Annual Report 2017 - Daikin

1 Annual Report 2017. Fiscal Year Ended March 31, 2017. Meeting Your Expectations and Earning Your Trust by Both Solving Problems of Society and Expanding Our Business Focusing on the air-conditioning and fluorochemicals business, Daikin Industries, Ltd. operates in more than 150 countries, contributing to healthy and comfortable lives through the providing of air conditioners and a wide range of other products and services. Constantly refining the atmosphere- and environment-related technologies that it has developed since its founding, Daikin strives to both solve problems of society and expand its business. That is how Daikin Industries' corporate value is born. Under the FUSION 20 strategic management plan started in fiscal 2017, Daikin Industries is working to meet your expectations and earn your trust by contributing to the sustainable development of global society through new value co-created by bringing together not only internal expertise of our Group but also external expertise obtained via open innovation.

2 Contents Our Group Philosophy/ Corporate Governance 18 Consolidated Statement of Process of Value Creation 1 Directors, Audit and Supervisory Comprehensive Income 45. Financial Highlights 2 Board Members, and Consolidated Statement of Executive Officers 21 Changes in Equity 45. At a Glance 3. ESG Summary 22 Consolidated Statement of A Message from the CEO 4 Cash Flows 46. CSR (Corporate Social Responsibility) 24. Interview with the CEO 6 Notes to Consolidated Financial Section Financial Statements 47. Review of Operations Eleven-Year Financial Highlights 32 Independent Auditors' Report 73. Air Conditioning 10. Financial Review 34 Corporate Data 74. Chemicals 14. Consolidated Balance Sheet 42. Oil Hydraulics 16. Consolidated Statement of Income 44. Defense 17. 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.

3 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 p erformance of the Company may be influenced by economic trends, strong competition in the industrial sectors where it conducts its operations, foreign currency exchange rates, and changes in taxation and other systems. For these reasons, these forward-looking statements are subject to latent risk and uncertainty. Our Group Philosophy 1. Create New Value by Anticipating the Future Needs of Customers 2. Contribute to Society with World-Leading Technologies 3. Realize Future Dreams by Maximizing Corporate Value 4. Think and Act Globally 5. Be a Flexible and Dynamic Group 1. Flexible Group Harmony 2. B. uild Friendly yet Competitive Relations with Our Business Partners to Achieve Mutual Benefit 6.

4 Be a Company that Leads in Applying Environmentally Friendly Practices 7. With Our Relationship with Society in Mind, Take Action and Earn Society's Trust 1. Be Open, Fair, and Known to Society 2. Make Contributions that Are Unique to Daikin to Local Communities 8. The Pride and Enthusiasm of Each Employee Are the Driving Forces of Our Group 1. The Cumulative Growth of All Group Members Serves as the Foundation for the Group's Development 2. Pride and Loyalty 3. Passion and Perseverance 9. Be Recognized Worldwide by Optimally Managing the Organization and its Human Resources, under Our Fast & Flat Management System 1. Participate, Understand, and Act 2. Offer Increased Opportunities to Those who Take on Challenges 3. Demonstrate Our Strength as a Team Composed of Diverse Professionals 10. An Atmosphere of Freedom, Boldness, and Best Practice, Our Way . Process of Value Creation Direction for Group Strategic Assumptions Strategy: FUSION 20 FY2021 Goals Development Environmental SWOT 12 Group Strategies Awareness Strengths Basic Approaches Heat pump technology Contribute to Air Existing business domains conditioning as Inverter technology (AC, Chemicals, Filters) solving problems a part of society's Refrigerant control 1.

5 AC in North America 2. AC in Asia of customers and infrastructure technology 3. Chemicals 4. Filters Sales and service network society while enables the creation of comfortable Development and New business domains/structure working to achieve (Environment/Energy, IAQ/AE Engineering). lives. production closest to market sales of 5. New businesses to quickly produce results Heating/Water Heaters, Energy Solutions trillion and an An enterprise Weaknesses 6. Strategic business in the long-term Commercial operating income When our Refrigeration, Next-generation Refrigerants/Gas, margin of 12% group that will Sales skewed towards IAQ/Air Environment (AE) Engineering products are used, main products "Co-Create New a large amount of (air conditioners). Technologies and monozukuri electricity is Value in the Air 7. Differentiated technologies/products with the consumed. Opportunities Technology and Innovation Center and Environment 8. Enhanced monozukuri in the AC business Global cooperation on Create new value Fields".

