (10,000 ) (27,000 ) (30,500 ) (10,000 ) (30,500 ) 58,100 42,700 48,800 42,700 March 31, 2019 - Outstanding March 31, 2019 - Outstanding 40,000 22,700 40,000 58,100 22,700 48,800 58,100 42,700 48,800 42,700 Year Ended March 31, 2020 Year Ended March 31, 2020 Vested Vested April 1, 2019 - Outstanding April 1, 2019 - Outstanding 40,000 22,700 40,000 58,100 22,700 48,800 58,100 42,700 Granted Exercised Canceled Granted Exercised Canceled (32,000 ) (10,500 ) March 31, 2020 - Outstanding March 31, 2020 - Outstanding 8,000 12,200 (32,000 ) (33,500 ) (1,000 ) 8,000 23,600 (10,500 ) (800 ) 48,000 12,200 (33,500 ) (1,000 ) (700 ) 23,600 42,000 Exercise price Average stock price at exercise Fair value price at grant date Exercise price Average stock price at exercise Fair value price at grant date ¥2,186 ¥12,956 ¥676 ¥4,500 ¥12,491 ¥1,220 ¥2,186 ¥6,715 ¥12,956 ¥14,520 ¥676 ¥1,697 ¥4,500 ¥1 ¥12,491 ¥14,280 ¥1,220 ¥7,726 ¥6,715 ¥1 ¥14,520 ¥14,436 ¥1,697 ¥7,859 ¥1 ¥1 ¥14,280 ¥7,726 ¥10,711 ¥1 ¥1 ¥14,436 ¥7,859 ¥11,670 48,800 46,100 (800 ) 48,000 46,100 42,700 (700 ) 42,000 46,100 46,100 ¥1 ¥1 ¥1 ¥1 ¥10,711 ¥12,777 ¥11,670 ¥12,777 The assumptions used to measure the fair value of 2019 Stock Option The assumptions used to measure the fair value of 2019 Stock Option Estimate method: Volatility of stock price: Estimated remaining outstanding period: Estimated dividend: Risk-free interest rate: Estimate method: Volatility of stock price: Estimated remaining outstanding period: Estimated dividend: Risk-free interest rate: Black-Scholes option-pricing model Black-Scholes option-pricing model 29.7% 29.7% 9 years 9 years ¥160 per share ¥160 per share (0.2)% (0.2)% - 23 - - 23 - Annual Report 2020 83 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% for the years ended March 31, 2020 and 2019. The tax effects of significant temporary differences and tax loss carryforwards that resulted in deferred tax assets and liabilities at March 31, 2020 and 2019 were as follows: Millions of Yen 2020 2019 Deferred tax assets: Provision for product warranties Tax loss carryforwards Software and other intangible assets Unrealized profit on inventories Inventories Accrued bonus Investment securities Liabilities for retirement benefits Deferred revenue 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 ¥ 13,625 11,655 10,256 9,271 6,059 4,628 3,871 3,538 2,933 2,343 70 22,445 90,694 (8,707 ) (6,374 ) (15,081 ) ¥ 12,795 10,427 8,668 9,307 5,135 4,368 5,421 2,498 3,100 1,994 77 20,293 84,083 (8,206 ) (6,947 ) (15,153 ) Total deferred tax assets ¥ 75,613 ¥ 68,930 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 ¥ 64,092 40,385 10,131 4,131 1,705 18,462 ¥ 68,816 39,862 19,342 4,662 1,722 11,425 Total deferred tax liabilities ¥ 138,906 ¥ 145,829 Net deferred tax liabilities ¥ (63,293 ) ¥ (76,899 ) 84 - 24 - The expiration of tax loss carryforwards, related valuation allowances, and the resulting net deferred tax assets as of March 31, 2020 were as follows: Millions of Yen March 31, 2020 One Year or Less After One Year through Two Years After Two Years through Three Years After Three Years through Four Years After Four Years through Five Years After Five Years Total Deferred tax assets relating to tax loss carryforwards Less valuation ¥ 134 ¥ 37 ¥ 137 ¥ 384 ¥ 265 ¥10,698 ¥ 11,655 allowances for tax loss carryforwards (130 ) (29 ) (137 ) (248 ) (190 ) (7,973 ) (8,707 ) Net deferred tax assets relating to tax loss carryforwards 4 8 136 75 2,725 2,948 A reconciliation of the difference between the normal effective statutory tax rate and the actual effective tax rate is not disclosed since the difference is less than 5% of the normal effective statutory income tax rate for the year ended March 31, 2020. A reconciliation between the normal effective statutory tax rate and the actual effective tax rate reflected in the accompanying consolidated statement of income for the year ended March 31, 2019, was as follows: Normal effective statutory income tax rate 2019 30.6 % Differences in foreign subsidiaries' tax rates (5.5 ) Taxes and tax effects on dividends from foreign subsidiaries 3.7 Amortization of goodwill 2.7 Tax credit for research and development (2.2 ) Permanently non-deductible expenses, such as entertainment expenses 0.5 Valuation allowance 0.1 Permanently non-taxable income, such as dividend income (0.1 ) Other – net (0.9 ) Actual effective income tax rate 28.9 % - 25 - Annual Report 2020 85 Notes to Consolidated Financial Statements 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 Payment for acquisition of equity interest of newly consolidated subsidiaries, net of cash and cash equivalents acquired Millions of Yen 2019 ¥ 25,233 93,823 30,137 (16,188 ) (61,077 ) 140 72,068 (7,358 ) ¥ 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 ¥67,968 million and ¥65,216 million for the years ended March 31, 2020 and 2019, respectively. - 26 - 86 15. LEASES The Group mainly leases certain buildings, land and vehicles. Obligations for future minimum payments on non-cancelable operating leases at March 31, 2020 was as follows: Due within one year Due after one year Total Millions of Yen Operating Leases ¥ 1,172 7,716 ¥ 8,888 (Note) As foreign consolidated subsidiaries have adopted IFRS 16 "Leases" or ASU 2016-02 "Leases" since the fiscal year ended March 31, 2020, they are included in the book value by type of "property, plant and equipment" in the consolidated balance sheet for the fiscal year. 16. FINANCIAL INSTRUMENTS AND RELATED DISCLOSURES Group policy for financial instruments The Group uses financial instruments, mainly bank loans and bonds, based on its capital financing plan. Short-term bank loans and commercial paper are used to fund the Group's ongoing operations, and cash surpluses are invested in low-risk financial assets. Derivatives are 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. - 27 - Annual Report 2020 87 Notes to Consolidated Financial Statements 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. 