avatar DENSO MANUFACTURING UK LTD. Manufacturing
  • Location: SHROPSHIRE 
  • Founded:
  • Website:

Pages

  • Page 1

    Annual Report 2010 For th e y ear en ded M a r c h 31, 2 0 1 0


  • Page 2

    Profile DENSO Corporation, headquartered in Kariya, Aichi Prefecture, Japan, is a leading global supplier of advanced automotive technologies, systems and components. Since its foundation in 1949, the Company has spurred industry growth through pioneering research and development and superior quality products. As one of the world’s top suppliers of automotive components, DENSO works hand-in-hand with all major automakers worldwide in the fields of climate control, engine management, body electronics, driving control and safety, hybrid vehicle components, and information and communications. DENSO also utilizes its proprietary technologies and expertise in the fields of industrial systems and non-automotive thermal systems. The company currently employs approximately 120,000 people in 32 countries and regions including Japan. Contents n Financial Highlights 1 n A Message From the President 2 n Review of Operations by Segment 6 n Working to Enhance Corporate Value 12 n Executive Management 18 n Financial Section 19 n Corporate Data 65 n Investor Information 68 Forward-looking Statements This annual report contains forward-looking statements about DENSO’s future plans, strategies, benefits and performance that are not historical facts. They are based on current expectations, estimates, forecasts and projections about the industries in which it operates and benefits and assumptions made by management. As the expectations, estimates, forecasts, and projections are subject to a number of risks, uncertainties and assumptions, they may cause actual results to differ materially from those projected. DENSO, therefore, wishes to caution readers not to place undue reliance on forward-looking statements. Furthermore, the company undertakes no obligation to update any forward-looking statements as a result of new information, future events or other developments, risks, uncertainties and assumptions mentioned.


  • Page 3

    Financial Highlights DENSO CORPORATION and Consolidated Subsidiaries Years ended March 31, 2010, 2009 and 2008 Thousands of Millions of yen Percent change U.S. dollars 2010 2009 2008 2010/2009 2010 Financial Highlights Net Sales: ¥2,976,709 ¥3,142,665 ¥4,025,076 (5.3%) $31,993,863 Sales in Japan 1,518,105 1,615,771 1,976,877 (6.0%) 16,316,692 Sales outside Japan 1,458,604 1,526,894 2,048,199 (4.5%) 15,677,171 Net Income (Loss) 73,427 (84,085) 244,417 – 789,198 Total Assets 3,364,070 3,018,438 3,643,418 11.5% 36,157,244 Equity 2,032,264 1,900,719 2,282,677 6.9% 21,842,906 Capital Expenditures 114,422 314,425 343,779 (63.6%) 1,229,815 Depreciation 237,944 276,624 263,519 (14.0%) 2,557,438 R&D Expenses 270,077 297,148 311,474 (9.1%) 2,902,805 Yen Percent change U.S. dollars Per Share: Basic net income (loss) ¥ 91.11 ¥ (104.13) ¥ 299.96 – $ 0.98 Cash dividends 27.00 40.00 54.00 (32.5%) 0.29 Equity 2,378.18 2,220.89 2,658.06 7.1% 25.56 Billions of yen Percent change Foreign Exchange: Foreign exchange (loss) gain ¥ (43.8) ¥ (56.6) ¥ 14.9 (22.6%) U.S. dollar (21.7) (22.5) (7.5) (3.6%) Euro (9.7) (8.0) 9.7 21.3% Impact of ¥1/U.S.$ change 2.3 1.9 2.6 21.1% Impact of ¥1/Euro change 0.6 0.4 0.8 50.0% Yen Percent change Average Exchange Rate: Yen/U.S. dollar ¥ 91.31 ¥ 100.90 ¥ 113.24 (9.5%) Yen/Euro 129.24 146.14 160.26 (11.6%) Number of Employees 120,812 119,919 118,853 Note: U.S. dollar amounts have been translated, for convenience only, at the rate of ¥93.04=US$1, the approximate exchange rate prevailing on March 31, 2010, the last trading day of the fiscal year. Dividends Net Sales Net Income (Loss) (With Treasury Stock Repurchases) (Billions of yen) (Billions of yen) (Billions of yen) 5,000 250 80 200 4,000 60 150 3,000 100 40 50 2,000 0 20 1,000 –50 0 –100 0 06 07 08 09 10 06 07 08 09 10 06 07 08 09 10 n฀Cash dividends n฀Treasury stock repurchases Figures of the treasury stock repurchases show the amounts that have been purchased between the general shareholders’ meeting of one year to the next. DENSO Corporation Annual Report 2010 1


  • Page 4

    A Message From the President A Message From the President Nobuaki Katoh President and CEO Review of Fiscal 2010 Since the second quarter of fiscal 2010, the year ended March development costs and capital investment. At the same 31, 2010, the global economy picked up toward the end of time, we streamlined and standardized business pro- the fiscal year due to economic stimulation measures in vari- cesses in non-manufacturing sectors at all companies ous countries and business recovery in Asia. In the auto indus- across the globe. These efforts helped us steadily reduce try, the markets recovered in China, India and other emerging fixed costs and return to profitability, in spite of a year-on- nations, but automobile sales in the United States fell year on year decline in sales. year, and sales in Japan were even, marking a clear contrast Our financial performance in fiscal 2010 was as follows: between emerging nations and developed countries. Net sales totaled ¥2,976.7 billion, a 5.3 percent decrease from In response to these market challenges and changes, last the previous fiscal year. On the earnings front, operating fiscal year DENSO promoted a mid-term profit recovery policy income amounted to ¥136.6 billion, a year-on-year increase of for structural reform that consists of the two key goals of ¥173.9 billion from last year’s operating loss, mainly due to the building a leaner and stronger corporate structure and of insti- benefits of reduced fixed costs. Net income totaled ¥73.4 bil- tuting our approach to future growth. lion, a year-on-year increase of ¥157.5 billion from last year’s To build a leaner and stronger corporate structure, the net loss. On a local currency basis, all regions except for DENSO Group further strengthened its existing initiative Japan and Europe saw increases in net sales, and all regions to reduce fixed costs. After a comprehensive review of saw increases in operating income. all expenditures, we reduced spending, research and 2 DENSO Corporation Annual Report 2010


  • Page 5

    Improving Mid-term Profit Recovery Leaner and Stronger As a result of these research and development efforts, DENSO’s sales to automakers in Japan, the United States and Last fiscal year, our employees worked hard to reduce fixed Europe are increasing, and we are committed to further costs, and their efforts were successful as we succeeded in strengthening these initiatives. reducing fixed costs by ¥157.6 billion, exceeding our initial In emerging markets, a company-wide project team is A Message From the President target. That meant we achieved our goal of profitability at 70 leading efforts on several different fronts, including optimizing percent capacity earlier than planned. functions, performance and structures; setting quality stan- dards suitable for the region; and examining how to procure Instituting Our Approach to Future Growth local parts and materials. Our goal is to develop competitive, Our approach for future growth is focused on developing optimal products for each region. We have also been prepar- technology and building systems that meet the needs of ing a system that enables us to conduct all business opera- regions worldwide, improving fuel efficiency and reducing CO2 tions, from development to production and sales, in the local emissions, and responding to emerging markets. region, ensuring that we can meet local needs in a timely There is an accelerating trend in the automobile industry manner. For example, we recently began construction on a for electrification; smaller, lighter vehicles; and systemization. new plant at our current facility in Brazil to increase production DENSO continues to develop technologies that can be used of car air conditioners and radiators. This new plant is sched- in a wide range of vehicles, from conventional engines to uled to begin production in January 2011. This follows expan- hybrid and electric vehicles. In particular, we are focusing on sion work on a plant in India last year. developing gasoline direct injection components that help improve the fuel efficiency of conventional engines; a common rail system for diesel vehicles to reduce CO2 emissions; idle Reduce Fixed Cost stop/start systems that improve fuel efficiency and improve ¥104.0 Profitable even the starter’s efficiency and durability; smaller and lighter hybrid Billion yen operating at ¥157.6 vehicle components; and energy management systems that Billion yen 70% capacity make the best use of the heat energy and electric power gen- erated by vehicles. Previous Year Plan Result Mid-term Profit Recovery Policy Products for Emerging Markets High Cost Reduction Building a Leaner and Our Approach for Future Stronger Corporate Cost 30% Growth Structure reduction Cost Half Reduce fixed costs Improving Fuel Efficiency The Americas・Europe・Japan Emerging Markets Efficiency improvement of nonmanufacturing Reducing CO2 emissions Target of 50% cost reduction for 20 products sectors by standardization Achieved 30 percent cost reduction so far DENSO Corporation Annual Report 2010 3


  • Page 6

    We have also been putting in place systems and struc- We are continuing our efforts to cut our development costs in tures that support local development of lower-cost technolo- half and grow sales. Going forward, we will localize our busi- gies. Our goal is to cut development costs by 50 percent. ness further and consider expanding our technical centers in Applying these lower-cost technologies to 20 of our current China, India and Brazil. products has allowed us to cut costs by 30 percent to date. A Message From the President Outlook for Fiscal 2011 We anticipate an unfavorable impact from the termination or Diversifying Powertrain contraction of sales promotion measures, such as purchase 100% Conventional Vehicles replacement subsidies in Japan and Western Europe, despite 80% (Gasoline Diesel) a moderate expansion in overall global demand driven by the 60% 40% recovery of the U.S. economy and increasing demand in Idle-stop/start System (Company estimate) 20% emerging markets such as China, India and Brazil. In addition, Hybrid (Electric Vehicles) 0% we believe the operating environment of the DENSO Group 2006 2015 2025 will continue to be severe, partly due to the instability of the global economy. further strengthening technological development, and expand- In mature markets, we expect an accelerating shift to ing business in emerging markets with an emphasis on insti- hybrid vehicles, electric vehicles and idle-stop/start systems tuting its approach to future growth. due to fuel-efficiency regulations and environmental concerns. Our business forecasts for fiscal 2011, the year from April In the growing emerging markets, we expect that reasonably 1, 2010 to March 31, 2011, includes net sales of ¥3,060.0 priced compact cars will remain mainstream and sales of such billion, operating income of ¥150.0 billion and net income of vehicles will increase. ¥98.0 billion. DENSO is strongly committed to its structural reform tar- gets of building a streamlined and lean business structure, Mid-term Profit Recovery Activity – Summary – Sales (Billions of Yen) Over 4,200 4,025 Emerging markets Fuel-efficient compact cars Sales expansion of current products 3,143 3,060 2,977 Current Business FY08 FY09 FY10 FY11 (Forecast) FY15 (Forecast) FY16 (Forecast) Target FY15 : Over 4,000 billion yen FY16 : Over 4,200 billion yen 4 DENSO Corporation Annual Report 2010


  • Page 7

    FY2011 (Forecast) FY2010 Change ¥90/$ ¥91/$ –¥1/$ Foreign Exchange Rate (US$) ¥130/Euro ¥129/Euro ¥1/Euro (Millions of Units) Domestic Car Production 8.86 8.87 –0.01 –0.1% Overseas Car Production of Japanese 12.34 11.97 0.37 3.1% Manufactures (North America) (3.78) (3.55) (+0.23) (6.5%) A Message From the President Developing Systems for Future Growth Smaller and Lighter Electrification System Approach s s s Developing smaller and lighter components Developing hybrid and electric vehicles Fuel saving through system collaboration for fuel-efficient compact cars Returning Profits to Shareholders At DENSO, we consider the proactive return of profits to structural reform and achieve continued business growth, shareholders to be one of the Company’s most important thereby meeting the expectations and maintaining the trust of management objectives. This involves a combination of divi- our shareholders, customers and other stakeholders. dends and share buybacks. Our fundamental policy is to meet On December 16, 2009, DENSO commemorated the 60th the expectations of our shareholders by consistently increas- anniversary of its founding. We sincerely appreciate the sup- ing the cash dividend per share over the long term, giving due port of all our stakeholders that made this possible. consideration to a comprehensive range of factors that include In the coming fiscal year, we will focus our resources on consolidated business performance and the dividend payout research and development activities directed at the next five ratio. Based on DENSO’s business performance and the busi- and ten year periods and to accelerating our business growth. ness environment, the dividend for fiscal 2010 was ¥27 per We will continue to strive to meet the expectations of share- share, for a dividend payout ratio of 29.7 percent. holders and investors, and we thank you for your continued We continue to buy back shares, while considering cash support of our activities. flow, for the purpose of increasing per-share corporate value, returning more profits to shareholders and ensuring capital July 2010 policy flexibility to meet changes in business conditions. In fiscal 2010, the business climate remained harsh and the outlook was extremely unclear, so our priority was to secure enough funds for minimally necessary business investment and development and on paying a dividend. In order to fur- Nobuaki Katoh President and CEO ther raise shareholder value, we must accelerate our DENSO Corporation Annual Report 2010 5


  • Page 8

    Review of Operations by Segment Automotive Business Segment Thermal Systems Powertrain Control Information and Systems Safety Systems P. 8 P. 9 P. 9 Sales (Percentage change from previous year) ¥901.7 billion (–10.4%) ¥684.4 billion (–7.8%) ¥526.8 billion (+11.7%) Percentage of Net Sales 30.3% 23.0% 17.7% Review of Operations by Segment Main Products [Air conditioning Products] [Engine Control Components] [Body Electronics Components] Air conditioning systems for cars Ignition coils, Magnetos, Spark plugs, Instrument clusters, Integrated Glow plugs, Exhaust gas sensors, climate control panels, Smart keys, [Cooling Systems and Ceramic substrates, Diesel Particu- Remote keyless entry controllers, Components] late Filters (DPFs), Engine ECUs for Rear and corner sonars, Car security Radiators, Cooling fans, Inter coolers, motorcycles systems, Body ECUs Oil coolers, Engine cooling modules, Reserve tanks [System Control Components] [ITS Products] Valves (Exhaust gas recirculation Car navigation systems, Electronic [Climate, Cooling and Heating (EGR) valves, Automatic transmission Toll Collection (ETC) on-board equip- Products] (AT) control valves, AT solenoid ment, Data communication modules Air conditioning systems for buses valves, and others), Canisters, Knock and construction equipment, Truck sensors, Accelerator sensors, Vari- [Driving Assist and Safety refrigeration units, Air purifiers able cam timing (VCT) components, Products] Throttle bodies, Air flow meters, Oil Airbag sensors and ECUs, ABS/ESC filters, Air cleaners, Integrated air fuel actuators and ECUs, Millimeter-wave modules, Shift-by-wire actuators, radars and ECUs for pre-crash safety Horns systems and adaptive cruise control systems, Laser radars and ECUs for [Diesel Injection Products] adaptive cruise control systems, Common rail systems, In-line fuel Cameras and ECUs for lane keeping injection pumps, Rotary fuel injection assist, HID ballast, ECUs for adaptive pumps, Nozzles, Fuel filters front lighting systems [Gasoline Injection Products] Fuel pumps, Fuel pump modules, Fuel injectors, Direct injection components (Injector, Pump) Air conditioning unit Fuel pump module Car navigation system Engine cooling module Common rail systems Millimeter-wave radar Note: In addition to the above, the other business segment recorded net sales of ¥38.2 billion. 6 DENSO Corporation Annual Report 2010