6 Climate change (Paris Agreement) Corporate management and contribute to Setting of sustainable 9. Lean and competitive fixed-cost structure Reducing development goals the sustainable 10. Optimal inventory aiming at cash flow the impact on (UN SDGs) maximization development of climate change is a top-priority issue 11. Financial operation standardization and IT. integration society through for us. Threats our business Changes in de facto Unique corporate philosophy standards for 12. Enhanced HR based on people-centered air conditioning management ESG. Corporate Governance, Environment, New Value Creation, Customer Satisfaction, Human Resources, Compliance Risk Management, Risk Management, CSR Promotion System, Respect for Human Rights, Supply Chain Management, Stakeholder Engagement, Regional Society Daikin INDUSTRIES, LTD. Annual Report 2017 1. Financial Highlights Daikin Industries, Ltd. and Consolidated Subsidiaries Years Ended March 31. Millions of Yen 2016 2017.

7 Operating Results (for the year): Net sales 2,043,691 2,043,969. Gross profit 711,576 730,935. Operating income 217,872 230,769. Net income attributable to owners of parent 136,987 153,939. Cash Flows (for the year): Net cash provided by operating activities 226,186 267,663. Net cash used in investing activities (105,493) (128,823). Free cash flow (Note) 120,693 138,840. Net cash used in financing activities (85,422) (73,544). Financial Position (at year-end): Total assets 2,191,105 2,356,149. Total shareholders' equity 1,014,409 1,111,636. Per Share Data (yen): Net income (basic) Shareholders' equity 3, 3, Cash dividends Cash flow per share 413 475. Ratios (%): Gross profit margin Operating income margin Return on shareholders' equity (ROE) Shareholders' equity ratio Note: F ree cash flow = Net cash provided by operating activities + net cash used in investing activities Net Sales, Gross Profit, Operating Income and ROE. and Gross Profit Margin Operating Income Margin ( billion) (%) ( billion) (%) %.

8 2,400 40 250 15 15. 200 12 12. 1,800 30. 150 9 9. 1,200 20. 100 6 6. 600 10. 50 3 3. 0 0 0 0 0. 2013 2014 2015 2016 2017 2013 2014 2015 2016 2017 2013 2014 2015 2016 2017. Net Sales Gross Profit Gross Profit Margin Operating Income Operating Income Margin 2. At a Glance Defense Air-Conditioning Chemicals Percentage of Net Sales E. Oil Hydraulics Net Sales and Operating Income Major Products Description Air-Conditioning ( billion) ( billion) Room air-conditioning systems Since becoming the first in Japan 2,000 1, 200 Air purifiers to manufacture packaged Heat-pump hot-water-supply and room-heating air-conditioning systems in 1951, 1,500 150. systems Daikin has supported comforta- Packaged air-conditioning systems ble living based on the strengths Multiple air-conditioning systems for office of technologies that it has itself 1,000 100. buildings nurtured as the world's sole Air-conditioning systems for facilities and plants manufacturer to create a full line 500 50 Absorption refrigerators of products from refrigerants to Freezers air conditioners.

9 0 0 Water chillers 2013 2014 2015 2016 2017 Turbo refrigerator equipment Air-handling units Air filters Industrial dust collectors Marine-type container refrigeration Chemicals ( billion) ( billion) Fluorocarbons In 1933, Daikin was the first 180 24 Fluoroplastics in Japan to engage in research Fluoroelastomers on fluorinated refrigerants. Today, Fluoropaints our activities range from research 120 16 Fluoro coating agents and development to commercial- Semiconductor-etching products ization, and we offer a lineup of Water and oil repellent agents 1,800 fluorine c ompounds. 60 8 Pharmaceuticals and intermediates Dry air suppliers 0 0. 2013 2014 2015 2016 2017. Oil Hydraulics ( billion) ( billion) Oil hydraulic pumps Daikin 's unique hydraulic 40. 0. 4 Oil hydraulic valves technologies offer outstanding Cooling equipment and systems energy-conservation performance 30 3 Inverter controlled pump motors and are contributing to the Hydrostatic transmissions development of industry by Centralized lubrication units and systems unleashing the potential of 20 2.

10 Power control. 10 1. 0 0. 2013 2014 2015 2016 2017. Defense ( billion) ( billion) Warheads for Japan's Ministry of Defense/ Daikin 's superior machining 20 Warhead parts for guided missiles and quality control technologies Home-use oxygen therapy equipment are used in the production of 15 defense-related products and other industries where high lev- els of precision and performance 10 are critical. 5 0 0. 2013 2014 2015 2016 2017. Daikin INDUSTRIES, LTD. Annual Report 2017 3. A Message from the CEO. For the success of plan, we will further implement policies of the Group. In fiscal 2017, we were able to achieve a good performance despite the severe busi- ness environment. Maintaining that momen- tum, we will move forward with the FUSION 20 priority policies of thor- oughly strengthening existing businesses, expanding into new business domains, and trans- forming our business structure. June 2017. Masanori Togawa President and CEO. 4. our FUSION 20 strategic management strengthen management and steadily leading to new growth and development In fiscal 2017, the degree of recovery greatly increased production-process to provide innovative products and ser- seen varied between countries and efficiency.