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 Lease obligations Total Derivatives Cash and cash equivalents Short-term investments Trade notes and accounts receivable Investment securities Total Trade notes and accounts payable Short-term borrowings Income taxes payable Long-term debt Lease obligations Total Derivatives Millions of Yen March 31, 2020 Carrying Amount Fair Value Unrealized Loss ¥ 321,152 49,641 440,755 138,482 ¥ 321,152 49,641 440,755 138,482 ¥ 950,030 ¥ 950,030 ¥ 189,844 48,938 19,894 429,085 75,784 ¥ 189,844 48,938 19,894 430,452 78,156 ¥ 1,367 2,372 ¥ 763,545 ¥ 767,284 ¥ 3,739 ¥(6,055 ) ¥(6,055 ) Millions of Yen March 31, 2019 Carrying Amount Fair Value Unrealized Loss ¥ 367,189 592 447,831 187,865 ¥ 367,189 592 447,831 187,865 ¥ 1,003,477 ¥ 1,003,477 ¥ 204,535 146,066 25,576 428,375 11,201 ¥ 204,535 146,066 25,576 431,326 12,776 ¥ 2,951 1,575 ¥ 815,753 ¥ 820,279 ¥ 4,526 - 28 - ¥969 ¥969 88 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. 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. Lease obligations The fair market value of lease obligations is calculated by discounting the total amount of principal and interest by the interest rate that would be used if similar new lease transactions were entered into. 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. - 29 - Annual Report 2020 89 Notes to Consolidated Financial Statements Derivative transactions to which hedge accounting is not applied Millions of Yen March 31, 2020 Contract Amount Due after One Year Fair Value Unrealized Gain (Loss) ¥ (86 ) (223 ) (3,753 ) 38 10 0 205 (98 ) (63 ) (7 ) 842 670 1 (33 ) (10 ) (3 ) 2 2 1 3 (24 ) 0 ¥ (86 ) (223 ) (3,753 ) 38 10 0 205 (98 ) (63 ) (7 ) 842 670 1 (33 ) (10 ) (3 ) 2 2 1 3 (24 ) 0 ¥(102 ) ¥(102 ) Millions of Yen March 31, 2019 Contract Amount Due after One Year Fair Value Unrealized Gain (Loss) ¥ 5 (11 ) (142 ) 98 3 (2 ) (3 ) 5 (3 ) 0 (43 ) (0 ) (44 ) 10 3 0 (0 ) 50 (1 ) ¥ 5 (11 ) (142 ) 98 3 (2 ) (3 ) 5 (3 ) 0 (43 ) (0 ) (44 ) 10 3 0 (0 ) 50 (1 ) ¥47 ¥47 Contract Amount ¥ 5,470 22,901 49,711 5,144 453 15 4,088 1,567 2,753 2,738 4,591 4,990 653 445 392 1,474 175 114 122 1,172 2,143 186 ¥985 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 ¥722 - 30 - Forward exchange contracts: Selling: GBP EUR USD AUD NZD ZAR CZK HKD SGD MYR TRY IDR INR NOK QAR PHP HUF THB CNY AED Buying: CNY EUR Commodity futures contracts: Buying: Metal 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 90 Derivative transactions to which hedge accounting is applied Millions of Yen March 31, 2020 Contract Amount Due after One Year Fair Value ¥ 218 (1,155 ) 39 263 158 (71 ) Hedged Item Contract Amount Receivables Receivables Receivables Receivables Receivables Payables ¥ 7,533 34,299 5,224 5,519 2,962 9,033 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 Long-term debt Long-term debt Raw materials ¥141,417 ¥92,680 ¥ (872 ) 63,000 10,000 ¥ 13,708 ¥ (2,006 ) Millions of Yen March 31, 2019 Contract Amount Due after One Year Fair Value ¥(158 ) 92 (4 ) 77 6 101 Hedged Item Contract Amount Receivables Receivables Receivables Receivables Receivables Payables ¥ 6,307 32,091 1,620 5,704 1,418 7,576 Long-term debt Long-term debt Raw materials ¥173,215 ¥154,886 ¥722 63,000 63,000 ¥ 7,223 ¥161 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 (*) 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 Millions of Yen Carrying Amount 2020 2019 Nonlisted equity securities Investments in limited partnerships and other investments ¥ 11,060 1,076 ¥ 9,549 1,284 Total ¥ 12,136 ¥ 10,833 - 31 - Annual Report 2020 91 Notes to Consolidated Financial Statements Maturity analysis for financial assets and securities with contractual maturities Cash and cash equivalents Short-term investments Trade notes and accounts receivable Investment securities: Available-for-sale securities with contractual maturities (corporate bonds) Total ¥ 811,545 ¥ 3 Millions of Yen March 31, 2020 Due after One Year through Five Years Due after Five Years through Ten Years Due after Ten Years ¥ 3 Due in One Year or Less ¥ 321,152 49,641 440,752 Millions of Yen March 31, 2019 Due after One Year through Five Years Due after Five Years through Ten Years Due after Ten Years ¥ 39 Due in One Year or Less ¥ 367,189 592 447,792 ¥ 300 ¥ 300 ¥ 300 ¥ 300 Cash and cash equivalents Short-term investments Trade notes and accounts receivable Investment securities: Available-for-sale securities with contractual maturities (corporate bonds) Total ¥ 815,573 ¥ 39 Please see Note 8 for annual maturities of long-term debt. 17. COMMITMENTS AND CONTINGENT LIABILITIES Commitments for capital expenditures outstanding at March 31, 2020 totaled approximately ¥25,689 million. The Group had the following contingent liabilities at March 31, 2020 and 2019. Trade notes endorsed Millions of Yen 2020 2019 ¥1,835 ¥1,733 - 32 - 92 18. COMPREHENSIVE INCOME The components of other comprehensive income (loss) for the years ended March 31, 2020 and 2019 were as follows: Unrealized losses on available-for-sale securities: Losses arising during the year Reclassification adjustments to profit or loss Amount before income tax effect Income tax effect Total Deferred losses on derivatives under hedge accounting: (Losses) gains arising during the year Reclassification adjustments to profit or loss Amount