  • Page 9

    Non-automotive Electric Systems Electronic Systems Small Motors Industrial Systems and Consumer Products P. 10 P. 10 P. 11 P. 11 ¥265.8 billion (–9.5%) ¥297.3 billion (+8.9%) ¥222.5 billion (+1.9%) ¥40.0 billion (–24.2%) 8.9% 10.0% 7.5% 1.3% Review of Operations by Segment [Engine Electrical Systems] [Electronics Products] Windshield wiper systems, Wind- [Automatic ID Data Capture Starters, Alternators Engine ECUs, Transmission ECUs, shield washer systems, Power Devices] Power management ECUs window motors, Power seat motors, Bar code handy scanners and handy [EHV Components] Power sliding door motors, Power terminals, QR code scanners and Inverters, DC-DC converters, Battery [Electronics Devices] steering motors, Motors for engine handy terminals, IC card readers/ monitoring units Semiconductor sensors, ICs, Power control systems, and other automo- writers, Radio Frequency Identification modules, EL displays tive motors (RFID) systems [Electric Control Components] Sensors and ECUs for electric power [Relays] [Factory Automation (FA) steering systems Products] Industrial robots, Programmable controllers [Refrigeration and Air Conditioning Systems] Cooling units for electronic devices (Mobile phone base stations, Com- puters, and others), Kerosene heat- pumps, Spot coolers and heaters [Consumer Products] CO2 refrigerant heat-pump water heaters, Automatic faucets Alternator Engine ECU Windshield wiper system Industrial robot Battery monitoring unit Semiconductor sensor (Inertia sensor) Power window motor CO2 refrigerant heat-pump water heater DENSO Corporation Annual Report 2010 7


  • Page 10

    Thermal Systems Net Sales (Billions of yen) [ New Business Initiatives ] Constructing a New Plant in Brazil 10 DENSO is building new plant for DENSO DO BRASIL LTDA. (DNBR) 09 that is slated to start production in January 2011. DNBR manufac- 08 07 tures and sells car and bus air conditioners, radiators and other 06 products. All signs point to more growth in demand for automobiles 0 300 600 900 1,200 1,500 in Brazil. The new factory will give DNBR the space needed to expand output capacity for increasing sales of current products and capturing orders for new products. [ New Products & Technology ] Developed Car Air Conditioning System Car Air Conditioning System Manufacturing with Ejector Company Established in Morocco DENSO has developed the world’s first passenger vehicle conditioning DENSO has established a new company called DENSO Thermal Review of Operations by Segment system that has an ejector, which is a small refrigerant injection device. Systems Morocco S.A.R.L. to manufacture car air conditioners in the This system cuts compressor power consumption by up to about 25% city of Tangier on the country’s northern coast. Plans call for the factory compared with conventional air conditioning systems at high tempera- to be completed in April 2011 and production to begin the following tures. Toyota’s new Prius uses this new system. December. The second DENSO production base in Africa, this company Most air conditioning systems for large buses and freezers for will be used to supply car air conditioning systems to automobile trucks consume a large amount of fuel because of the substantial power assembly plants in Africa. these systems require. In 1991, DENSO started developing a new freezing cycle with the aim of lowering energy consumption. In 2003, Joint Venture in India for Design of DENSO created the world’s first practical “ejector cycle,” which is a Car Air Conditioners freezing cycle using an ejector. Cooling efficiency improved dramatically, DENSO and Subros Limited have reached an agreement to jointly cutting power consumption by as much as about 25%. Truck freezing establish a company in India that will design car air conditioners and units, household CO2 heat-pump water heaters and other equipment other products. Subros is India’s leading car air conditioner manufac- now benefit from this breakthrough. turer and receives technical assistance from DENSO. The tentative name of the new company is DENSO Subros Thermal Engineering The new air conditioning system with an ejector uses this ejector cycle Center India Limited. The company will be established in September technology in automobiles for the first time. Car air conditioning systems 2010 with DENSO holding a 74% equity stake and Subros the remain- have pipes to link the compressor, condenser and evaporator. Placing ing 26%. an ejector in the engine compartment requires combining the ejector with an existing component because of the limited amount of space. Acquisition of Italian Aftermarket Distributor of DENSO decided to devise a way to integrate the ejector into the Automotive Climate Control Products evaporator. In May 2009, DENSO completed work on the world’s first DENSO reached an agreement with Finber S.p.A., which develops, car air conditioning system equipped with an ejector. The new ejector manufactures and sells automotive components and other products technology provides benefits not only for car air conditioning systems throughout Europe, to purchase all shares of its subsidiary CTR s.r.l. but also for freezing warehouses, room air conditioners and many The acquisition was completed on June 1. CTR is a distributor of other products. compressors, car air conditioner parts, heat exchangers and many other items. The company has an expansive sales and service network Car air conditioning system and is one of the largest aftermarket distributors of automotive climate with ejector control products in Italy. CTR will operate as a subsidiary of DENSO Evaporator Thermal Systems, which manufactures and sells climate control sys- tems and other thermal products in Italy. Ejector 8 DENSO Corporation Annual Report 2010


  • Page 11

    Powertrain Control Systems Net Sales (Billions of yen) [ New Products & Technology ] 10 DENSO Introduces the Twin Tip Fuel-efficient 09 Spark Plug 08 DENSO has started selling the new spark plug named “Twin Tip”, which 07 features fuel efficiency and environmental responsibility along with a 06 reasonable price. This innovative spark plug adds a small tip to the 0 200 400 600 800 1,000 ground electrode that receives the spark. Along with the tip on the central electrode that generates the spark, this results in a “Twin Tip” structure. Both electrodes are made of a nickel alloy that was newly developed by DENSO. This material holds down cost and reduces the diameter of the central electrode by 40% compared with conventional DENSO nickel spark plugs. The result is better ignition performance Conventional Twin Tip New product because the spark suppression effect*1 is suppressed. For automobiles, Review of Operations by Segment product this improvement cuts CO2 emissions by 0.8%*2 while lowering fuel consumption by 1.2% and boosting torque by 1.1%. *1 As the spark between a spark plug’s electrodes grows during combustion of the air-fuel mixture, the spark loses heat when coming into contact with electrodes and ignition performance suffers as a result. *2 Based on DENSO’s comparison with a conventional DENSO nickel spark plug. All data are supplied by DENSO. Information and Safety Systems Net Sales (Billions of yen) [ New Products & Technology ] 10 Developed Organic Electroluminescence Display 09 Organic electroluminescence (EL) displays incorporate an organic 08 compound that emits light in response to an electric current. Since 07 these displays produce their own light, they are much easier to see 06 than conventional displays. Furthermore, organic EL displays are slim- 0 100 200 300 400 500 600 700 mer, lighter and more energy-efficient because no backlighting is needed. With much better visibility than LCDs, organic EL displays help make driving easier as well. Toyota’s Lexus RX and HS already use these displays. Organic electroluminescence display DENSO Corporation Annual Report 2010 9


  • Page 12

    Electric Systems Net Sales (Billions of yen) [ New Products & Technology ] 10 Development of Battery Monitoring Unit for 09 Lithium-ion Batteries 08 Toyota introduced late in 2009 the Prius Plug-in Hybrid, which can be 07 recharged from an ordinary household power outlet. A high-performance 06 lithium-ion battery powers the vehicle. Using this battery allows the 0 100 200 300 400 Prius to function almost like an electric vehicle, yielding a big saving in fuel consumption. To operate the battery safely and efficiently, DENSO developed a lithium-ion battery monitoring unit that checks battery voltage, current, temperature and other parameters. The unit is installed in the Prius Plug-in Hybrid. Review of Operations by Segment Lithium-ion battery monitoring unit Electronic Systems Net Sales (Billions of yen) 10 The newly developed temperature sensor 09 08 07 06 0 100 200 300 400 [ New Products & Technology ] [ New Business Initiatives ] Development of Exhaust Temperature Sensor with DENSO Electronics Begins Full-scale Operations Higher Temperature Detection Accuracy DENSO Electronics Corporation started full-scale business opera- Diesel exhaust temperature sensors are critical to temperature control tions in April 2009 as a manufacturer and marketer of automotive for diesel particulate filter (DPF)* regeneration, in which the filtering semiconductor products. DENSO plans to invest about ¥24 billion capability is restored and regenerated by burning particulate matter in this company between the current fiscal year and fiscal 2015 with trapped in the filter. With much better temperature detection accuracy the goal of raising this company’s annual sales to about ¥100 billion than conventional sensors, this new sensor permits monitoring the in fiscal 2015. Automotive electronic control systems are certain to temperature in and around the center of the DPF with even greater become even more advanced and complex because of rising precision. By improving the efficiency of DPF regeneration control, this demands for better environmental performance, safety, comfort and higher accuracy yields two benefits. First is better exhaust filtering convenience. Demand for automotive semiconductor products is performance. Second is lower fuel consumption because less fuel is expected to grow significantly as automakers continue to improve needed for the DPF regeneration process. The new sensor has been vehicles to meet these demands. used in diesel engines for commercial vehicles sold in the United States since the fall of 2009. The sensor will be incorporated in engines for vehicles sold in Japan and Europe starting in 2010. * DPF: A diesel particulate filter captures particulate matter (soot and other substances) contained in engine exhaust. 10 DENSO Corporation Annual Report 2010


  • Page 13

    Small Motors Net Sales (Billions of yen) [ New Products & Technology ] 10 Developed a Slim Link Wiper 09 Our Slim Link Wiper improves vehicle safety by incorporating a slimmer 08 wiper link that makes pedestrians more easily visible. A processing technol- 07 ogy that allows pipes to be bent in any way made this advance possible. 06 This is the first time in the world that pipe-bending technology was 0 100 200 300 employed in a wiper motor to provide better protection for pedestrians. Slim Link Wiper Review of Operations by Segment Industrial Systems and Consumer Products Net Sales (Billions of yen) DENSO Wave Starts Selling the VS-Series 6-axis 10 DENSO WAVE INC. has introduced its new high performance and more 09 user-friendly VS-Series compact six-axis robots in November 2010. 08 The robots are the world’s fastest and have the slimmest arms in their 07 class of small industrial robots. They also feature the world’s first design 06 to have all linking wires embedded inside and to the end of the robot’s 0 20 40 60 80 arm, which saves valuable space on the factory floor. The company expects to sell 5,000 units per year. [ New Products & Technology ] Joint Development of Solar Power and Small Household ECO-Cute Water Heater Systems The ECO-Cute water heater system produces hot water with a heat- pump that uses a natural substance (CO2) as a refrigerant. The system minimizes its environmental impact by employing heat-pump technol- ogy found in air conditioners and other equipment in order to use heat The VP-G2 Aseptic Robot in the air to produce hot water. DENSO joined forces with The Tokyo Electric Power Company and YAZAKI Corporation to develop the Solar Power ECO-Cute, a household hot water supply system that combines [ New Company ] ECO-Cute*1 and solar power technology. New Company Provides Internet Driving *1 ECO-Cute is the name used by electric utilities and hot water heater manufacturers Information Service for heat-pump water heaters that use a natural substance (CO2) as a refrigerant. New DENSO Group member DENSO Communications Corp. provides a driving information service in Japan by using the Internet. The company was established on April 1, 2010 and started operations the The ECO-Cute same day. Backing up the service are equity investments and business alliances with partner companies in the travel, publishing and many other industries*. Access to these resources makes it possible to supply information and other services that cover a broad spectrum of user needs. DENSO Communications plans to propose ways for people to discover an entirely new world of driving enjoyment. Hot water storage * BeMap Inc., Nagase & Co., Ltd., JTB Central Japan Corp., and Ryukohasshin Heat-pump unit tank unit Holdings, Inc. DENSO Corporation Annual Report 2010 11


  • Page 14

    Working to Enhance Corporate Value Corporate Social Responsibility CSR Activities The DENSO Group is leveraging its unique strengths in three priority CSR Overview areas of its CSR activities: environmental protection, corporate citi- DENSO defines its corporate social responsibility (CSR) as contrib- zenship and respecting employees. Below, we explain our activities uting to the sustained development of society to support the contin- in these areas in more detail. ued growth of the Group. Accordingly, in conjunction with our economic contribution to society through our business results, we Environmental Protection are also working to enhance our contribution in the environmental Aiming for growth balanced with consideration for the environment, and social spheres. With this in mind, we have established a dedi- DENSO is working to help solve a wide range of environmental cated CSR Promotion Center to strengthen Group-wide CSR activi- issues. Specifically, in line with our basic environmental policy and ties. Our CSR activities have earned high marks outside the Group. action plan in DENSO EcoVision 2015 that guide our approach to For example, DENSO has been included in global socially respon- issues such as global warming, recycling, and substances with sible investment indices such as the Dow Jones Sustainability environmental impact, we are focusing on four key areas: enhanc- Indexes (DJSI) for the past nine consecutive years and the Ethibel ing the development of environmentally friendly products; ascertain- Sustainability Index (ESI) from June 2004. ing then reducing the volume of CO2 emitted by all our corporate activities; steadily reducing our global environmental impact; and CSR Framework reinforcing Group-wide environmental management. Below, we DENSO has created a shared CSR framework, shown in the dia- explain the first two areas in more detail.. Working to Enhance Corporate Value gram below, for the entire Group to systemize an emphasis on CSR across all its activities. 1 Enhancing the development of environmentally friendly products This declaration sits at the heart of our CSR activities. It clarifies As a supplier of automotive components and systems, the DENSO the kind of corporate activities we need to implement to contribute Group believes that developing technologies and products that reduce to the sustained development of society in the context of our rela- the environmental impact of automobiles is vital. DENSO is working to tionships with stakeholders. improve fuel efficiency, reduce the volume of harmful substances in DENSO established a CSR Promotion Committee, chaired by exhaust emissions and realize other advances. For example, we have the president and comprising all the Company’s directors, to make developed technologies including a battery monitoring unit for lithium- decisions related to CSR activities. CSR Leaders have also been ion batteries used in a plug-in hybrid vehicle launched by Toyota Motor appointed at each Group company to play a central role in imple- Corporation, a car air conditioner system with a built-in ejector for the menting CSR initiatives. In addition, we have largely finished build- new Prius model, and an energy-efficient spark plug. ing a CSR management framework at each DENSO Group company, We have also begun research and experiments in a project to including our supply chains. Going forward, we will also expand the make bio-fuel from algae. Essentially, the algae absorbs CO2 in the CSR management framework to our overseas suppliers. photosynthesis process as it grows, and produces and CSR Framework DENSO Group Declaration of Corporate Behavior Policy Priority Areas: •฀Environmental฀conservation฀฀฀•฀Corporate฀citizenship฀฀฀•฀Respecting฀employees*1 Content of Activities Fundamental Areas: •฀Customer฀relations Economic Environmental •฀Compliance฀ •฀Information฀disclosure,฀IR฀ Aspects and Social (business results) Aspects •฀Open,฀fair฀and฀transparent฀transactions฀ •฀Mental฀health •฀Occupational฀safety฀ •฀Risk฀management*2 Promotion Structure CSR Promotion Committee CSR Promotion Center CSR Leaders *1 Including respect for human rights *2 Added to the basic field of CSR along with risk management fiscal 2010 12 DENSO Corporation Annual Report 2010


  • Page 15

    accumulates oil that primarily consists of hydrocarbon, the main Corporate Citizenship constituent in light oil. DENSO is aiming to win even greater trust from the international There are still issues to overcome, such as finding a low-cost community through efforts to coexist with local communities world- way of extracting the oil, but we aim to commercialize bio-fuel that wide. To realize this objective, we formulated the DENSO Group does not compete for food resources as raw materials. Basic Policy for Corporate Citizenship Activities. This policy defines two key areas where DENSO can use its unique strengths to best 2 Ascertaining then reducing the volume of CO2 emitted by all effect—supporting the physically challenged and promoting har- our corporate activities mony with the environment. The policy also promotes Group-wide DENSO is working to reduce emissions of CO2 in every area of its efforts to create a corporate culture that encourages the participa- operations. These activities encompass manufacturing, logistics tion of all employees in corporate citizenship activities. and administration divisions, as well as the actions of individual employees. In manufacturing divisions, efforts to identify and stan- 1 Supporting the physically challenged dardize the groundbreaking energy-saving technologies and exper- Our efforts in Japan are focused on DENSO Taiyo Co., Ltd., a sub- tise we have deployed in Japan and transfer them to other DENSO sidiary established in 1984 to help people with physical disabilities companies are realizing benefits across the entire Group. As a become more independent. Overseas, in 1999, we established the result, in fiscal 2010, we reduced CO2 emissions per unit of produc- Wheelchairs and Friendship Center of Asia (WAFCA), a non-profit tion by 5% (unit of production: volume of emissions in manufactur- organization that manufactures and distributes wheelchairs, among ing divisions per unit of net sales) compared with the fiscal 2001 other activities. WAFCA is extending its reach into other parts of Working to Enhance Corporate Value benchmark, exceeding our EcoVision 2015 target of a 20% reduc- Asia. For example, in fiscal 2008, WAFCA began support activities tion by fiscal 2011 for the second year running. In logistics divisions, in China as part of efforts to help people with physical disabilities we are adopting more environmentally sound transportation meth- across Asia gain more independence; this organization has been ods, shifting some container transport from road to rail. For example, conducting similar activities in Thailand since fiscal 2000. In 2007, we began transporting car air conditioners, electronic components DENSO launched “DENSO YOUTH for EARTH Action—New Earth- and other products by rail to customers in North Kyushu, and in lings Project,” a global program for fostering youth. The goal of this 2007 in Iwate Prefecture; previously we transported products over international program is to develop and support young people who these long distances by road. To further increase the effectiveness have a deep appreciation of what living in harmony with the environ- of these initiatives, we are also strengthening the DENSO Group’s ment means and who are active in working to create a sustainable supply chain. Specific steps included tightening our Green Procure- society. In fiscal 2010, 25 undergraduate and graduate university ment Guidelines for suppliers and working with them in manufactur- students were selected to participate in the program through a call ing and logistics to reduce CO2 emissions. for participants in six ASEAN countries and Japan. The students took part in on-site nature workshops at Mt. Fuji and Lake Biwa. DENSO YOUTH for EARTH Action Bio-fuel from algae DENSO Corporation Annual Report 2010 13


  • Page 16

    2 Harmony with the environment Corporate Governance We introduced a unique scheme called DENSO EcoPoint designed to encourage our employees to take part in voluntary eco-activities DENSO regards the establishment of sound corporate governance that help protect the environments of local communities. Employ- as a key management task and is working to further improve its ees are awarded points for participating in local clean-up activities provisions in this regard. The Company sees this as vital to raise or using more eco-friendly commuting methods. Saved points can Group competitiveness, in order to maintain and improve long-term then be exchanged for eco-products or contributions to tree- business performance in today’s rapidly changing global markets. planting and other schemes that benefit the environment. A total DENSO has adopted the corporate auditor system. In addition of 10,000 people had signed up for the scheme by the end of to statutory bodies such as the General Meeting of Shareholders, fiscal 2010. the Board of Directors and the Board of Corporate Auditors, as well as the Accounting Auditor, DENSO has put in place a number of 3 DENSO Group Community Service Day internal control mechanisms. Furthermore, through the ongoing One example of our efforts to create a corporate culture that encour- provision of management information to shareholders and other ages more employees to participate in corporate citizenship activi- investors, the Company practices sound, highly efficient and trans- ties is the DENSO Group Community Service Day, where DENSO parent management. Group employees volunteer to work together in teams on activities To expedite accurate decision-making by the Board of Directors in individual communities. In fiscal 2008, around 30,000 DENSO and execute rapid business operations, the Company has put in employees in Japan and overseas participated in these activities. place a management system that enables appropriate oversight and Working to Enhance Corporate Value monitoring by corporate auditors, and a system that heightens the Respecting Employees effectiveness of implementing full corporate governance. For exam- We provide in-depth human resources development from a medium- ple, in order to speed up decision-making and operational execution, to long-term perspective so that each employee can maximize their we have reduced the number of directors and adopted a managing capabilities. DENSO considers the basis of development to be con- officer system whereby we appointed managing officers. Under this tinuous on-the-job training. In addition, DENSO is promoting its system, directors oversee activities in all business divisions and play off-the-job training designed to enhance the knowledge and skills of a bridging role between management and day-to-day operations, employees in a systematic manner. These and other approaches while managing officers focus exclusively on business execution in are part of support given to employees to help them demonstrate each business division. In addition, the term of office for directors is their abilities and attain even higher goals. There are now more than set at one year to create a management structure capable of adapt- 120,000 employees in the DENSO Group as a result of business ing flexibly to changes in the business environment and to further expansion over the past few years. So that our employees exemplify clarify management responsibility for each business term. the “DENSO Approach to Working,” we promote activities designed to share the DENSO Spirit, which embodies the shared set of values Roles and Results of Principal Executive Bodies we have held dear since our foundation: foresight, credibility and DENSO has also established an “executive meeting” system collaboration. In this regard, we are also focusing on the develop- whereby two bodies are involved in making decisions regarding ment of a global and common training system. In fiscal 2008, in an business operations. The Board of Directors makes final decisions effort to create a structure for strengthening development of mana- on statutory and important matters as the decision-making body, gerial staff, we took steps such as establishing common proficiency while the Top Management Meeting acts as a deliberative body that standards for the DENSO Group. We plan to continue actively pro- debates matters from a Group-wide perspective and submits pro- viding support to employees to help them grow and achieve per- posals to the Board of Directors. sonal fulfillment. Board of Directors (met 20 times in fiscal 2010, with attendance rates of 95% and 91% for directors and corporate auditors, respectively) Top Management Meeting (met 43 times in fiscal 2010) 14 DENSO Corporation Annual Report 2010


  • Page 17

    Management Auditing Function Department and departments related to internal controls, and the The Company’s two standing corporate auditors and three external accounting auditor, in order to audit directors’ execution of their corporate auditors are responsible for monitoring the execution of duties and to fulfill their management oversight function. duties by directors and auditing the operations and financial condi- The auditing firm of Deloitte Touche Tohmatsu has been selected tion of DENSO Corporation and its domestic and overseas subsid- to conduct accounting audits, and the assistant personnel involved iaries. In line with corporate governance, the Company believes it is with our accounting audit comprise six certified public accountants, important to have objective and independent monitoring of man- three assistant accountants and six others. agement from outside the Company, and so appoints outside cor- Mr. Fujio Cho, an outside corporate auditor of DENSO, has porate auditors who reflect their varied experience and extensive been appointed chairman of Toyota Motor Corporation, with whom insight outside the Company in their audits of DENSO. DENSO has a business relationship. The Company has entered into an agreement with each outside DENSO’s basic internal control policy is decided by the Com- corporate auditor to limit his or her liability with regard to the dam- pany’s Board of Directors, and the corporate governance system is ages stipulated in Article 423, Paragraph 1, of the Companies Act, as illustrated below. based on Article 427, Paragraph 1, of the Companies Act. Based on this agreement, the liability for damages of each shall be limited Remuneration for Directors to a legally determined amount. This limitation of liability applies only The following amounts of remuneration were paid to directors and when the outside corporate auditor conducts his or her duties in corporate auditors. good faith and without gross negligence. Total Total remuneration by type (Millions of yen) Working to Enhance Corporate Value remunera- Number of Category of Basic tion eligible In addition to the statutory appointment of corporate auditors, director (Millions of remunera- Stock Bonus Retirement directors option benefit yen) tion the Company’s audit system also comprises dedicated internal audit Directors 852 499 172 181 – 13 departments at the parent company and key domestic and overseas Corporate auditors subsidiaries. In terms of audit methods, DENSO’s business divisions (excluding 81 38 – 16 27 3 outside and domestic and overseas subsidiaries have voluntary inspection corporate auditors) systems by which they inspect the status of their own internal con- Outside corporate 28 18 – 4 6 3 trols, while the internal audit departments continuously conduct auditors audits to ensure compliance with laws and the appropriateness of the Company’s own management and business procedures. There is no director of the submitting company whose total DENSO’s corporate auditors attend important meetings, includ- amount of consolidated remuneration exceeds ¥100 million. The ing Board of Directors meetings and the Top Management Meeting, following describes the policies, methods of determining and the and exchange information and opinions with the Internal Audit calculation of directors’ remuneration amounts. Corporate Governance System Basic internal control policy is decided by the Company’s Board of Directors, and the corporate governance system is as illustrated below. General Meeting of Shareholders Appoint, Supervise Board of Directors Top Management Meeting Board of Corporate Audit Auditors Chairman/President/ CSR Promotion Meeting (Majority of External Executive Vice President Risk Management Meeting Corporate Auditors) Information Strategy Committee Customer Satisfaction Improvement Committee Senior Managing Directors Environment Committee (Business Division Leaders) Export & Import Administration Controls Committee Safety and Health Committee Internal Information Committee Accounting Managing Officers Others Audit Accounting Auditor (Frontline Operational Execution) Audit Internal Audit Department DENSO Corporation Annual Report 2010 15


  • Page 18

    As regards the basic monthly remuneration, the upper limit of Compliance the total remuneration amount (¥80 million per month for directors, ¥7 million for corporate auditors) is set within a total monetary DENSO considers legal compliance as fundamental to appropriate amount decided by resolution of the General Meeting of Sharehold- corporate conduct, and is focusing efforts on instilling an awareness ers. The monthly remuneration for directors authorized by the Board of compliance in each employee. The Company sees compliance of Directors is determined based on the Company’s standards, and as not only the observance of laws but also a responsibility to meet the remuneration of corporate auditors is determined in collabora- the expectations of stakeholders. In this sense, the Company con- tion with the auditors. siders it to be the cornerstone of all conduct. In an effort to ensure Stock options are granted to directors in units of a certain thorough compliance, the Company formulated the Code of Con- number of shares, linked to the position of each director. Bonuses duct for DENSO Group Associates, which is shared by domestic are decided by resolution of the Regular Meeting of Shareholders. Group companies. Overseas Group companies use a regional ver- After the total amounts to be paid to the directors and corporate sion of the Code of Conduct for DENSO Group Associates formu- auditors have been approved, the bonus for each director is autho- lated by their regional headquarters in accordance with national and rized by the Board of Directors based on the extent of the individual regional laws and customs. director’s contribution, and the bonuses for corporate auditors are In Japan, the Company has established a Business Ethics determined in collaboration with the auditors. Hotline, which offers all employees, including contract, temporary As regards retirement benefits for corporate auditors, the Com- and other employees, the opportunity to ask questions or obtain pany used to apply a certain increase factor to the monthly remu- advice about compliance from outside legal counsel and the Com- Working to Enhance Corporate Value neration of each corporate auditor corresponding to the years of pany’s Legal Department. In fiscal 2010, the hotline received some service. With the aim of increasing the transparency of the remu- 168 inquiries. In addition, DENSO is proactive in promoting aware- neration system for corporate auditors, the Company abolished the ness of ethical matters, offering regular compliance education by system of retirement benefits for corporate auditors at the conclu- employee level and publishing a compliance-related newsletter. sion of the Regular Meeting of Shareholders on June 25, 2010. Domestic Group companies use promotion structures based on DENSO Corporation’s system. Developing and Strengthening Internal Controls For overseas Group companies, regional headquarters develop In order to ensure the reliability of financial reporting, since fiscal organizational systems, introduce and operate reporting systems, 2009 the Financial Instruments and Exchange Law requires an audit and pursue enlightenment activities that take into consideration the of the internal control reporting system (where companies assess characteristics of their country and region. In North America, Group the effectiveness of their internal controls pertaining to financial companies are working to prevent unlawful conduct by assigning reporting and have those controls audited by an auditing firm). compliance officers to each operating base and administering a DENSO Corporation considered this to be an opportunity for devel- 24-hour helpline (reporting system) and audit system. oping and strengthening the foundation for sound and sustainable The status of these activities is regularly reported to base man- business growth, and the Company has been working to develop agers and used in efforts to prevent recurrences and improve activi- and strengthen the Group’s overall internal controls with the goal of ties. In Europe and China, Group companies are operating a ensuring the reliability of our financial reporting, as well as the effec- compliance program that includes a helpline that is appropriate to tiveness and efficiency of our operations. As a result, since fiscal the circumstances in each country. In addition, regional headquar- 2009, the first year of these changes, an auditing firm gave our ters employees responsible for legal affairs in Japan, North America, internal controls a fair assessment based on pertinent legal proce- Europe, China and Southeast Asia meet regularly to work to ensure dures, and we submitted a report on our internal controls to the and maintain compliance by sharing information and issues. Financial Services Agency, which determines whether the Group’s In February 2010, DENSO INTERNATIONAL AMERICA, INC., a internal controls are effective. U.S. subsidiary of DENSO, was investigated by the U.S. Federal Bureau of Investigation and the U.S. Department of Justice in rela- tion to anti-trust legislation. DENSO INTERNATIONAL AMERICA is fully cooperating with this investigation. 16 DENSO Corporation Annual Report 2010