before income tax effect Income tax effect Total Foreign currency translation adjustments: Adjustments arising during the year Reclassification adjustments to profit or loss Amount before income tax effect 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 arising during the year Total other comprehensive loss Millions of Yen 2020 2019 ¥ (26,901 ) (10,231 ) (37,132 ) 9,211 ¥ (27,921 ) ¥ (23,504 ) 4 (23,500 ) 6,601 ¥ (16,899 ) ¥ ¥ (3,859 ) (568 ) (4,427 ) 1,011 (3,416 ) ¥ ¥ 505 (698 ) (193 ) 84 (109 ) ¥ (69,568 ) (19 ) (69,587 ) ¥ (69,587 ) ¥ (8,393 ) 284 (8,109 ) ¥ (8,109 ) ¥ ¥ (3,670 ) 202 (3,468 ) 1,011 (2,457 ) ¥ ¥ (556 ) 1,159 603 (155 ) 448 ¥ (495 ) ¥ (1,167 ) ¥ (103,876 ) ¥ (25,836 ) - 33 - Annual Report 2020 93 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, 2020 and 2019 were as follows: Millions of Yen Net Income Thousands of Shares Weighted- Average Shares Yen EPS Year Ended March 31, 2020 Basic EPS: Net income available to common shareholders ¥ 170,731 292,546 ¥ 583.61 Effect of dilutive securities: Stock options Diluted EPS: 193 Net income for computation ¥ 170,731 292,739 ¥ 583.22 Year Ended March 31, 2019 Basic EPS: Net income available to common shareholders ¥ 189,049 292,470 ¥ 646.39 Effect of dilutive securities: Stock options Diluted EPS: 197 Net income for computation ¥ 189,049 292,667 ¥ 645.95 20. SEGMENT INFORMATION Under ASBJ Statement No. 17, "Accounting Standard for Segment Information Disclosures," and ASBJ Guidance No. 20, "Guidance on Accounting Standard for Segment Information Disclosures," an entity is required to report financial and descriptive information about its reportable segments. Reportable segments are operating segments or aggregations of operating segments that meet specified criteria. Operating segments are components of an entity about which separate financial information is available and such information is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Generally, segment information is required to be reported on the same basis as is used internally for evaluating operating segment performance and deciding how to allocate resources to operating segments. 1. Description of reportable segments The Group's reportable segments are those for which separate financial information is available and regularly evaluated by the Company's Board of Directors in order to decide how resources are allocated among the Group. Therefore, the Group's reportable segments consist of the Air Conditioning segment and the Chemicals segment. The Air Conditioning segment manufactures, distributes and installs air conditioning and refrigeration equipment. The Chemicals segment manufactures and distributes chemicals. 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." - 34 - 94 19. NET INCOME PER SHARE Reconciliations of the differences between basic and diluted net income per share (EPS) for the years ended March 31, 2020 and 2019 were as follows: Millions of Thousands Yen of Shares Yen Weighted- Average Shares Net Income EPS Net income available to common shareholders ¥ 170,731 292,546 ¥ 583.61 Net income for computation ¥ 170,731 292,739 ¥ 583.22 193 Year Ended March 31, 2020 Basic EPS: Effect of dilutive securities: Stock options Diluted EPS: Year Ended March 31, 2019 Basic EPS: Net income available to common shareholders ¥ 189,049 292,470 ¥ 646.39 Effect of dilutive securities: Stock options Diluted EPS: 197 Net income for computation ¥ 189,049 292,667 ¥ 645.95 20. SEGMENT INFORMATION Under ASBJ Statement No. 17, "Accounting Standard for Segment Information Disclosures," and ASBJ Guidance No. 20, "Guidance on Accounting Standard for Segment Information Disclosures," an entity is required to report financial and descriptive information about its reportable segments. Reportable segments are operating segments or aggregations of operating segments that meet specified criteria. Operating segments are components of an entity about which separate financial information is available and such information is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Generally, segment information is required to be reported on the same basis as is used internally for evaluating operating segment performance and deciding how to allocate resources to operating segments. 1. Description of reportable segments The Group's reportable segments are those for which separate financial information is available and regularly evaluated by the Company's Board of Directors in order to decide how resources are allocated among the Group. Therefore, the Group's reportable segments consist of the Air Conditioning segment and the Chemicals segment. The Air Conditioning segment manufactures, distributes and installs air conditioning and refrigeration equipment. The Chemicals segment manufactures and distributes chemicals. 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." - 34 - Annual Report 2020 95 Notes to Consolidated Financial Statements 3. 3. 3. 