  • Page 19

    Risk Management Information Security Basic Approach and Promotion System for Basic Approach and Promotion System for Risk Management Information Security DENSO works to minimize the diverse risks associated with its DENSO views technology and information, as well as customer and global business operations by reinforcing risk management as employee data, as assets that must be safeguarded. This recogni- another element of its internal control system. Specifically, DENSO tion prompted the Company to draft the DENSO Group’s Basic gives due attention to identifying and preventing risk before it mate- Principles of Information Security in 2003, and to take steps to rializes, and to ensuring a timely and accurate initial response and better protect and strengthen control of its information assets. In recovery measures in order to minimize damage when unforeseen 2005, DENSO applied the DENSO Group Information Security crises do arise. To this end, the Company has established the Risk Standards to 56 domestic Group companies and 77 Group bases Management Meeting, an all-encompassing body that is designed overseas. Formulated with reference to Information Security Man- to unite the entire Group in a common effort to enhance its ability to agement System criteria, these standards contain 142 specific respond to risk in Japan and overseas. points pertaining to the management of information assets. In order to enable swift and accurate execution of business, while continu- Specific Initiatives ing to protect information assets, from fiscal 2008, the Company In fiscal 2010, we positioned risk management as the foundation created a new policy on establishment of security measures that of CSR, and worked to integrate and strengthen the risk manage- take into account not only confidentiality of information, but also Working to Enhance Corporate Value ment promotion system. Through these efforts, we developed a completeness and usability (i.e., the difficulty of systems breaking system in which measures to continuously improve and entrench down or malfunctioning). Under the Information Security Control risk management systems and frameworks during ordinary times Promotion Department, the Company has begun implementing this are incorporated into the CSR Promotion Committee, while initial policy. An Information Security Leader and Information Security responses to crises (emergencies) are promoted by the Risk Man- Center have been established as specialized departments under agement Committee as before. Furthermore, specialist response the Information Strategy Committee, and Information Security Con- units are organized depending on the seriousness of the situation trol Promotion Officers and leaders have been appointed in each and the degree of urgency, in order to enable flexible measures to department. For the promotion of these activities, DENSO has also minimize damages. built an information management system based on ISO/IEC 27001 and other internationally recognized information management Risk Management Structure system standards. In addition to the control of trade secrets, audits Board of Directors and Company-wide voluntary inspections, DENSO conducts annual Product divisions/ CSR Promotion Each department monitoring surveys to ascertain actual conditions at each Group Committee Responsible Dept. (Ordinary times) company to continuously raise the level of information security Regional Domestic DENSO Group Risk Management Headquarters throughout the Group. Committee Overseas DENSO Group (Emergencies) Security Control Structure Information Strategy Committee Audit Department Propose/Report Direct/Oversee Audit Direct/ Information Security Chief Oversee Report Direct/Oversee Cooperate Information Security Center General Administration Supervisory directors Department Report Direct/Oversee IT Planning Department Responsible directors Engineering Administration Department Report Direct/Oversee Legal Department Respective Department Intellectual Property Responsible person Department for security management Human Resources Department Promoters for Corporate Communications security management Department DENSO Corporation Annual Report 2010 17


  • Page 20

    Executive Management (As of June 25, 2010) Board of Directors Chairman President and CEO Executive Vice President Executive Vice President Koichi Fukaya Nobuaki Katoh Hiromi Tokuda Koji Kobayashi Senior Managing Directors Director Kazuo Hironaka Mitsuhiko Masegi Shoichiro Toyoda Sojiro Tsuchiya Masahiko Miyaki Hikaru Sugi Akio Shikamura Shinji Shirasaki Haruya Maruyama Corporate Auditors Standing Corporate Auditors Corporate Auditors Executive Management Toshio Watanabe Fujio Cho* Masato Iwase Tamiki Kishida* Tsutomu Saito* *External Corporate Auditors Managing Officers Shigehiro Nishimura Noboru Yamada Hiroyuki Murayama Yukihiro Kato Yasushi Nei Satoshi Iwata Hitoshi Tasaka Kazuaki Fujitani Manfredo Nicolelli Akihiro Yukawa Koji Arima Shoji Tsuzuki Yoshikazu Makino Masahiko Ito Katsuhisa Shimokawa Yoshifumi Kato Akio Tajima Yoshihiro Saka Tatsuya Toyoda Yasushi Yamanaka Toshiyuki Kato Yukihiko Murakami Michio Adachi Sadahiro Usui Hiroyuki Ina Hiroyuki Wakabayashi Yoshiki Sekiguchi Shingo Kuwamura 18 DENSO Corporation Annual Report 2010


  • Page 21

    Financial Section Contents Financial Section n Financial Review 20 n Management’s Discussion and Analysis 24 n Consolidated Balance Sheets 34 n Consolidated Statements of Operations 36 n Consolidated Statements of Changes in Equity 37 n Consolidated Statements of Cash Flows 38 n Notes to Consolidated Financial Statements 39 n Independent Auditors’ Report 64 DENSO Corporation Annual Report 2010 19


  • Page 22

    Financial Review Financial Summary DENSO CORPORATION and Consolidated Subsidiaries Years ended March 31 2010 2009 2008 2007 Net Sales: ¥2,976,709 ¥3,142,665 ¥4,025,076 ¥3,609,700 Sales in Japan 1,518,105 1,615,771 1,976,877 1,859,046 Sales outside Japan 1,458,604 1,526,894 2,048,199 1,750,654 Operating Income (Loss) 136,640 (37,309) 348,652 303,068 Net Income (Loss) 73,427 (84,085) 244,417 205,170 Total Assets 3,364,070 3,018,438 3,643,418 3,765,135 Equity*2 2,032,264 1,900,719 2,282,677 2,286,956 Shareholders’ Equity – – – – Capital Expenditures 114,422 314,425 343,779 312,457 Depreciation 237,944 276,624 263,519 219,873 R&D Expenses 270,077 297,148 311,474 279,890 Net Cash Provided by Operating Activities 357,141 209,915 572,663 406,543 Per Share: Basic net income (loss) ¥ 91.11 ¥ (104.13) ¥ 299.96 ¥ 249.88 Diluted net income 91.11 – 299.70 249.56 Cash dividends 27.00 40.00 54.00 45.00 Equity*2 2,378.18 2,220.89 2,658.06 2,668.82 Ratios: Return on Sales (%) 2.5 (2.7) 6.1 5.7 Current Ratio (%) 230.4 208.3 162.6 151.0 Fixed Ratio (%) 83.8 97.8 95.6 104.1 Return on Equity (%) 4.0 (4.3) 11.3 9.9 Average Number of Shares (in thousands) 805,892 807,469 814,833 821,060 Number of Employees 120,812 119,919 118,853 112,262 Notes: 1. As of March 31, 2010, DENSO CORPORATION had 184 subsidiaries and applied the equity method of accounting with respect to 30 affiliates. 2. The figures for the year ended March 31, 2002 include the effect of an irregular 15-month reporting period, due to certain major overseas consolidated subsidiaries and overseas affiliates (45 companies) deciding to change their year-end to March 31 from December 31. 3. U.S. dollar amounts have been translated, for convenience only, at the rate of ¥93.04=US$1, the approximate exchange rate prevailing on March 31, 2010, Financial Review the last trading day of the fiscal year. Net Sales (Billions of yen) (%) 5,000 10 2,500 5 0 0 –2,500 –5 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 n฀Sales in Japan (left scale) n฀Sales outside Japan (left scale) Operating income (loss) / Net sales (right scale) 20 DENSO Corporation Annual Report 2010


  • Page 23

    Thousands of Millions of yen U.S. dollars 2002*1 2006 2005 2004 2003 2002 unaudited 2001 2010 ¥3,188,330 ¥2,799,949 ¥2,562,411 ¥2,332,760 ¥2,401,098 ¥2,183,062 ¥2,014,978 $31,993,863 1,690,215 1,554,795 1,442,645 1,325,637 1,277,865 1,277,865 1,245,830 16,316,692 1,498,115 1,245,154 1,119,766 1,007,123 1,123,233 905,197 769,148 15,677,171 266,559 213,895 188,659 159,893 133,340 129,888 123,526 1,468,616 169,648 132,620 110,027 111,018 72,313 70,800 60,799 789,198 3,411,975 2,780,982 2,526,502 2,354,657 2,361,048 – 2,343,328 36,157,244 2,066,303 – – – – – – 21,842,906 1,970,388 1,643,182 1,509,489 1,397,888 1,421,212 – 1,451,211 – 288,714 235,258 196,461 171,108 193,599 183,977 140,447 1,229,815 185,143 160,993 151,169 146,651 147,277 139,991 134,416 2,557,438 256,339 238,241 214,917 182,886 185,627 181,044 176,959 2,902,805 368,575 273,296 231,814 267,344 206,663 – 202,127 3,838,575 Yen U.S. dollars ¥ 204.80 ¥ 159.02 ¥ 130.02 ¥ 128.37 ¥ 80.22 ¥ 78.54 ¥ 66.51 $ 0.98 204.62 158.96 130.01 126.65 78.93 77.29 65.51 0.98 38.00 32.00 24.00 20.00 18.00 – 17.00 0.29 2,384.05 1,990.48 1,809.55 1,656.93 1,641.72 – 1,587.77 25.56 5.3 4.7 4.3 4.8 3.0 3.2 3.0 160.6 161.4 163.0 161.2 174.0 – 199.0 102.1 98.2 97.2 97.3 95.2 – 91.4 9.4 8.4 7.6 7.9 5.0 4.9 4.4 825,725 830,869 842,005 860,828 901,489 – 914,121 105,723 104,183 95,461 89,380 86,639 – 85,371 *1 The italicized figures for the year ended March 31, 2002 represent unaudited amounts calculated by management to reflect comparative income statement informa- tion including the results of these overseas companies for the 12-month period ended December 31, 2001. *2 Section under “Equity” is newly provided to conform to Japanese new accounting standard for the fiscal year 2006 and after. Financial Review Profits (Billions of yen) 400 300 200 100 0 –100 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 n฀Operating income (loss) n฀Net income (loss) DENSO Corporation Annual Report 2010 21


  • Page 24

    Sales by Business Segment DENSO CORPORATION and Consolidated Subsidiaries Years ended March 31 Millions of yen Thousands of (percentage of net sales) U.S. dollars 2010 2009 2008 2007 2006 2010 Thermal Systems ¥ 901,748 ¥1,006,914 ¥1,287,900 ¥1,137,975 ¥1,031,836 $ 9,692,046 (30.3%) (32.0%) (32.0%) (31.5%) (32.4%) Powertrain Control Systems 684,375 741,873 940,162 830,111 733,520 7,355,707 (23.0) (23.6) (23.4) (23.0) (23.0) Information and Safety Systems 526,818 471,432 650,044 583,873 499,843 5,662,274 (17.7) (15.0) (16.2) (16.2) (15.7) Electric Systems 265,811 293,647 368,073 329,981 266,139 2,856,954 (8.9) (9.3) (9.1) (9.2) (8.3) Electronic Systems 297,321 272,909 349,664 310,737 270,040 3,195,626 (10.0) (8.7) (8.7) (8.6) (8.5) Small Motors 222,458 218,339 270,838 248,772 224,709 2,390,993 (7.5) (7.0) (6.7) (6.9) (7.0) Other Automotive 29,171 37,634 44,423 47,513 40,730 313,532 (1.0) (1.2) (1.1) (1.3) (1.3) Automotive sub-total 2,927,702 3,042,748 3,911,104 3,488,962 3,066,817 31,467,132 (98.4) (96.8) (97.2) (96.7) (96.2) Industrial Systems and Consumer Products 40,017 52,815 58,511 65,628 70,258 430,106 (1.3) (1.7) (1.5) (1.8) (2.2) Others 8,990 47,102 55,461 55,110 51,255 96,625 (0.3) (1.5) (1.3) (1.5) (1.6) New businesses sub-total 49,007 99,917 113,972 120,738 121,513 526,731 (1.6) (3.2) (2.8) (3.3) (3.8) Total ¥2,976,709 ¥3,142,665 ¥4,025,076 ¥3,609,700 ¥3,188,330 $31,993,863 (100.0) (100.0) (100.0) (100.0) (100.0) Note: U.S. dollar amounts have been translated, for convenience only, at the rate of ¥93.04=US$1, the approximate exchange rate prevailing on March 31, 2010, the last trading day of the fiscal year. Financial Review Sales by Business Segment (Billions of yen) 4,000 3,000 n฀฀Industrial Systems and Consumer Products and Others n฀Other Automotive 2,000 n฀Small Motors n฀Electronic Systems n฀Electric Systems n฀Information and Safety Systems 1,000 n฀Powertrain Control Systems n฀Thermal Systems 0 2006 2007 2008 2009 2010 22 DENSO Corporation Annual Report 2010


  • Page 25

    Sales by Company Location DENSO CORPORATION and Consolidated Subsidiaries Years ended March 31 Thousands of Millions of yen U.S. dollars 2010 2009 2008 2007 2006 2010 Japan Customers ¥1,553,492 ¥1,667,990 ¥2,029,482 ¥1,905,193 ¥1,727,675 $16,697,034 Intersegment 487,823 477,646 696,410 636,068 561,284 5,243,153 Total 2,041,315 2,145,636 2,725,892 2,541,261 2,288,959 21,940,187 The Americas Customers 526,654 554,213 822,982 756,250 681,367 5,660,512 Intersegment 5,517 5,554 9,302 12,831 9,076 59,297 Total 532,171 559,767 832,284 769,081 690,443 5,719,809 Europe Customers 401,967 451,626 605,373 507,503 414,243 4,320,368 Intersegment 9,116 10,858 14,904 11,796 8,804 97,979 Total 411,083 462,484 620,277 519,299 423,047 4,418,347 Asia & Oceania Customers 494,596 468,836 567,239 440,754 365,045 5,315,950 Intersegment 39,510 38,847 48,918 39,447 30,064 424,656 Total 534,106 507,683 616,157 480,201 395,109 5,740,606 Eliminations (541,966) (532,905) (769,534) (700,142) (609,228) (5,825,086) Consolidated ¥2,976,709 ¥3,142,665 ¥4,025,076 ¥3,609,700 ¥3,188,330 $31,993,863 Note: U.S. dollar amounts have been translated, for convenience only, at the rate of ¥93.04=US$1, the approximate exchange rate prevailing on March 31, 2010, the last trading day of the fiscal year. Financial Review Sales by Company Location (Billions of yen) 5,000 4,000 3,000 2,000 n฀Asia & Oceania n฀Europe 1,000 n฀The Americas n฀Japan 0 2006 2007 2008 2009 2010 DENSO Corporation Annual Report 2010 23


  • Page 26

    Management’s Discussion and Analysis Business Overview In fiscal year 2010, the year ended March 31, 2010, the global economy, which had been stagnant since the financial crisis in the fall of 2008, bottomed out in the spring of 2009. After the second quarter of fiscal 2010, the global economy gradually picked up toward the end of the year in response to the economic policies implemented by various nations and the business recovery in Asia. In particular, domestic demand recovered in China, India and elsewhere, with subsequent high eco- nomic growth. However, economic conditions in the U.S., Japan and other developed nations did not make a full-fledged recovery as personal consumption remained weak in the face of severe employment conditions, despite signs of the downturn bottoming out in response to the economic policies of the various nations. In the automotive industry, economic conditions brightened in both the developed nations, includ- ing Japan, and the emerging nations. Markets steadily recovered in the emerging nations, particularly in Asia, and the markets in China and India expanded significantly from the previous year. However, vehicle sales in the key U.S. market were down year on year due to sluggish sales in the first half of the year, despite the recovery trend of the market underpinned by the economic upturn and other factors. In Japan, vehicle sales were approximately level year on year. Sales had been sluggish in the first half of the year, the same as in the U.S., but then picked up in response to governmental measures that reduced taxes and provided purchase-exchange subsidies for environmentally friendly eco-cars. Vehicle production in Japan and exports of finished vehicles were both down year on year. During the year, the yen gained 9.9% against the U.S. dollar and 11.6% against the euro. Average yen exchange rates against these currencies were ¥91 and ¥129, respectively. Management Strategy Amid these severe market changes, the Group (DENSO Corporation and its consolidated subsidiaries) formulated structural reforms last year and has been focusing on the two objectives of “Building a streamlined and lean business structure” and “Developing systems for future growth.” To build a streamlined and lean business structure, the Group deployed company-wide measures to further strengthen its activities to reduce fixed costs, including curbing costs through a complete overhaul of business expenses, reducing R&D expenses and capital expenditures, and increasing work efficiency by focusing on administrative overhead. In line with the second objective of developing systems for future growth, the Group pushed ahead with implementing technological development and creating structures that address the needs of regions throughout the world, responding to the increasing electrification of cars, improvements in fuel consumption, reductions in carbon dioxide, and the markets of emerging nations. We identi- Management’s Discussion and Analysis fied the 14 most important targets for our second policy, including “Develop competitive products” and “Develop low-cost products,” and set up the DENSO Project Department to handle projects to achieve these targets, especially those interdivisional projects that require coordination between business departments. In response to the increasing electrification of cars, our battery monitoring unit that detects volt- age, current and temperature levels, thereby enabling the high-voltage lithium battery to be used safely and efficiently, was installed at the end of last year in the plug-in hybrid vehicles sold by Toyota Motor Corporation. In response to improvements in fuel consumption and reductions in CO2, we developed the world’s first car air conditioning system with a built-in ejector, a small refrigerant ejec- tion device, that dramatically improves the energy-saving and efficiency levels of the system. Com- pared with conventional systems, the compressor enables the electricity consumption to be reduced by up to 25%. Toyota has installed the system in its new Prius vehicle. In further efforts to improve fuel consumption and reduce CO2, we developed Twin Tip, a fuel-saving nickel spark plug that can be sold at a reasonable price. By using a nickel alloy newly developed by DENSO, the product price can be held low and, compared with DENSO’s conventional nickel spark plugs, CO2 emissions can be reduced by 0.8% while the vehicle’s fuel consumption is cut by 1.2% and the torque improved by 1.1%. 24 DENSO Corporation Annual Report 2010


  • Page 27

    In our efforts to develop low-cost products for emerging nations’ markets, for which future growth is anticipated, we have been addressing local needs in a timely manner by putting in place structures that enable the complete range of business operations from development to production and sales to be conducted locally. At our production base in Brazil, we built a new plant for DENSO DO BRASIL LTDA. (DNBR) that will manufacture and sell car and bus air conditioners, radiators and other items, with production scheduled to start in January 2011. Going forward, we will further develop these region-based initiatives to bring about the optimum production systems for each region and to promote the procurement of reasonably priced local parts and materials. As regards the Group’s corporate social responsibility (CSR) initiatives, amid the heightened expectations of stakeholders regarding companies’ approaches to environmental issues, the Group has given priority to addressing these issues by focusing on energy-saving activities, with the entire Group working together to rigorously implement energy-saving initiatives. As a result, DENSO received the Japan’s Ministry of Economy, Trade and Industry (METI) Award in the Organizational category of the Energy Conservation Prize, by which METI recognizes achievements in promoting energy conservation. The Group was recognized and acclaimed for its energy-saving technologies for making production facilities. In this context, the Group was able to make full use of the advantage that the Group develops, designs and builds its own manufacturing facilities. The Group has con- tributed to the realization of production facilities in Japan and overseas that save more energy, are not wasteful, and feature the optimum supply of energy to production lines. Moreover, as part of our ongoing efforts to be a corporate group trusted by society, we published a picture-book that shows in an easy-to-understand manner the CSR responsibilities a company has to its various stakehold- ers, and followed this up by holding presentations and exhibitions about CSR for elementary-school students. Going forward, every employee of the Group in all the countries and regions in which it conducts business will implement CSR initiatives, aiming to fully realize a corporate group that earns the trust and respect of society. Return on Sales Net Sales (%) Despite the successful implementation of economic policies in various countries and the steady 8 recovery of Asian markets centered on China, consolidated net sales for the fiscal year ended March 6.1 31, 2010 decreased compared to the previous year, falling 5.3%, or ¥166.0 billion, to ¥2,976.7 6 5.7 5.3 billion. This mainly reflected foreign currency fluctuations. 4 2.5 Sales by Geographic Segment 2 In Japan, sales totaled ¥2,041.3 billion, a decrease of 4.9%, or ¥104.3 billion, from the previous Management’s Discussion and Analysis year. The decrease was due to lower production of vehicles in Japan and exchange rate fluctuations, 0 offset by increased exports of parts and other items for overseas production. –2 In the Americas, decreased production of vehicles in the U.S. reduced sales to ¥532.2 billion, a –2.7 decrease of 4.9%, or ¥27.6 billion, from the previous year. –4 06 07 08 09 10 In Europe, lower vehicle production in European countries led to sales of ¥411.1 billion, a decrease of 11.1%, or ¥51.4 billion, from the previous year. In Asia & Oceania, sales totaled ¥534.1 billion, an increase of 5.2%, or ¥26.4 billion, from the previous year, because of increased vehicle production in China by Japanese companies and recov- ered demand even in ASEAN countries. DENSO Corporation Annual Report 2010 25


  • Page 28

    Sales Breakdown Sales by Product Category by Product Category In the fiscal year ended March 31, 2010, the Group recorded a decrease in sales in the automotive (%) field of 3.8%, or ¥115.0 billion, to ¥2,927.7 billion. Sales in this area represented 98.4% of consoli- 7.5 1.0 1.6 dated Industrial net and Systems sales, compared with 96.8% a year earlier. Sales in new business fields were down 51.0%, Consumer 30.3 10.0 or ¥50.9 billion, to ¥49.0 billion, accounting for 1.6% of consolidated net sales, compared with 3.2% Other Automotive last year. Small Motors Sales in the six main product categories in the automotive field were as follows: 8.9 Electronic Systems Electric Systems Thermal Systems: sales decreased 10.4%, or ¥105.2 billion, to ¥901.7 billion, despite increased 17.7 23.0 vehicle production by Toyota and expanded sales of car air conditioners and compressors for Euro- Information and Safety Systems peanControl Powertrain car manufacturers, Systems due to lower production of cars using these systems by other Japanese and overseas Thermal Systems automakers. Sales of thermal systems accounted for 30.3% of consolidated net sales, n฀Thermal Systems down from 32.0% last year. n฀Powertrain Control Systems n฀Information and Safety Systems Powertrain Control Systems: sales declined 7.8%, or ¥57.5 billion, to ¥684.4 billion, mainly due n฀Electric Systems to the fact that sales of diesel common rail injection systems in Europe turned downward, in addition n฀Electronic Systems to lower production at Japanese and overseas automakers. Sales of powertrain control systems n฀Small Motors accounted for 23.0% of consolidated net sales, down slightly from 23.6% last year. n฀Other Automotive n฀฀Industrial Systems and Consumer Information and Safety Systems: sales rose 11.7%, or ¥55.4 billion, to ¥526.8 billion, mainly due Products and Others to increased sales of car navigation systems resulting from higher vehicle production at Toyota. Sales in this product category accounted for 17.7% of consolidated net sales, up from 15.0% in the previ- ous year. Electric Systems: sales decreased 9.5%, or ¥27.8 billion, to ¥265.8 billion, primarily because of lower sales of starters, alternators and other electrical components, due to lower vehicle production at Japanese automobile manufacturers. Sales of electric systems accounted for 8.9% of consoli- dated net sales, compared with 9.3% last year. Electronic Systems: sales increased 8.9%, or ¥24.4 billion, to ¥297.3 billion, reflecting mainly strong sales of engine ECUs and higher vehicle production at Toyota. Sales of electronic systems accounted for 10.0% of consolidated net sales, up from 8.7% last year. Small Motors: sales increased 1.9%, or ¥4.1 billion, to ¥222.5 billion, due to increased sales of motors primarily for use in wiper systems and power windows, resulting from higher vehicle produc- tion at Toyota. Sales of small motors accounted for 7.5% of consolidated net sales, compared with 7.0% in the previous year. Operating Income (Loss) Operating Income Management’s Discussion and Analysis (¥ Billion) Operating income of ¥136.6 billion was recorded, in contrast to an operating loss of ¥37.3 billion in 400 the previous year. This result was mainly due to reduced fixed costs such as business expenses 349 (¥103.0 billion), personnel expenses (¥17.8 billion) and depreciation costs (¥38.7 billion), and savings 303 300 from rationalization efforts (¥48.3 billion), despite foreign exchange losses (¥43.8 billion) and capacity 267 utilization losses (¥12.1 billion) resulting from decreased sales. 200 137 Operating Income by Geographic Segment 100 Operating income increased in all geographic segments mainly due to the benefits of reduced fixed costs. 0 In Japan, operating income of ¥40.9 billion was recorded, compared with an operating loss of ¥114.7 –37 billion last year. –100 06 07 08 09 10 In the Americas, operating income rose 154.3%, or ¥7.8 billion, to ¥12.9 billion. In Europe, operating income climbed 195.9%, or ¥7.1 billion, to ¥10.7 billion. In Asia & Oceania, operating income increased 24.6%, or ¥14.9 billion, to ¥75.4 billion. 26 DENSO Corporation Annual Report 2010


  • Page 29

    Net Income (Loss) per Share and Other Income (Expenses) Dividends per Share (¥) Other income-net totaled ¥10.3 billion, a difference of ¥72.3 billion compared with other expenses 400 80 in the previous year. This mainly reflected the loss on sale of investment securities and affiliates’ stock recorded last year (down ¥20.6 billion) and the reduced impairment loss on long-lived assets (down 299.96 300 60 249.88 ¥26.8 billion). 54 40 204.80 200 45 40 38 27 Net Income 100 91.11 20 The Group recorded income before income taxes and minority interests of ¥146.9 billion for fiscal year 2010, compared with a loss before income taxes and minority interests of ¥99.3 billion in the 0 0 previous year. Income taxes were ¥67.6 billion, compared with a negative ¥19.8 billion in income –100 –104.13 –20 taxes in the previous year. Minority interests were ¥5.9 billion, up 26.6%, or ¥1.2 billion, from the previous year. As a result, –200 –40 06 07 08 09 10 the Group recorded net income of ¥73.4 billion, compared with a net loss of ¥84.1 billion in the previ- n฀Net Income (Loss) per Share (left scale) ous year. ฀n฀ Dividends per Share (right scale) ROE increased from –4.3% to 4.0%, and net income per share of common stock was ¥91.11, compared with net loss per share of common stock of ¥104.13 in the previous year. Policy on Allocation of Earnings Dividends The Company aims to consistently increase dividends, while taking into consideration operating results and the dividend payout ratio. The Company uses retained earnings for capital expenditures and research and development to sustain long-term business growth, and to support its share buyback program as a means of returning profits to shareholders. In accordance with the enactment of the Company Law in May 2006, the Company had altered its Articles of Incorporation to accommodate the flexible allocation of future earnings. For the time being, however, the Company has decided to continue paying a twice-yearly dividend payment. For a year-end dividend, the approval of the general shareholders’ meeting is needed. Taking into consideration the operating results for the fiscal year under review, the Company has decided upon a year-end dividend of ¥14.00 per share and decreased the dividend applicable to the fiscal year by ¥13.00 from the previous year to ¥27.00 per share. Treasury Stock Repurchases The Company repurchases its own shares as part of its strategy to increase ROE, return profits to shareholders and implement a flexible capital policy in response to changes in the operating environ- Management’s Discussion and Analysis ment. As of March 31, 2009, the Company had repurchased a total of 154 million shares at an aggregate cost of ¥349.0 billion since the introduction of the share buyback program in the year ended March 31, 1997. This represents 17% of all the Company’s outstanding shares as of March 31, 1997. In the future, while giving consideration to cash flows, the Company will maintain this share repurchasing policy as an important tool in improving ROE and increasing shareholder value. Source of Funds and Liquidity Risk Management The Group’s fundamental financial policy is designed to: ensure efficient funding and management of funds for the operational activities of the entire Group, secure an optimum level of funds and liquidity, and maintain a sound financial position. Global Cash Management System The Group has created a structure facilitating optimum management of Group-wide funds by inte- grating financing functions into each Regional Headquarters (RHQ) in Japan, North America, Europe, and Asia. By utilizing this sort of structure, in which each RHQ is responsible for managing funds within its respective region, the Group can procure capital resources and manage excess or deficient funds in a more centralized manner. DENSO Corporation Annual Report 2010 27


  • Page 30

    Financial Position Total assets as of March 31, 2010, stood at ¥3,364.1 billion, 11.4%, or ¥345.6 billion, more than the previous fiscal year-end. Current assets increased 38.5%, or ¥488.3 billion, to ¥1,755.1 billion, primarily reflecting increases in notes and accounts receivable, and in cash and deposits. Property, plant and equipment decreased 12.8%, or ¥132.0 billion, to ¥902.7 billion, mainly due to curbs on capital investment. Investments and other assets decreased 1.5%, or ¥10.8 billion, to ¥706.2 billion, mainly due to a decrease in deferred tax assets. The total of current and long-term liabilities increased 19.2%, or ¥214.1 billion, to ¥1,331.8 billion, due to an increase in notes and accounts payable, and the issuance of bonds. Interest-bearing debt increased 14.8%, or ¥52.9 billion, to ¥409.5 billion. Equity increased 6.9%, or ¥131.5 billion, to ¥2,032.3 billion, primarily reflecting increases in unrealized gain on available-for-sale securities and retained earnings. Net Cash Provided Cash Flows by Operating Activities (¥ Billion) In terms of cash flows for the fiscal year ended March 31, 2010, net cash provided by operating activities was ¥357.1 billion, net cash used in investing activities was ¥155.1 billion, and net cash 800 provided by financing activities was ¥29.2 billion. As a result, cash and cash equivalents increased ¥231.2 billion from the end of the previous fiscal year to ¥681.7 billion. 600 573 Net cash provided by operating activities for the fiscal year ended March 31, 2010, totaled ¥357.1 billion, ¥147.2 billion more than in the previous year. Cash flows chiefly reflected an operating income 407 of ¥136.6 billion, mainly due to the benefits of reduced fixed costs, compared with a net loss of 400 369 357 ¥37.3 billion last year. Investing activities used net cash of ¥155.1 billion, ¥79.2 billion less than the previous year. 210 200 This primarily reflected a ¥190.8 billion decrease in cash used for the acquisition of property, plant and equipment, offset by a ¥50.8 billion increase in cash used for the purchase of available-for- 0 sale securities. 06 07 08 09 10 Net cash provided by financing activities was ¥29.2 billion, down ¥61.2 billion from the previous year. This was mainly attributable to a ¥60.0 billion decrease in proceeds from the issuing of corpo- rate bonds. Capital Expenditures and Capital Expenditures/Depreciation Depreciation The Group applies a number of benchmarks to ensure appropriate decisions are made with regard Management’s Discussion and Analysis (¥ Billion) to capital expenditures. These benchmarks include projected cash flow, ROA, number of years to 400 recover investments, and forecasts of profitability. As part of a drive to reduce medium-term fixed 344 costs, the Group is minimizing the scale of its production lines, standardizing components, and using 313 314 300 289 global procurement to reduce facilities costs. 277 265 Capital expenditures during the year under review totaled ¥114.4 billion, a decrease of 63.6%, or 238 220 ¥200.0 billion, from the previous year. Depreciation decreased 14.0%, or ¥38.7 billion, to ¥237.9 billion. 200 185 Capital Expenditures/Depreciation by Geographic Segment 114 100 As regards capital expenditures by geographic segment, the Group focused for all regions on curbing investments to increase production, and mainly invested in new products and rationalization measures. As a result, capital expenditures in Japan were ¥75.0 billion, a decrease of 66.2%, or ¥146.6 billion. 0 06 07 08 09 10 In regions outside Japan, capital expenditures in the Americas were ¥10.2 billion, a decrease of n฀Capital Expenditures 67.1%, or ¥20.8 billion. Capital expenditures in Europe were ¥13.0 billion, a decrease of 50.8%, or n฀Depreciation ¥13.4 billion. Capital expenditures in Asia & Oceania were ¥16.3 billion, a decrease of 54.0%, or ¥19.1 billion. In Japan, depreciation amounted to ¥178.4 billion, a decrease of 14.8%, or ¥31.1 billion. Mean- while, depreciation amounted to ¥22.2 billion, a decrease of 13.3%, or ¥3.4 billion, in the Americas; to ¥16.1 billion, a decrease of 13.0%, or ¥2.4 billion, in Europe; and to ¥21.2 billion, a decrease of 7.8%, or ¥1.8 billion, in Asia & Oceania. 28 DENSO Corporation Annual Report 2010