3. Information about sales, profit, assets and other items Information about sales, profit, assets and other items Information about sales, profit, assets and other items Information about sales, profit, assets and other items Millions of Yen Millions of Yen Millions of Yen Millions of Yen March 31, 2020 March 31, 2020 March 31, 2020 March 31, 2020 Reportable Segment Reportable Segment Reportable Segment Reportable Segment Sales: Sales: Sales: Sales: Sales to external customers Sales to external customers Sales to external customers Sales to external customers Intersegment sales Intersegment sales Intersegment sales Intersegment sales Total Total Total Total Segment profit Segment profit Segment profit Segment profit Segment assets Segment assets Segment assets Segment assets Other: Other: Other: Other: Depreciation Depreciation Depreciation Depreciation Amortization of goodwill Amortization of goodwill Amortization of goodwill Amortization of goodwill Investment balance in unconsolidated Investment balance in unconsolidated Investment balance in unconsolidated Investment balance in unconsolidated Air Air Air Air Conditioning Conditioning Conditioning Conditioning Chemicals Chemicals Chemicals Chemicals Total Total Total Total Other Other Other Other Total Total Total Total Reconciliations Reconciliations Reconciliations Reconciliations Consolidated Consolidated Consolidated Consolidated ¥ 2,309,117 ¥ 2,309,117 ¥ 2,309,117 ¥ 2,309,117 871 871 871 871 2,309,988 2,309,988 2,309,988 2,309,988 236,185 236,185 236,185 236,185 2,228,944 2,228,944 2,228,944 2,228,944 ¥ 179,884 ¥ 179,884 ¥ 179,884 ¥ 179,884 13,850 13,850 13,850 13,850 193,734 193,734 193,734 193,734 23,770 23,770 23,770 23,770 239,069 239,069 239,069 239,069 ¥ 2,489,001 ¥ 2,489,001 ¥ 2,489,001 ¥ 2,489,001 14,721 14,721 14,721 14,721 2,503,722 2,503,722 2,503,722 2,503,722 259,955 259,955 259,955 259,955 2,468,013 2,468,013 2,468,013 2,468,013 ¥ 61,304 ¥ 61,304 ¥ 61,304 ¥ 61,304 699 699 699 699 62,003 62,003 62,003 62,003 5,549 5,549 5,549 5,549 35,297 35,297 35,297 35,297 ¥ 2,550,305 ¥ 2,550,305 ¥ 2,550,305 ¥ 2,550,305 15,420 15,420 15,420 15,420 2,565,725 2,565,725 2,565,725 2,565,725 265,504 265,504 265,504 265,504 2,503,310 2,503,310 2,503,310 2,503,310 ¥ (15,420 ) ¥ (15,420 ) ¥ (15,420 ) ¥ (15,420 ) (15,420 ) (15,420 ) (15,420 ) (15,420 ) 9 9 9 9 ¥ 2,550,305 ¥ 2,550,305 ¥ 2,550,305 ¥ 2,550,305 2,550,305 2,550,305 2,550,305 2,550,305 265,513 265,513 265,513 265,513 164,203 164,203 164,203 164,203 2,667,513 2,667,513 2,667,513 2,667,513 ¥ 81,373 ¥ 81,373 ¥ 81,373 ¥ 81,373 30,497 30,497 30,497 30,497 ¥14,618 ¥14,618 ¥14,618 ¥14,618 187 187 187 187 ¥ 95,991 ¥ 95,991 ¥ 95,991 ¥ 95,991 30,684 30,684 30,684 30,684 ¥1,802 ¥1,802 ¥1,802 ¥1,802 ¥ 97,793 ¥ 97,793 ¥ 97,793 ¥ 97,793 30,684 30,684 30,684 30,684 ¥ 97,793 ¥ 97,793 ¥ 97,793 ¥ 97,793 30,684 30,684 30,684 30,684 subsidiaries and associated companies subsidiaries and associated companies subsidiaries and associated companies subsidiaries and associated companies accounted for using the equity method accounted for using the equity method accounted for using the equity method accounted for using the equity method Investment in property, plant and Investment in property, plant and Investment in property, plant and Investment in property, plant and 13,760 13,760 13,760 13,760 9,434 9,434 9,434 9,434 23,194 23,194 23,194 23,194 23,194 23,194 23,194 23,194 equipment and intangible assets equipment and intangible assets equipment and intangible assets equipment and intangible assets 101,113 101,113 101,113 101,113 28,209 28,209 28,209 28,209 129,322 129,322 129,322 129,322 2,633 2,633 2,633 2,633 131,955 131,955 131,955 131,955 Millions of Yen Millions of Yen Millions of Yen Millions of Yen March 31, 2019 March 31, 2019 March 31, 2019 March 31, 2019 Reportable Segment Reportable Segment Reportable Segment Reportable Segment Air Air Air Air Conditioning Conditioning Conditioning Conditioning Chemicals Chemicals Chemicals Chemicals Total Total Total Total Other Other Other Other Total Total Total Total Reconciliations Reconciliations Reconciliations Reconciliations Consolidated Consolidated Consolidated Consolidated ¥ 2,222,173 ¥ 2,222,173 ¥ 2,222,173 ¥ 2,222,173 714 714 714 714 2,222,887 2,222,887 2,222,887 2,222,887 237,646 237,646 237,646 237,646 2,230,118 2,230,118 2,230,118 2,230,118 ¥ 200,790 ¥ 200,790 ¥ 200,790 ¥ 200,790 18,124 18,124 18,124 18,124 218,914 218,914 218,914 218,914 32,534 32,534 32,534 32,534 230,736 230,736 230,736 230,736 ¥ 2,422,963 ¥ 2,422,963 ¥ 2,422,963 ¥ 2,422,963 18,838 18,838 18,838 18,838 2,441,801 2,441,801 2,441,801 2,441,801 270,180 270,180 270,180 270,180 2,460,854 2,460,854 2,460,854 2,460,854 ¥ 58,146 ¥ 58,146 ¥ 58,146 ¥ 58,146 646 646 646 646 58,792 58,792 58,792 58,792 6,066 6,066 6,066 6,066 41,009 41,009 41,009 41,009 ¥ 2,481,109 ¥ 2,481,109 ¥ 2,481,109 ¥ 2,481,109 19,484 19,484 19,484 19,484 2,500,593 2,500,593 2,500,593 2,500,593 276,246 276,246 276,246 276,246 2,501,863 2,501,863 2,501,863 2,501,863 ¥ (19,484 ) ¥ (19,484 ) ¥ (19,484 ) ¥ (19,484 ) (19,484 ) (19,484 ) (19,484 ) (19,484 ) 9 9 9 9 ¥ 2,481,109 ¥ 2,481,109 ¥ 2,481,109 ¥ 2,481,109 2,481,109 2,481,109 2,481,109 2,481,109 276,255 276,255 276,255 276,255 199,028 199,028 199,028 199,028 2,700,891 2,700,891 2,700,891 2,700,891 Sales: Sales: Sales: Sales: Sales to external customers Sales to external customers Sales to external customers Sales to external customers Intersegment sales Intersegment sales Intersegment sales Intersegment sales Total Total Total Total Segment profit Segment profit Segment profit Segment profit Segment assets Segment assets Segment assets Segment assets Other: Other: Other: Other: Depreciation Depreciation Depreciation Depreciation Amortization of goodwill Amortization of goodwill Amortization of goodwill Amortization of goodwill Investment balance in unconsolidated Investment balance in unconsolidated Investment balance in unconsolidated Investment balance in unconsolidated subsidiaries and associated companies subsidiaries and associated companies subsidiaries and associated companies subsidiaries and associated companies accounted for using the equity method accounted for using the equity method accounted for using the equity method accounted for using the equity method Investment in property, plant and Investment in property, plant and Investment in property, plant and Investment in property, plant and equipment and intangible assets equipment and intangible assets equipment and intangible assets equipment and intangible assets ¥57,166 ¥57,166 ¥57,166 ¥57,166 26,792 26,792 26,792 26,792 ¥13,489 ¥13,489 ¥13,489 ¥13,489 200 200 200 200 ¥70,655 ¥70,655 ¥70,655 ¥70,655 26,992 26,992 26,992 26,992 ¥1,667 ¥1,667 ¥1,667 ¥1,667 ¥72,322 ¥72,322 ¥72,322 ¥72,322 26,992 26,992 26,992 26,992 13,552 13,552 13,552 13,552 10,097 10,097 10,097 10,097 23,649 23,649 23,649 23,649 23,649 23,649 23,649 23,649 68,982 68,982 68,982 68,982 15,914 15,914 15,914 15,914 84,896 84,896 84,896 84,896 2,266 2,266 2,266 2,266 87,162 87,162 87,162 87,162 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 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 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 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. Hydraulics segment, the Defense segment and the Electronics segment. Hydraulics segment, the Defense segment and the Electronics segment. Hydraulics segment, the Defense segment and the Electronics segment. 2. "Reconciliations" include unallocated items and intersegment eliminations. The unallocated corporate assets included in "Reconciliations" 2. "Reconciliations" include unallocated items and intersegment eliminations. The unallocated corporate assets included in "Reconciliations" 2. "Reconciliations" include unallocated items and intersegment eliminations. The unallocated corporate assets included in "Reconciliations" 2. "Reconciliations" include unallocated items and intersegment eliminations. The unallocated corporate assets included in "Reconciliations" amounted to ¥175,010 million and ¥211,637 million at March 31, 2020 and 2019, respectively, which consisted mainly of the Company's cash, amounted to ¥175,010 million and ¥211,637 million at March 31, 2020 and 2019, respectively, which consisted mainly of the Company's cash, amounted to ¥175,010 million and ¥211,637 million at March 31, 2020 and 2019, respectively, which consisted mainly of the Company's cash, amounted to ¥175,010 million and ¥211,637 million at March 31, 2020 and 2019, respectively, which consisted mainly of the Company's cash, time deposits and investment securities. time deposits and investment securities. time deposits and investment securities. time deposits and investment securities. 3. The aggregated amount of segment profit equals operating income in the consolidated statement of income. 3. The aggregated amount of segment profit equals operating income in the consolidated statement of income. 3. The aggregated amount of segment profit equals operating income in the consolidated statement of income. 3. The aggregated amount of segment profit equals operating income in the consolidated statement of income. 4. Intersegment sales are recorded at values that approximate market prices. 4. Intersegment sales are recorded at values that approximate market prices. 4. Intersegment sales are recorded at values that approximate market prices. 4. Intersegment sales are recorded at values that approximate market prices. 23,194 23,194 23,194 23,194 131,955 131,955 131,955 131,955 ¥72,322 ¥72,322 ¥72,322 ¥72,322 26,992 26,992 26,992 26,992 23,649 23,649 23,649 23,649 87,162 87,162 87,162 87,162 96 - 35 - - 35 - - 35 - - 35 - Other Total Total Reconciliations Reconciliations Other Total Consolidated Consolidated Reconciliations Total Reconciliations Reconciliations Reconciliations Consolidated Consolidated Consolidated Consolidated ¥ 2,550,305 ¥ 2,550,305 ¥ 61,304 ¥ 61,304 ¥ 61,304 699 699 699 62,003 62,003 62,003 5,549 5,549 5,549 35,297 35,297 35,297 ¥ 2,550,305 ¥ 2,550,305 ¥ 61,304 ¥ 2,550,305 15,420 699 15,420 ¥ (15,420 ) 15,420 ¥ (15,420 ) 2,565,725 2,565,725 62,003 (15,420 ) 2,565,725 (15,420 ) 265,504 265,504 9 265,504 5,549 9 2,503,310 2,503,310 164,203 2,503,310 164,203 35,297 ¥ 2,550,305 ¥ (15,420 ) ¥ (15,420 ) ¥ (15,420 ) 15,420 ¥ (15,420 ) 2,550,305 2,550,305 (15,420 ) (15,420 ) (15,420 ) 2,550,305 2,550,305 2,565,725 2,550,305 (15,420 ) 9 9 265,513 9 265,513 9 265,504 265,513 265,513 265,513 2,667,513 164,203 164,203 2,667,513 164,203 2,667,513 164,203 2,667,513 2,503,310 2,667,513 ¥ 2,550,305 ¥ 2,550,305 ¥ 2,550,305 2,550,305 265,513 2,667,513 ¥ 2,550,305 accounted for using the equity method accounted for using the equity method accounted for using the equity method accounted for using the equity method accounted for using the equity method accounted for using the equity method 13,760 13,760 9,434 9,434 13,760 13,760 13,760 13,760 23,194 23,194 9,434 9,434 9,434 9,434 23,194 23,194 23,194 23,194 23,194 23,194 23,194 23,194 23,194 23,194 23,194 23,194 23,194 23,194 23,194 23,194 ¥1,802 ¥1,802 ¥1,802 ¥1,802 ¥ 97,793 ¥ 97,793 ¥ 97,793 30,684 30,684 30,684 ¥ 97,793 30,684 ¥ 97,793 ¥ 97,793 30,684 30,684 ¥ 97,793 ¥ 97,793 ¥ 97,793 30,684 30,684 30,684 ¥ 97,793 30,684 2,633 2,633 2,633 2,633 131,955 131,955 131,955 131,955 131,955 131,955 131,955 131,955 131,955 131,955 Other Total Total Reconciliations Reconciliations Other Total Consolidated Consolidated Reconciliations Total Reconciliations Reconciliations Reconciliations Consolidated Consolidated Consolidated Consolidated 3. 3. Information about sales, profit, assets and other items Information about sales, profit, assets and other items Information about sales, profit, assets and other items Information about sales, profit, assets and other items Information about sales, profit, assets and other items Information about sales, profit, assets and other items 3. 3. 3. 