  • Page 31

    R&D Activities Research and Development (R&D) Activities (¥ Billion) The Group is moving ahead with product development that focuses on the four areas of the environ- 400 ment, safety, comfort and convenience, in order to help create an environmentally friendly, accident- free automotive society and to bring about comfortable driving and convenient vehicles. We also 311 297 make full use of our technology developed in the automotive field in product development for equip- 300 279 256 270 ment and machines for daily life, and for industrial machinery. The Group has also introduced its energy-saving technologies for making production facilities. In this context, the Group was able to 200 make full use of the advantage that the Group develops, designs and builds its own manufacturing facilities. As a result, DENSO received the Japan’s Ministry of Economy, Trade and Industry (METI) 100 Award in the Organizational category of the Energy Conservation Prize, by which METI recognizes achievements in promoting energy conservation. R&D expenses of the entire Group for the fiscal year ended March 31, 2010 amounted to 0 06 07 08 09 10 ¥270,077 million. During the fiscal year under review, we have been working in the automotive field to reduce environmental burdens by coordinating various products and technologies that make full use of our strengths in a wide variety of business fields. To cite a typical example of one of our solutions, we developed technology that improves fuel consumption based on “Energy Management.” DENSO’s “Energy Management” is a technological approach that comprehensively controls the efficient energy usage of the entire vehicle from the three viewpoints of raising efficiency, reducing the environmental burden and using energy regeneration. Because each system and product works together in an organic manner, we have been able to achieve greater savings in energy and fuel consumption. We introduced this technology to improve the fuel economy of cars centered on energy management as our main exhibit at the 41st Tokyo Motor Show held in October 2009. We also developed the world’s first car air conditioning system with a built-in injector, that is, a small refrigerant ejection device. DENSO had already been supplying ejectors, such as refrigeration equipment for refrigeration vans and domestic-use CO2 hot-water supply systems, but this small- sized car air conditioning system enables the power consumption of the compressor to be reduced by up to 25% compared with a conventional system. Our newly developed system has been installed in the new Prius vehicle from Toyota Motor Corporation. In terms of parts for hybrid vehicles, we developed a battery monitoring unit for the lithium-ion batteries that are installed in vehicles. DENSO’s unit uses a special technique that we have developed to provide voltage control at the cell level, thereby simplifying the circuitry compared with that required by the normal techniques used for notebook computers and like products, and hence costing less. This newly developed battery monitoring unit was put on the market from the end of 2009 by Toyota, Management’s Discussion and Analysis who installed it in their Prius plug-in hybrid vehicle. Since the first Prius was launched in 1997, we have been developing products that utilize battery monitoring technology. Going forward, we will make use of this technology to develop products that incorporate the efficient utilization of high- voltage batteries. The R&D expenses of this business field for the fiscal year ended March 31, 2010 amounted to ¥263,678 million. In the area of new businesses, we jointly developed ECO-Cute Solar Heat, a combination of the two existing products series of ECO-Cute and solar heating systems, with the Tokyo Electric Power Company and Yazaki Corporation. The ECO-Cute Solar Heat system is a hot-water supply system that combines the features of ECO-Cute, which makes hot water by using “atmospheric heat” at night, and of solar heating systems, which effectively make hot water by using “the sun’s heat” in the daytime. As a result, this system is able to supply about 80% of the energy consumed by a household to heat water in the form of recycled energy. This in turn means that we expect the system to produce a quantity of annual CO2 emissions (approximately 0.86 tons of CO2 per household) that are about 70% less than those produced by conventional fuel-driven water heaters. The R&D expenses of this business area for the fiscal year ended March 31, 2010 amounted to ¥6,399 million. DENSO Corporation Annual Report 2010 29


  • Page 32

    R&D expenses for the fiscal year ended March 31, 2010 decreased 9.1%, or ¥27.0 billion, to ¥270.1 billion, representing 9.1% of net sales, down from 9.5% in the previous period. In this way, the Group is working to enhance the welfare of people everywhere by creating prod- ucts that offer greater innovation, advanced performance, and superior quality. Risk Management The Company has established a Risk Management Committee to minimize the diverse risk associ- ated with its global operations. This committee is responsible for mitigating risk that may impact the Group, implementing countermeasures in the event of risks materializing, and taking other steps to enhance the Group’s overall capability to deal with risks both in Japan and overseas. Economic Risk Demand for auto parts, which account for the major part of the Group’s operating revenue around the globe, is easily affected by the economic situation in the countries and regions where the Group has sales bases. Accordingly, an economic downturn and resulting decrease in demand for auto parts in the Group’s major markets, including Japan, the Americas, Europe, Asia & Oceania, may have an adverse effect on the Group’s operating results and financial condition. Further, Group operations can be indirectly affected by the economic situation in regions where competitors have their manufacturing bases. For example, if a competitor is able to employ local labor at lower cost and provide equivalent products at prices below those of the Group, this may adversely affect sales. Further, if the local currency of regions where parts and raw materials are sourced falls, there is a chance that the manufacturing cost not only for the Group, but also for other manufacturers, will fall. As a result of these trends, export and price wars may intensify, and have an adverse effect on the Group’s operating results and financial condition. Exchange Rate Risk Operations within the Group include the sale and manufacture of products around the world. All regional items in local currency including sales, costs and assets are converted to yen for the purpose of creating consolidated financial statements. Based on the exchange rate used in conversion, even though items have not changed as an amount of local currency, there is a possibility that the amount expressed in yen after the conversion has been changed. In general, a strong yen (in particular against the U.S. dollar and euro that constitute a major part of Group sales) has an adverse effect on the Group’s operations, and a weak yen has a positive effect on the Group’s operations. For Group operations that manufacture in Japan and export, a strong yen against other curren- Management’s Discussion and Analysis cies decreases the worldwide comparative price competitiveness of their products and can have an adverse effect on operating results. The Group performs currency hedging, and makes efforts to minimize the adverse effect of short-term fluctuations in the exchange rates of major currencies including the U.S. dollar, euro and yen. However, as a result of medium- and long-term movements in exchange rates, there are cases where procurement, manufacturing, distribution and sales cannot be performed exactly as planned and, as a result, exchange rate movements may have an adverse effect on the Group’s operating results and financial condition. Raw Materials and Component Supply Risk The Group procures raw materials and components used to manufacture its products from numer- ous external vendors. Although basic business contracts have been concluded with these external vendors, and transactions are generally stable, there is no guarantee against shortages or sharply higher prices for raw materials and components due to fluctuations in market conditions, unforeseen accidents at vendors or other such events. In such cases, the Group could incur higher manufactur- ing costs or be forced to halt production, which may in turn have an adverse effect on the Group’s operating results and financial condition. 30 DENSO Corporation Annual Report 2010


  • Page 33

    New Product Development Risk While the Group believes that it can continue to develop original and appealing new products, the product development and sales process is, by its nature, complex and uncertain, and is subject to the following risks: •฀ ฀There฀ is฀ no฀ guarantee฀ of฀ acquiring฀ sufficient฀ funds฀ and฀ resources฀ for฀ investment฀ in฀ new฀ products and new technologies. •฀ ฀There฀is฀no฀guarantee฀that฀long-term฀investment฀and฀allocation฀of฀large฀amounts฀of฀resources฀ will lead to the development of successful new products and the creation of new technologies. •฀ ฀It฀is฀not฀certain฀that฀Group฀will฀be฀able฀to฀correctly฀predict฀which฀new฀products฀and฀new฀tech- nologies will earn the support of the Group’s customers, and there is no guarantee that the sales of these products will be successful. •฀ ฀As฀a฀result฀of฀fast-paced฀technological฀advances฀and฀changes฀in฀market฀needs,฀there฀is฀a฀ possibility that the Group’s products will become outdated. •฀ ฀As฀a฀result฀of฀delays฀in฀the฀commercialization฀of฀new฀technologies฀under฀development,฀there฀ is a possibility that market demands might not be met. Beginning with the risks outlined above, if the Group is unable to fully anticipate industry and market changes, and is unable to develop attractive new products, this may result in a drop in future growth and profitability and may have an adverse effect on the Group’s operating results and financial condition. Pricing Risk Price competition in the automotive industry is fierce. In particular, demands for price reductions by automakers have increased in recent years. Further, it can be foreseen that the Group will face intensified competition in the component fields and regional markets that it operates in. Competitors include other component manufacturers, and some of these manufacturers are providing products at a lower price than the Group. Also, in line with the evolution of the automotive electronics busi- ness, there has been a rise in new competitors, such as consumer-electronics manufacturers and tie-ups between existing competitors, and there is a chance that they will quickly gain a large share in the market. While we believe that the Group is the leading component manufacturer in the world and con- tinues to develop automotive parts that are technically advanced, of high quality and high added- value, this is no guarantee that the Group will be able to compete effectively in the future. There is always the possibility that pricing pressure and ineffective competitive practices on the Group’s part will lead to a decrease in customers, which may have an adverse effect on the Group’s operating Management’s Discussion and Analysis results and financial condition. Potential Risks of International Activities and Overseas Expansion The proportion of manufacturing and sales activities carried out in the Americas and Europe, as well as in developing and emerging markets in Asia & Oceania, has been increasing in recent years. Expansion into these overseas markets has the following inherent risks, which if they materialize, may have an adverse effect on the Group’s operating results and financial condition. •฀ ฀Unforeseen฀change฀in฀laws฀or฀regulations. •฀ ฀Unfavorable฀political฀or฀economic฀conditions. •฀ ฀Difficulties฀in฀employing฀and฀retaining฀personnel. •฀ ฀Inadequate฀social฀infrastructure฀that฀may฀adversely฀affect฀the฀Group’s฀business฀activities. •฀ ฀The฀potentially฀adverse฀impact฀of฀tax฀regulations. •฀ ฀Social฀or฀economic฀turmoil฀caused฀by฀terrorist฀incidents,฀military฀conflict,฀epidemics฀and฀other฀ events. DENSO Corporation Annual Report 2010 31


  • Page 34

    Intellectual Property Risk The Group has accumulated technology and expertise that allows it to differentiate its products from those of its competitors. However, legal restrictions in certain regions and countries are inadequate to fully protect these technologies and expertise as intellectual property. Consequently, the Group may not be able to effectively prevent third parties from using its intellectual property to manufacture similar products. Additionally, because the Group’s products employ a broad range of technologies, there is a possibility that these products may be judged to have infringed third-party intellectual property rights in the future. OEM Customer Risk The OEM business, which constitutes the majority of the Group’s business, serves automobile manufacturers around the world and supplies a wide range of products, including air conditioning, engine, driving control and safety, and information and communication products. Sales to OEM customers are liable to be affected by factors that the Group cannot control such as the operating results of the OEM customer, while demands for reduced prices from the OEM customer may reduce the Group’s profit margins. Further, there is a possibility that OEM customer business downturns, unforeseen contract cancellations, changes in OEM customer procurement policies, and price cuts to satisfy large customers may have an adverse effect on the Group’s operating results and financial condition. Sales to the Toyota Group account for roughly half of the Group’s sales. Such sales made to a specific client group can be significantly impacted by the operating results of the customer. Product Defect Risk The Group manufactures a variety of products to meet internationally recognized quality control standards at factories around the world. However, there is no guarantee that all the Group’s products are defect-free and that there will be no product recalls in the future. Also, while the Group does have product liability insurance coverage, there is no guarantee that this insurance will completely cover any compensation that the Group may be forced to pay. Further, the Group may not be able to continue to subscribe to this insurance under conditions acceptable to the Group. Product defects that lead to large-scale product recalls or product liability compensation could have a huge cost and large impact on the Group’s reputation, and this may lead to a decrease in sales and adversely affect the Group’s operating results and financial condition. Risks of Natural Disasters and Power Outages Management’s Discussion and Analysis In order to minimize the potential negative impact of manufacturing lines being shut down, the Group carries out disaster-prevention inspections and equipment checks on a regular basis. However, there is no guarantee that the Group can totally prevent or reduce the impact of natural disasters, power outages or other stoppages of manufacturing lines. For example, many of the Group’s places of business are in the Tokai region, and if a disastrous earthquake were to hit this region, there is a possibility that the Group’s production and delivery activities would be suspended. Pension Liability Risk Costs and liabilities for employees’ retirement benefits are calculated based on actuarial assumptions such as the discount rate and the expected rate of return on pension assets. When actual results differ from the assumptions used for calculation, or when changes are made to the assumptions, the effect is accumulated and brought forward into future calculations, generally resulting in an impact on reported future costs and liabilities. 32 DENSO Corporation Annual Report 2010


  • Page 35

    Legal Proceedings The DENSO Group endeavors to ensure continual legal compliance in the course of its business activities. Nevertheless, it is possible that the Group may become party to legal proceedings due to judicial action or the actions of a regulating authority. Accordingly, such an event may have an adverse effect on the Group’s operating results and financial condition. Risk Management Meeting With expansion of the Group’s overseas business, the rapid development of information technology and greater pressure on companies to fulfill their social responsibility with respect to the environment, managing these diversifying risks from a global perspective is becoming increasingly important. In this context, the Company established a Risk Management Meeting to reinforce its ability to respond to risk. Specifically, the Company has identified 58 areas of risk that require management’s attention. The Group, as a whole, has already begun taking steps to mitigate these potential risks by preparing to implement thorough initial response measures in the event that such risks should materialize. Outlook Looking ahead, the global economy is expected to continue to be driven by Asia, especially by China with its strong domestic demand. The gradual economic recovery should continue, with positive growth in both developed countries and emerging nations. In the automotive industry, the Japanese, Western Europe and certain other markets are likely to contract due to their reaction to the ending or reduction of sales promotion measures to stimulate replacement purchases of automobiles, despite a gradual expansion of the global market overall resulting from the recovery of the U.S. economy and the strong markets in China, India and other emerging nations. The Group’s business environment continues to be severe, partly as a result of concern about the appreciation of the yen caused by worldwide economic instability, including the financial turmoil in Greece. In this business climate, the Group will move ahead with streamlining business structures and utilize the resources we have created by streamlining in responses to the increasing electrification of cars, improvements in fuel consumption, reductions in CO2, the expansion of low-cost technolo- gies and the markets of emerging nations. We will renew our efforts focused on creating the frame- work for the next stage of growth. Through these initiatives, we will strengthen our products’ competitiveness and conduct rigorous cost-cutting activities. Assuming U.S. dollar and euro exchange rates of ¥90 and ¥130, respectively, the Group is projecting consolidated net sales of ¥3,060.0 billion, an increase of 2.8%, or ¥83.3 Management’s Discussion and Analysis billion; operating income of ¥138.0 billion, an increase of 1.0%, or ¥1.4 billion; and net income of ¥98.0 billion, an increase of 33.5%, or ¥24.6 billion, for the fiscal year ending March 31, 2011. Forward-looking Statements The above forecasts are based on information available as of the date of this report. Actual results may differ materially from forecasts due to a variety of internal and external factors, such as changes in business operations and exchange rates. DENSO Corporation Annual Report 2010 33


  • Page 36

    Consolidated Balance Sheets DENSO CORPORATION and Consolidated Subsidiaries March 31, 2010 and 2009 Thousands of U.S. dollars Millions of yen (Note 1) Assets 2010 2009 2010 Current Assets: Cash and cash equivalents ¥ 681,725 ¥ 450,490 $ 7,327,225 Short-term investments (Note 3) 101,279 43,529 1,088,553 Notes and accounts receivable: Trade 555,745 365,286 5,973,184 Non-consolidated subsidiaries and affiliates 8,283 4,301 89,026 564,028 369,587 6,062,210 Less: Allowance for doubtful accounts (2,150) (2,285) (23,109) 561,878 367,302 6,039,101 Inventories (Note 4) 266,264 255,526 2,861,823 Deferred tax assets (Note 6) 59,826 61,819 643,014 Other current assets 84,150 88,136 904,450 Total current assets 1,755,122 1,266,802 18,864,166 Property, Plant and Equipment (Notes 5 and 8): Land 156,669 154,107 1,683,889 Buildings and structures 710,380 703,912 7,635,211 Machinery and equipment 2,571,558 2,533,324 27,639,273 Construction in progress 46,597 76,181 500,827 3,485,204 3,467,524 37,459,200 Less: Accumulated depreciation (2,582,504) (2,432,891) (27,756,922) Net property, plant and equipment 902,700 1,034,633 9,702,278 Consolidated Balance Sheets Investments and Other Assets: Investment securities (Note 3) 492,570 408,245 5,294,175 Investments in and advances to non-consolidated subsidiaries and affiliates 41,544 36,421 446,518 Prepaid pension costs (Note 9) 84,452 107,781 907,696 Intangible assets 17,678 19,959 190,004 Deferred tax assets (Note 6) 49,944 120,977 536,801 Other assets 20,060 23,620 215,606 Total investments and other assets 706,248 717,003 7,590,800 Total ¥ 3,364,070 ¥ 3,018,438 $ 36,157,244 See accompanying notes to consolidated financial statements. 34 DENSO Corporation Annual Report 2010


  • Page 37

    Thousands of U.S. dollars Millions of yen (Note 1) Liabilities and Equity 2010 2009 2010 Current Liabilities: Short-term borrowings (Note 7) ¥ 29,898 ¥ 31,760 $ 321,346 Current portion of long-term debt (Notes 7 and 8) 15,807 18,944 169,895 Notes and accounts payable: Trade 398,617 267,002 4,284,361 Non-consolidated subsidiaries and affiliates 24,380 14,732 262,038 422,997 281,734 4,546,399 Income taxes payable 13,114 7,876 140,950 Accrued expenses 205,424 191,938 2,207,910 Other current liabilities (Note 6) 74,512 75,813 800,860 Total current liabilities 761,752 608,065 8,187,360 Long-Term Liabilities: Long-term debt (Notes 7 and 8) 364,103 306,186 3,913,403 Liability for employees’ retirement benefits (Notes 2 (K) and 9) 180,390 181,317 1,938,844 Retirement allowances for directors and corporate auditors (Note 2 (L)) 1,991 2,184 21,399 Deferred tax liabilities (Note 6) 10,310 5,260 110,813 Other long-term liabilities 13,260 14,707 142,519 Total long-term liabilities 570,054 509,654 6,126,978 Contingent Liabilities (Note 10) Equity (Note 11): Common stock: Authorized: 1,500,000,000 shares in 2010 and 2009 Issued: 884,068,713 shares in 2010 and 2009 187,457 187,457 2,014,800 Capital surplus 266,610 266,635 2,865,542 Stock acquisition rights 2,750 1,852 29,557 Consolidated Balance Sheets Retained earnings 1,626,988 1,574,515 17,486,973 Unrealized gain on available-for-sale securities 154,178 89,000 1,657,115 Deferred gain (loss) on derivatives under hedge accounting 161 (270) 1,730 Foreign currency translation adjustments (120,317) (129,007) (1,293,175) Treasury stock, at cost: 78,167,760 shares in 2010 and 78,219,105 shares in 2009 (198,498) (198,629) (2,133,469) Total 1,919,329 1,791,553 20,629,073 Minority interests 112,935 109,166 1,213,833 Total equity 2,032,264 1,900,719 21,842,906 Total ¥3,364,070 ¥3,018,438 $36,157,244 DENSO Corporation Annual Report 2010 35


  • Page 38

    Consolidated Statements of Operations DENSO CORPORATION and Consolidated Subsidiaries Years ended March 31, 2010, 2009 and 2008 Thousands of U.S. dollars Millions of yen (Note 1) 2010 2009 2008 2010 Net Sales (Note 13) ¥2,976,709 ¥3,142,665 ¥4,025,076 $31,993,863 Cost of Sales (Note 14) 2,559,993 2,850,990 3,314,890 27,514,972 Gross profit 416,716 291,675 710,186 4,478,891 Selling, General and Administrative Expenses (Note 14) 280,076 328,984 361,534 3,010,275 Operating income (loss) 136,640 (37,309) 348,652 1,468,616 Other Income (Expenses): Interest and dividend income 12,110 24,420 25,956 130,159 Interest expense (5,936) (5,593) (6,814) (63,801) Equity in earnings (losses) of affiliates 2,129 (8,314) 3,468 22,883 Foreign exchange gain (loss) 6,767 (7,770) (2,710) 72,732 Loss on sale or disposal of property, plant and equipment, net (5,790) (2,937) (4,664) (62,231) Impairment loss on investment securities (344) (8,307) (45) (3,697) Gain (Loss) on sale of investment securities and affiliates’ stock 4 (20,575) 608 43 Impairment loss on long-lived assets (Note 5) (514) (27,293) (767) (5,524) Loss on liquidation of a subsidiary (2,656) (8,661) (28,547) Restructuring charges (1,519) (808) Cumulative effect of accounting change for retirement benefit to directors, corporate auditors and managing officers (Notes 2 (K) and 2 (L)) (3,330) Loss on valuation of investments in capital (1,026) (599) (11,028) Loss on change in pension plans of subsidiaries (994) (10,684) Loss on sale of stock of an affiliate (234) (2,515) Other, net 6,757 5,174 5,283 72,625 Total 10,273 (61,974) 16,177 110,415 Income (Loss) before income taxes and minority interests 146,913 (99,283) 364,829 1,579,031 Income Taxes (Note 6): Consolidated Statements of Operations Current 29,336 27,952 109,432 315,305 Deferred 38,266 (47,798) (9,125) 411,286 Total 67,602 (19,846) 100,307 726,591 Minority Interests in Net Income 5,884 4,648 20,105 63,242 Net income (loss) ¥ 73,427 ¥ (84,085) ¥ 244,417 $ 789,198 U.S. dollars Yen (Note 1) Per Share of Common Stock (Notes 2 (U) and 18): Basic net income (loss) ¥ 91.11 ¥ (104.13) ¥ 299.96 $ 0.98 Diluted net income 91.11 – 299.70 0.98 Cash dividends applicable to the year 27.00 40.00 54.00 0.29 Average Number of Shares (in thousands) 805,892 807,469 814,833 See accompanying notes to consolidated financial statements. 36 DENSO Corporation Annual Report 2010


  • Page 39

    Consolidated Statements of Changes in Equity DENSO CORPORATION and Consolidated Subsidiaries Years ended March 31, 2010, 2009 and 2008 Thousands Millions of yen Deferred Outstanding Unrealized Gain (Loss) Number of Gain on on Foreign Shares of Stock Available- Derivatives Currency Common Common Capital Acquisition Retained for-sale under Hedge Translation Treasury Minority Stock Stock Surplus Rights Earnings Securities Accounting Adjustments Stock Total Interests Total Equity Balance, April 1, 2007 814,485 ¥187,457 ¥266,463 ¥ 294 ¥1,500,807 ¥ 374,060 ¥(905) ¥ 14,962 ¥(169,130) ¥2,174,008 ¥112,948 ¥2,286,956 Net income 244,417 244,417 244,417 Cash dividends, ¥49 per share (39,925) (39,925) (39,925) Purchase of treasury stock (2,620) (9,347) (9,347) (9,347) Disposal of treasury stock 856 188 2,083 2,271 2,271 Net change in the year 764 (150,967) 915 (60,820) (210,108) 8,413 (201,695) Balance, March 31, 2008 812,721 ¥187,457 ¥266,651 ¥1,058 ¥1,705,299 ¥ 223,093 ¥ 10 ¥ (45,858) ¥(176,394) ¥2,161,316 ¥121,361 ¥2,282,677 Adjustment of retained earnings due to adoption of PITF No. 18 (Note 2 (B)) (1,370) (1,370) (1,370) Net loss (84,085) (84,085) (84,085) Cash dividends, ¥56 per share (45,329) (45,329) (45,329) Purchase of treasury stock (7,000) (22,562) (22,562) (22,562) Disposal of treasury stock 129 (16) 327 311 311 Net change in the year 794 (134,093) (280) (83,149) (216,728) (12,195) (228,923) Balance, March 31, 2009 805,850 ¥187,457 ¥266,635 ¥1,852 ¥1,574,515 ¥ 89,000 ¥(270) ¥(129,007) ¥(198,629) ¥1,791,553 ¥109,166 ¥1,900,719 Net income 73,427 73,427 73,427 Cash dividends, ¥26 per share (20,954) (20,954) (20,954) Purchase of treasury stock (8) (19) (19) (19) Disposal of treasury stock 59 (25) 150 125 125 Net change in the year 898 65,178 431 8,690 75,197 3,769 78,966 Balance, March 31, 2010 805,901 ¥187,457 ¥266,610 ¥2,750 ¥1,626,988 ¥ 154,178 ¥ 161 ¥(120,317) ¥(198,498) ¥1,919,329 ¥112,935 ¥2,032,264 Thousands of U.S. dollars (Note 1) Deferred Unrealized Gain (Loss) Gain on on Foreign Stock Available- Derivatives Currency Common Capital Acquisition Retained for-sale under Hedge Translation Treasury Minority Stock Surplus Rights Earnings Securities Accounting Adjustments Stock Total Interests Total Equity Balance, March 31, 2009 $2,014,800 $2,865,811 $19,905 $16,922,990 $ 956,578 $(2,902) $(1,386,576) $(2,134,877) $19,255,729 $1,173,323 $20,429,052 Consolidated Statements of Changes in Equity Net income 789,198 789,198 789,198 Cash dividends, $0.28 per share (225,215) (225,215) (225,215) Purchase of treasury stock (204) (204) (204) Disposal of treasury stock (269) 1,612 1,343 1,343 Net change in the year 9,652 700,537 4,632 93,401 808,222 40,510 848,732 Balance, March 31, 2010 $2,014,800 $2,865,542 $29,557 $17,486,973 $1,657,115 $ 1,730 $(1,293,175) $(2,133,469) $20,629,073 $1,213,833 $21,842,906 See accompanying notes to consolidated financial statements. DENSO Corporation Annual Report 2010 37


  • Page 40

    Consolidated Statements of Cash Flows DENSO CORPORATION and Consolidated Subsidiaries Years ended March 31, 2010, 2009 and 2008 Thousands of U.S. dollars Millions of yen (Note 1) 2010 2009 2008 2010 Operating Activities: Income (Loss) before income taxes and minority interests ¥ 146,913 ¥ (99,283) ¥ 364,829 $ 1,579,031 Adjustments for: Payment of income taxes (25,649) (90,599) (113,085) (275,677) Refund of income taxes 19,098 205,267 Depreciation 237,944 276,624 263,519 2,557,438 Impairment loss on long-lived assets 514 27,293 767 5,525 Amortization of negative goodwill (363) (304) (357) (3,902) Equity in (earnings) losses of affiliates (2,129) 8,314 (3,468) (22,883) Loss on sale or disposal of property, plant and equipment, net 5,790 2,937 4,664 62,231 (Gain) Loss on sale of investment securities and affiliates’ stock (4) 20,575 (608) (43) Foreign exchange loss (gain) 1,392 4,095 (139) 14,961 Changes in assets and liabilities: (Increase) Decrease in notes and accounts receivable (190,491) 250,991 (19,399) (2,047,410) (Increase) Decrease in inventories (11,291) 27,808 (13,403) (121,356) (Decrease) Increase in liability for retirement benefits (1,361) 10,791 2,973 (14,628) Increase (Decrease) in notes and accounts payable 122,937 (211,033) 49,632 1,321,335 Decrease (Increase) in prepaid pension cost 23,990 2,712 (11,222) 257,846 Other, net 29,851 (21,006) 47,960 320,840 Total adjustments 210,228 309,198 207,834 2,259,544 Net cash provided by operating activities 357,141 209,915 572,663 3,838,575 Investing Activities: Acquisition of property, plant and equipment (126,991) (317,805) (341,363) (1,364,907) Proceeds from sale of property, plant and equipment 7,374 40,394 13,482 79,256 Purchase of available-for-sale securities (69,597) (18,837) (98,965) (748,033) Proceeds from sale and redemption of available-for-sale securities 39,771 80,410 93,520 427,461 Other, net (5,672) (18,468) (30,423) (60,963) Net cash used in investing activities (155,115) (234,306) (363,749) (1,667,186) Financing Activities: Net increase (decrease) in short-term borrowings 67 (1,795) (30,974) 720 Proceeds from issuance of commercial paper 49,979 537,177 (50,000) (537,403) Consolidated Statements of Cash Flows Redemption of commercial paper Proceeds from long-term borrowings 34,491 73,698 26,147 370,711 Repayments of long-term borrowings (18,908) (8,631) (15,811) (203,224) Issuance of bonds 40,000 100,000 429,923 Repayments of long-term bonds (236) (34) (50,074) (2,537) Dividends paid (20,954) (45,329) (39,925) (225,215) Purchase of treasury stock (19) (22,562) (9,347) (204) Other, net (5,267) (5,021) (1,903) (56,610) Net cash provided by (used in) financing activities 29,153 90,326 (121,887) 313,338 Foreign Currency Translation Adjustments on Cash and Cash Equivalents 56 (24,135) (15,355) 602 Net Increase in Cash and Cash Equivalents 231,235 41,800 71,672 2,485,329 Cash and Cash Equivalents at Beginning of Period 450,490 408,675 337,003 4,841,896 Cash and Cash Equivalents of Newly Consolidated Subsidiary 15 Cash and Cash Equivalents at End of Period ¥ 681,725 ¥ 450,490 ¥ 408,675 $ 7,327,225 See accompanying notes to consolidated financial statements. 38 DENSO Corporation Annual Report 2010