3. Millions of Yen Millions of Yen Millions of Yen Millions of Yen Millions of Yen Millions of Yen March 31, 2020 March 31, 2020 March 31, 2020 March 31, 2020 March 31, 2020 March 31, 2020 Reportable Segment Reportable Segment Reportable Segment Reportable Segment Reportable Segment Reportable Segment Air Air Air Air Air Air Conditioning Conditioning Chemicals Chemicals Conditioning Conditioning Conditioning Conditioning Chemicals Chemicals Chemicals Total Total Chemicals Other Other Total Total Total Total Total Total Other Other Sales: Sales: Sales: Sales: Sales: Sales: Sales to external customers Sales to external customers Sales to external customers Sales to external customers Sales to external customers Sales to external customers ¥ 2,309,117 ¥ 2,309,117 ¥ 179,884 ¥ 179,884 ¥ 2,309,117 ¥ 2,309,117 ¥ 2,309,117 ¥ 2,309,117 ¥ 2,489,001 ¥ 2,489,001 ¥ 179,884 ¥ 179,884 ¥ 179,884 ¥ 61,304 ¥ 61,304 ¥ 179,884 ¥ 2,489,001 ¥ 2,489,001 ¥ 2,489,001 ¥ 2,550,305 ¥ 2,550,305 ¥ 2,489,001 Intersegment sales Intersegment sales Intersegment sales Intersegment sales Intersegment sales Intersegment sales 871 871 13,850 13,850 871 871 871 14,721 14,721 13,850 13,850 13,850 871 13,850 699 699 14,721 14,721 14,721 15,420 15,420 14,721 Total Total Total Total Total 2,309,988 2,309,988 Total 193,734 193,734 2,309,988 2,309,988 2,309,988 2,309,988 2,503,722 2,503,722 193,734 193,734 193,734 62,003 62,003 193,734 2,503,722 2,503,722 2,503,722 2,565,725 2,565,725 2,503,722 Segment profit Segment profit Segment profit Segment profit Segment profit Segment profit 236,185 236,185 23,770 23,770 236,185 236,185 236,185 236,185 259,955 259,955 23,770 23,770 23,770 5,549 5,549 23,770 259,955 259,955 259,955 265,504 265,504 259,955 Segment assets Segment assets Segment assets Segment assets Segment assets Segment assets 2,228,944 2,228,944 239,069 239,069 2,228,944 2,228,944 2,228,944 2,228,944 2,468,013 2,468,013 239,069 239,069 239,069 35,297 35,297 239,069 2,468,013 2,468,013 2,468,013 2,503,310 2,503,310 2,468,013 Other: Other: Other: Other: Other: Other: Depreciation Depreciation Depreciation Depreciation Depreciation Depreciation ¥ 81,373 ¥ 81,373 ¥14,618 ¥14,618 ¥ 81,373 ¥ 81,373 ¥ 81,373 ¥ 81,373 ¥ 95,991 ¥ 95,991 ¥14,618 ¥14,618 ¥14,618 ¥1,802 ¥1,802 ¥14,618 ¥ 95,991 ¥ 95,991 ¥ 95,991 ¥ 97,793 ¥ 97,793 ¥ 95,991 Amortization of goodwill Amortization of goodwill Amortization of goodwill Amortization of goodwill Amortization of goodwill Amortization of goodwill 30,497 30,497 187 187 30,497 30,497 30,497 30,497 30,684 30,684 187 187 187 187 30,684 30,684 30,684 30,684 30,684 30,684 Investment balance in unconsolidated Investment balance in unconsolidated Investment balance in unconsolidated Investment balance in unconsolidated Investment balance in unconsolidated Investment balance in unconsolidated subsidiaries and associated companies subsidiaries and associated companies subsidiaries and associated companies subsidiaries and associated companies subsidiaries and associated companies subsidiaries and associated companies Investment in property, plant and Investment in property, plant and Investment in property, plant and Investment in property, plant and Investment in property, plant and Investment in property, plant and equipment and intangible assets equipment and intangible assets equipment and intangible assets equipment and intangible assets equipment and intangible assets equipment and intangible assets 101,113 101,113 28,209 28,209 101,113 101,113 101,113 101,113 129,322 129,322 28,209 28,209 28,209 2,633 2,633 28,209 129,322 129,322 129,322 131,955 131,955 129,322 Millions of Yen Millions of Yen Millions of Yen Millions of Yen Millions of Yen Millions of Yen March 31, 2019 March 31, 2019 March 31, 2019 March 31, 2019 March 31, 2019 March 31, 2019 Reportable Segment Reportable Segment Reportable Segment Reportable Segment Reportable Segment Reportable Segment Air Air Air Air Air Air Conditioning Conditioning Chemicals Chemicals Conditioning Conditioning Conditioning Conditioning Chemicals Chemicals Chemicals Total Total Chemicals Other Other Total Total Total Total Total Total Other Other Sales: Sales: Sales: Sales: Sales: Sales: Sales to external customers Sales to external customers Sales to external customers Sales to external customers Sales to external customers Sales to external customers ¥ 2,222,173 ¥ 2,222,173 ¥ 200,790 ¥ 200,790 ¥ 2,222,173 ¥ 2,222,173 ¥ 2,222,173 ¥ 2,222,173 ¥ 2,422,963 ¥ 2,422,963 ¥ 200,790 ¥ 200,790 ¥ 200,790 ¥ 58,146 ¥ 58,146 ¥ 200,790 ¥ 2,422,963 ¥ 2,422,963 ¥ 2,422,963 ¥ 2,481,109 ¥ 2,481,109 ¥ 2,422,963 Intersegment sales Intersegment sales Intersegment sales Intersegment sales Intersegment sales Intersegment sales 714 714 18,124 18,124 714 714 714 18,838 18,838 18,124 18,124 18,124 714 18,124 646 646 18,838 18,838 18,838 19,484 19,484 18,838 Total Total Total Total Total 2,222,887 2,222,887 Total 218,914 218,914 2,222,887 2,222,887 2,222,887 2,222,887 2,441,801 2,441,801 218,914 218,914 218,914 58,792 58,792 218,914 2,441,801 2,441,801 2,441,801 2,500,593 2,500,593 2,441,801 Segment profit Segment profit Segment profit Segment profit Segment profit Segment profit 237,646 237,646 32,534 32,534 237,646 237,646 237,646 237,646 270,180 270,180 32,534 32,534 32,534 6,066 6,066 32,534 270,180 270,180 270,180 276,246 276,246 270,180 Segment assets Segment assets Segment assets Segment assets Segment assets Segment assets 2,230,118 2,230,118 230,736 230,736 2,230,118 2,230,118 2,230,118 2,230,118 2,460,854 2,460,854 230,736 230,736 230,736 41,009 41,009 230,736 2,460,854 2,460,854 2,460,854 2,501,863 2,501,863 2,460,854 Other: Other: Other: Other: Other: Other: Depreciation Depreciation Depreciation Depreciation Depreciation Depreciation ¥57,166 ¥57,166 ¥13,489 ¥13,489 ¥57,166 ¥57,166 ¥57,166 ¥57,166 ¥70,655 ¥70,655 ¥13,489 ¥13,489 ¥13,489 ¥1,667 ¥1,667 ¥13,489 ¥70,655 ¥70,655 ¥70,655 ¥72,322 ¥72,322 ¥70,655 Amortization of goodwill Amortization of goodwill Amortization of goodwill Amortization of goodwill Amortization of goodwill Amortization of goodwill 26,792 26,792 200 200 26,792 26,792 26,792 26,792 26,992 26,992 200 200 200 200 26,992 26,992 26,992 26,992 26,992 26,992 Investment balance in unconsolidated Investment balance in unconsolidated Investment balance in unconsolidated Investment balance in unconsolidated Investment balance in unconsolidated Investment balance in unconsolidated subsidiaries and associated companies subsidiaries and associated companies subsidiaries and associated companies subsidiaries and associated companies subsidiaries and associated companies subsidiaries and associated companies Investment in property, plant and Investment in property, plant and Investment in property, plant and Investment in property, plant and Investment in property, plant and Investment in property, plant and equipment and intangible assets equipment and intangible assets equipment and intangible assets equipment and intangible assets equipment and intangible assets equipment and intangible assets 68,982 68,982 15,914 15,914 68,982 68,982 68,982 68,982 15,914 15,914 15,914 84,896 84,896 2,266 2,266 15,914 84,896 84,896 84,896 87,162 87,162 84,896 Hydraulics segment, the Defense segment and the Electronics segment. Hydraulics segment, the Defense segment and the Electronics segment. Hydraulics segment, the Defense segment and the Electronics segment. Hydraulics segment, the Defense segment and the Electronics segment. Hydraulics segment, the Defense segment and the Electronics segment. Hydraulics segment, the Defense segment and the Electronics segment. time deposits and investment securities. time deposits and investment securities. time deposits and investment securities. time deposits and investment securities. time deposits and investment securities. time deposits and investment securities. 3. The aggregated amount of segment profit equals operating income in the consolidated statement of income. 3. The aggregated amount of segment profit equals operating income in the consolidated statement of income. 4. Intersegment sales are recorded at values that approximate market prices. 4. Intersegment sales are recorded at values that approximate market prices. 4. Intersegment sales are recorded at values that approximate market prices. 4. Intersegment sales are recorded at values that approximate market prices. 4. Intersegment sales are recorded at values that approximate market prices. 4. Intersegment sales are recorded at values that approximate market prices. ¥1,667 ¥1,667 ¥1,667 ¥1,667 ¥72,322 ¥72,322 ¥72,322 26,992 26,992 26,992 ¥72,322 26,992 ¥72,322 ¥72,322 26,992 26,992 ¥72,322 ¥72,322 ¥72,322 26,992 26,992 26,992 ¥72,322 26,992 accounted for using the equity method accounted for using the equity method accounted for using the equity method accounted for using the equity method accounted for using the equity method accounted for using the equity method 10,097 10,097 13,552 13,552 13,552 13,552 13,552 13,552 10,097 10,097 10,097 23,649 23,649 10,097 23,649 23,649 23,649 23,649 23,649 23,649 23,649 23,649 23,649 23,649 23,649 23,649 23,649 23,649 23,649 23,649 2,266 2,266 2,266 2,266 87,162 87,162 87,162 87,162 87,162 87,162 87,162 87,162 87,162 87,162 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 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 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 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 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 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 2. "Reconciliations" include unallocated items and intersegment eliminations. The unallocated corporate assets included in "Reconciliations" 2. "Reconciliations" include unallocated items and intersegment eliminations. The unallocated corporate assets included in "Reconciliations" amounted to ¥175,010 million and ¥211,637 million at March 31, 2020 and 2019, respectively, which consisted mainly of the Company's cash, amounted to ¥175,010 million and ¥211,637 million at March 31, 2020 and 2019, respectively, which consisted mainly of the Company's cash, 2. "Reconciliations" include unallocated items and intersegment eliminations. The unallocated corporate assets included in "Reconciliations" 2. "Reconciliations" include unallocated items and intersegment eliminations. The unallocated corporate assets included in "Reconciliations" 2. "Reconciliations" include unallocated items and intersegment eliminations. The unallocated corporate assets included in "Reconciliations" amounted to ¥175,010 million and ¥211,637 million at March 31, 2020 and 2019, respectively, which consisted mainly of the Company's cash, amounted to ¥175,010 million and ¥211,637 million at March 31, 2020 and 2019, respectively, which consisted mainly of the Company's cash, amounted to ¥175,010 million and ¥211,637 million at March 31, 2020 and 2019, respectively, which consisted mainly of the Company's cash, 2. "Reconciliations" include unallocated items and intersegment eliminations. The unallocated corporate assets included in "Reconciliations" amounted to ¥175,010 million and ¥211,637 million at March 31, 2020 and 2019, respectively, which consisted mainly of the Company's cash, 3. The aggregated amount of segment profit equals operating income in the consolidated statement of income. 3. The aggregated amount of segment profit equals operating income in the consolidated statement of income. 3. The aggregated amount of segment profit equals operating income in the consolidated statement of income. 3. The aggregated amount of segment profit equals operating income in the consolidated statement of income. - 35 - - 35 - - 35 - - 35 - - 35 - - 35 - Annual Report 2020 97 ¥ 2,481,109 ¥ 2,481,109 ¥ 58,146 ¥ 58,146 ¥ 58,146 646 646 646 58,792 58,792 58,792 6,066 6,066 6,066 41,009 41,009 41,009 ¥ 2,481,109 ¥ 2,481,109 ¥ 58,146 ¥ 2,481,109 646 19,484 19,484 ¥ (19,484 ) 19,484 ¥ (19,484 ) 2,500,593 2,500,593 58,792 (19,484 ) 2,500,593 (19,484 ) 276,246 276,246 9 276,246 6,066 9 2,501,863 2,501,863 199,028 2,501,863 199,028 41,009 ¥ 2,481,109 ¥ (19,484 ) ¥ (19,484 ) ¥ (19,484 ) 19,484 ¥ (19,484 ) 2,481,109 2,481,109 (19,484 ) (19,484 ) (19,484 ) 2,481,109 2,481,109 2,500,593 2,481,109 (19,484 ) 9 9 276,255 9 276,255 9 276,246 276,255 276,255 276,255 2,700,891 199,028 199,028 2,700,891 199,028 2,700,891 199,028 2,700,891 2,501,863 2,700,891 ¥ 2,481,109 ¥ 2,481,109 ¥ 2,481,109 2,481,109 276,255 2,700,891 ¥ 2,481,109 Notes to Consolidated Financial Statements 4. Supplemental information (1) Information about geographical areas (a) Sales Japan USA China Millions of Yen March 31, 2020 Asia and Oceania Europe Other Consolidated ¥596,978 ¥666,305 ¥341,284 ¥395,462 ¥405,611 ¥144,665 ¥2,550,305 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 Note: Sales are classified by country or region based on the physical locations of customers. (b) Property, plant and equipment Japan USA China Millions of Yen March 31, 2020 Asia and Oceania Europe Other Consolidated ¥165,554 ¥176,687 ¥80,095 ¥83,741 ¥58,710 ¥15,194 ¥579,981 Japan USA China Millions of Yen March 31, 2019 Asia and Oceania Europe Other Consolidated ¥161,703 ¥134,542 ¥70,657 ¥61,803 ¥44,607 ¥9,651 ¥482,963 (2) Significant impairment losses on long-lived assets by reportable segment Millions of Yen March 31, 2020 Air Conditioning Chemicals Other Eliminations and Corporate Consolidated Impairment losses on long-lived assets ¥23,555 ¥23,555 - 36 - 98 (3) Information about goodwill (a) Balance of goodwill by reportable segment Goodwill for each reportable segment at March 31, 2020 and 2019 was as follows: Millions of Yen 2020 Air Conditioning Chemicals Other Eliminations and Corporate Goodwill ¥281,061 ¥908 Millions of Yen 2019 Air Conditioning Chemicals Other Eliminations and Corporate Goodwill ¥321,183 ¥1,136 21. SUBSEQUENT EVENT a. Borrowing of Significant Amount of Funds Consolidated ¥281,969 Consolidated ¥322,319 The Company entered into a syndicated loan financing arrangement on May 26, 2020. The following is the overview of the syndicated loan. Overview of the syndicated loan (1) Amount of borrowing: ¥200,000 million (2) Lender: Sumitomo Mitsui Banking Corporation and other 17 financial institutions (3) Date of contract conclusion: May 26, 2020 (4) Date of borrowing: May 29, 2020 (5) Due date: May 31, 2022 (Provided, however, that repayment before maturity is permitted) (6) Use of funds: The Group's ongoing operations (7) Applicable interest rate: Tibor＋0.3% (8) Provision of security: None b. Appropriations of Retained Earnings Resolutions approved by the Company's Board of Directors' at the meeting held on May 12, 2020 are subject to approval at the general shareholders' meeting planned to be held on June 26, 2020. Payment of year-end cash dividends of ¥80 per share to shareholders at March 31, 2020, totaling ¥23,407 million is to be settled. - 37 - Annual Report 2020 99 Independent Auditor’s Report Independent Auditor’s Report 100 Annual Report 2020 101 Independent Auditor’s Report 102 Corporate Data Corporate Data (As of March 31, 2020) Company Name Daikin Industries, Ltd. Head Office Tokyo Office Umeda Center Bldg., 2-4-12, Nakazaki-Nishi, Kita-ku, Osaka 530-8323, Japan Phone: 81-6-6373-4312 URL: http://www.daikin.com/ JR Shinagawa East Bldg., 2-18-1, Konan, Minato-ku, Tokyo 108-0075, Japan Phone: 81-3-6716-0111 Fiscal Year-End Date March 31 on an annual basis Date of Founding October 25, 1924 Date of Establishment February 11, 1934 Paid-in Capital ¥85,032 million Number of Shares of Common Stock Issued 293,113 thousand Number of Shareholders 27,028 Major Shareholders • The Master Trust Bank of Japan, Ltd. (Trust Account) • Japan Trustee Services Bank, Ltd. (Trust Account) • Sumitomo Mitsui Banking Corporation • Japan Trustee Services Bank, Ltd. (Trust Account 7) • Japan Trustee Services Bank, Ltd. (Trust Account 5) • Japan Trustee Services Bank, Ltd. (Retirement Benefit Trust Account for The Norinchukin Bank, re-entrusted by Sumitomo Mitsui Trust Bank, Limited) • MUFG Bank, Ltd. • JP Morgan Chase Bank 385151 (Standing proxy Mizuho Bank Settlement Sales Department) • Japan Trustee Services Bank, Ltd. (Trust Account 4) • Government of Norway (Standing proxy Citibank, N. A., Tokyo Branch) Number of Subsidiaries and Affiliated Companies Subsidiaries: 313 Affiliates: 20 Number of Employees 80,369 (Consolidated) Stock Exchange Listing Tokyo Advertising Method The Company uses the electronic advertising method, posting advertisements on its website (http://www.daikin.co. jp/e-koukoku/). However, when electronic advertising is not possible due to technical problems or other circumstanc- es, the Company will post advertisements in the Nikkei Shimbun. Shareholder Register Administrator Mitsubishi UFJ Trust and Banking Corporation 3-6-3, Fushimicho, Chuo-ku, Osaka 541-8502, Japan Ordinary General Meeting of Shareholders June Auditor Deloitte Touche Tohmatsu LLC Annual Report 2020 103 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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