  • Page 41

    Notes to Consolidated Financial Statements DENSO CORPORATION and Consolidated Subsidiaries 1. Basis of Presenting Consolidated Financial Statements The accompanying consolidated financial statements have been prepared from accounts and records maintained by DENSO CORPORATION (the “Company”), and consolidated subsidiaries (collectively referred to as the “Group”) in accordance with the provisions set forth in the Japanese Financial Instruments and Exchange Act and its related accounting regulations, and in conformity with accounting principles generally accepted in Japan (“Japanese GAAP”), which are different in certain respects as to application and disclosure requirements from International Financial Reporting Standards. In preparing these consolidated financial statements, certain reclassifications and rearrangements have been made to the 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 2009 consolidated financial statements to conform to the classifications used in 2010. The consolidated financial statements are stated in Japanese yen, the currency of the country in which the Company is incorporated and operates. The translations of Japanese yen amounts into U.S. dollar amounts are included solely for the convenience of readers outside Japan and have been made at the rate of ¥93.04 to U.S. $1, the rate of exchange at March 31, 2010. Such translations should not be construed as representations that the Japanese yen amounts could be converted into U.S. dollars at that or any other rate of exchange. 2. Summary of Significant Accounting Policies (A) Principles of Consolidation and Accounting for Investments in Non-consolidated Subsidiaries and Affiliates The Company had 184 subsidiaries at March 31, 2010 (187 for 2009 and 2008). The Company applied the “control” concept for its consolidation policy. Under the control concept, those companies in which the Company, directly or indirectly, is able to exercise control over operations are fully consolidated. The consolidated financial statements for the year ended March 31, 2010 include 184 subsidiaries (187 for 2009 and 186 for 2008). The Company applied the “power to exercise significant influence” concept to determine affiliates to be accounted for by the equity method. Under the influence concept, those companies over which the Group has the ability to exercise significant influence are accounted for by the equity method. The Company applied the equity method to all 30 affiliates for the year ended March 31, 2010 (32 affiliates for 2009, and 1 non-consolidated subsidiary and 32 affiliates for 2008). The fiscal years of subsidiaries are not necessarily the same as that of the Company. Accounts of subsidiaries which have different fiscal years have been adjusted for significant transactions to properly reflect their financial position at March 31 of each year and the results of operations and cash flows for the years then ended. All significant intercompany balances and transactions have been eliminated in consolidation. All material unrealized profits included in assets resulting from transactions within the Group are eliminated. The net excess of the fair value of the net assets of consolidated subsidiaries and affiliates accounted for under the equity method over the acquisition cost of the Company’s investments in those companies is amortized over the estimated available life or five years. (B) Unification of Accounting Policies Applied to Foreign Subsidiaries for the Consolidated Financial Statements In May 2006, the Accounting Standards Board of Japan (the “ASBJ”) issued ASBJ Practical Issues Task Force (PITF) No. 18, “Practical Notes to Consolidated Financial Statements Solution on Unification of Accounting Policies Applied to Foreign Subsidiaries for the Consolidated Financial Statements”. PITF No. 18 prescribes: (1) 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, (2) financial statements prepared by foreign subsidiaries in accordance with either International Financial Reporting Standards or generally accepted accounting principles in the United States of America tentatively may be used for the consolidation process, (3) however, the following items should be adjusted in the consolidation process so that net income is accounted for in accordance with Japanese GAAP unless they are not material: 1) amortization of goodwill; 2) scheduled amortization of actuarial gain or loss of pensions that has been directly recorded in equity; 3) expensing capitalized development costs of R&D; 4) cancellation of the fair value model of accounting for property, plant, and equipment and investment properties and incorporation of the cost model of accounting; 5) recording the prior years’ effects of changes in accounting policies in the income statement where retrospective adjustments to financial statements have been incorporated; and 6) exclusion of minority interests from net income, if included. PITF No. 18 was effective for fiscal years beginning on or after April 1, 2008 with early adoption permitted. The Company applied this accounting standard effective April 1, 2008. The effect of this change was to decrease operating loss by ¥873 million ($8,887 thousand) and loss before income taxes and minority interests by ¥1,591 million ($16,197 thousand) for the year ended March 31, 2009. In addition, the Company adjusted the beginning balance of retained earnings at April 1, 2008 as if this accounting standard had been retrospectively applied. DENSO Corporation Annual Report 2010 39


  • Page 42

    (C) Cash and Cash Equivalents Cash equivalents are short-term investments that are readily convertible into cash and that are exposed to insignificant risk of changes in value. Cash equivalents include time deposits, certificates of deposits, commercial paper and money management funds, all of which mature or become due within three months of the date of acquisition. (D) Inventories Prior to April 1, 2008, finished products, work in process and supplies have been stated principally at cost, and raw materials principally at the lower of cost or market value, with cost determined by the annual average method. In July 2006, the ASBJ issued ASBJ Statement No. 9, “Accounting Standard for Measurement of Inventories”. This standard requires that inventories held for sale in the ordinary course of business be measured at the lower of cost or net selling value, which is defined as the selling price less additional estimated manufacturing costs and estimated direct selling expenses. Replacement cost may be used in place of the net selling value, if appropriate. The standard also requires that inventories held for trading purposes be measured at the market price. The standard was effective for fiscal years beginning on or after April 1, 2008 with early adoption permitted. The Group applied this new accounting standard for measurement of inventories effective April 1, 2008. The effect of this change was to increase loss before income taxes and minority interests by ¥8,201 million for the year ended March 31, 2009. (E) Securities All securities are classified as available-for-sale securities and are stated 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 determined based on the moving-average method. Non-marketable available-for-sale securities are stated at cost 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 a charge to income. (F) Property, Plant and Equipment and Depreciation Property, plant and equipment are stated at cost. Depreciation is computed, with minor exceptions, by the declining-balance method at rates based on the estimated useful lives of the assets. Property, plant and equipment acquired on and after April 1, 2007 by the Company and domestic subsidiaries are depreciated by the declining-balance method in accordance with the revised corporate tax law. The effect of this treatment was to decrease income before income taxes and minority interests for the year ended March 31, 2008 by ¥11,876 million. For the fiscal year ended March 31, 2007 and previous fiscal years, property, plant and equipment held by the Company and domestic subsidiaries had been depreciated up to 95% of acquisition cost with 5% of residual value carried forward to the following year. However, beginning in the year ended March 31, 2008, in accordance with the revised corporate tax law, such 5% portion of property, plant and equipment is systematically amortized over 5 years starting in the following year in which the carrying value of property, plant and equip- ment reaches 5% of the acquisition cost. The effect of this treatment was to decrease income before income taxes and minority interests for the year ended March 31, 2008 by ¥4,322 million. Effective April 1, 2008, the Company and several domestic consolidated subsidiaries shortened the useful lives of certain machinery after reviewing the expected useful lives following a change in statutory useful life of machinery under the revised corporate tax law of 2008. Notes to Consolidated Financial Statements The effect of this treatment was to increase loss before income taxes and minority interests for the year ended March 31, 2009 by ¥5,918 million. The range of useful lives is principally from 10 to 45 years for buildings and structures and mainly 7 years for machinery. Additional depreciation is charged for machinery operated in excess of normal usage. (G) 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 would be 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. (H) Intangible Assets Intangible assets consisted of in-house software and others. The straight-line method is primarily used to amortize intangible assets. The amortization of in-house software, which is available to reduce operating costs, is computed using the straight-line method based on the estimated useful life of five years. 40 DENSO Corporation Annual Report 2010


  • Page 43

    (I) Allowance for Doubtful Accounts The allowance for doubtful accounts is stated in amounts considered to be appropriate based on the Group’s past credit loss experience and an evaluation of potential losses in the receivables outstanding. (J) Bond Issue Costs Bond issue costs are charged to income as incurred. (K) Liability for Employees’ Retirement Benefits The Group accounted for the liability for employees’ retirement benefits based on projected benefit obligations and plan assets at the balance sheet date. Prior to April 1, 2007, retirement benefits to managing officers were expensed when paid. Effective April 1, 2007, managing officers’ retirement benefits are provided by the Company and major subsidiaries at the amount that would be required if all managing officers retired at the balance sheet date. The effect of this change is included in Note 2 (L) below. (L) Retirement Allowances for Directors and Corporate Auditors Prior to April 1, 2007, retirement benefits to directors and corporate auditors were expensed when paid. Effective April 1, 2007, retirement benefits to directors and corporate auditors are provided by the Company and major subsidiaries at the amount that would be paid if all directors and corporate auditors retired at the balance sheet date in accordance with a Report of the Auditing and Assurance Practice Committee, “An Auditing Treatment for Retirement Benefits to Directors and Corporate Auditors”, which was published by the Japanese Institute of Certified Public Accountants on April 13, 2007 and is effective for fiscal years beginning on or after April 1, 2007. The effect of this change including the effect of managing officers’ retirement benefits was to decrease income before income taxes and minority interests for the year ended March 31, 2008 by ¥2,183 million, which included a cumulative effect of ¥3,330 million at April 1, 2007. This cumulative effect was presented in other expense in the 2008 consolidated statement of operations. (M) Stock Options In December 2005, the ASBJ issued ASBJ Statement No. 8, “Accounting Standard for Stock Options” and related guidance. The new standard and guidance are applicable to stock options newly granted on and after May 1, 2006. This standard requires companies to recognize compensation expense for employee stock options based on the fair value at the date of grant and over the vesting period as consideration for receiving goods or services. The standard also requires companies to account for stock options granted to non-employees based on the fair value of either the stock option or the goods or services received. In the balance sheet, the stock option is presented as a stock acquisition right as a separate component of equity until exercised. The standard covers equity-settled, share-based payment transactions, but does not cover cash-settled, share-based payment transactions. In addition, the standard allows unlisted companies to measure options at their intrinsic value if they cannot reliably estimate fair value. The Company has applied this accounting standard for stock options to those granted on and after May 1, 2006. (N) Research and Development Expenses Research and development expenses are charged to income as incurred. Notes to Consolidated Financial Statements (O) Leases In March 2007, the ASBJ issued ASBJ Statement No. 13, “Accounting Standard for Lease Transactions”, which revised the previous accounting standard for lease transactions issued in June 1993. The revised accounting standard for lease transactions is effective for fiscal years beginning on or after April 1, 2008 with early adoption permitted for fiscal years beginning on or after April 1, 2007. Under the previous accounting standard, finance leases that deem to transfer ownership of the leased property to the lessee were to be capitalized. However, other finance leases were permitted to be accounted for as operating lease transactions if certain “as if capitalized” information is disclosed in the note to the lessee’s financial statements. The revised accounting standard requires that all finance lease transactions be capitalized to recognize lease assets and lease obligations in the balance sheet. In addition, the accounting standard permits leases which existed at the transition date and do not transfer ownership of the leased property to the lessee to be accounted for as operating lease transactions. The Group applied the revised accounting standard effective April 1, 2008. In addition, the Group accounted for leases which existed at the transition date and do not transfer ownership of the leased property to the lessee as operating lease transactions. There was no impact on the consolidated statements of operations for the year ended March 31, 2009. All other leases are accounted for as operating leases. (P) Bonuses to Directors and Corporate Auditors Bonuses to directors and corporate auditors are accrued at the year end to which such bonuses are attributable. DENSO Corporation Annual Report 2010 41


  • Page 44

    (Q) Income Taxes The provision for current income taxes is computed based on the pretax income included in the consolidated statements of operations. The asset and liability approach is used to recognize deferred tax assets and liabilities, which are recorded to reflect the impact of temporary differences between assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes. These deferred taxes are measured by applying currently enacted tax laws to the temporary differences. Future tax benefits are recognized to the extent that such benefits are likely to be realized. (R) Foreign Currency Translation All short-term and long-term monetary receivable and payable accounts denominated in foreign currencies are translated into Japanese yen at the current exchange rates at the balance sheet date. The foreign exchange gains and losses from translation are recognized in the consolidated statements of operations to the extent that they are not hedged by forward exchange contracts. (S) Foreign Currency Financial Statements The balance sheet accounts of consolidated foreign subsidiaries are translated into Japanese yen at the current exchange rates at the balance sheet date, except for equity, which is translated at historical rates. Differences arising from such translation were shown as “Foreign currency translation adjustments” in a separate component of equity. Revenue and expense accounts of the consolidated foreign subsidiaries are translated into Japanese yen at the annual average rates. (T) Derivative Financial Instruments Derivative financial instruments and foreign currency transactions are classified and accounted for as follows: a) all derivatives are recog- nized as either assets or liabilities and measured at fair value, and gains or losses on derivative transactions are recognized in the consoli- dated statements of operations and b) for derivatives used for hedging purposes, if derivatives qualify for hedge accounting because of high correlation and effectiveness between the hedging instruments and the hedged items, gains or losses on derivatives are deferred until maturity of the hedged transactions. The foreign exchange forward contracts, currency options and currency swap contracts employed to hedge foreign exchange expo- sures to the consolidated subsidiaries are measured at fair value, and the unrealized gain/loss are recognized in the consolidated state- ments of operations. Interest rate swaps are utilized to hedge interest rate exposures of financial assets and long-term debt (bonds). These swaps, which qualify for hedge accounting, are measured at market value at the balance sheet date and the unrealized gains and losses are deferred until maturity as an other liability or asset. When interest rate swap contracts meet specific matching criteria, the interest rate swaps are not re-measured at market value but the differentials paid or received under the swap contracts are recognized and included in interest expense or income. (U) Net Income (Loss) and Dividends per Share Basic net income (loss) per share is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding in each period, retroactively adjusted for stock splits. Diluted net income per share reflects the potential dilution that could occur if securities were exercised or converted into common stock. Diluted net income per share of common stock assumes full conversion of the outstanding convertible bonds at the beginning of the year (or at the time of issuance) with an applicable adjustment for related interest expense, net of tax, and full exercise of outstanding stock options. Notes to Consolidated Financial Statements Diluted net income per share was not disclosed due to loss position for the year ended March 31, 2009. Cash dividends per share presented in the accompanying consolidated statements of operations are dividends applicable to the respective years including dividends to be paid after the end of the year. (V) Construction Contracts In December 2007, the ASBJ issued ASBJ Statement No. 15, “Accounting Standard for Construction Contracts,” and ASBJ Guidance No. 18, “Guidance on Accounting Standard for Construction Contracts”. Under the previous Japanese GAAP, either the completed- contract method or the percentage-of-completion method was permitted to account for construction contracts. Under this new accounting standard, construction revenue and construction costs should be recognized by the percentage-of-completion method, if the outcome of a construction contract can be estimated reliably. When total construction revenue, total construction costs and the stage of completion of the contract at the balance sheet date can be reliably measured, the outcome of a construction contract can be estimated reliably. If the outcome of a construction contract cannot be reliably estimated, the completed-contract method should be applied. When it is probable that total construction costs will exceed total construction revenue, an estimated loss on the contract should be immediately recognized by providing for a loss on construction contracts. This standard is applicable to construction contracts and software develop- ment contracts and effective for fiscal years beginning on or after April 1, 2009. The Company applied the new accounting standard effective April 1, 2009. The effect of this change has no impact on the consolidated statement of operations for the year ended March 31, 2010. 42 DENSO Corporation Annual Report 2010


  • Page 45

    (W) Property Summing up of Equipment Spare Parts Prior to April 1, 2009, equipment spare parts were expensed when purchased. However, with the growth in significance of equipment spare parts, the Company determined to account for equipment spare parts as inventory in order to encourage inventory control from this fiscal year in the process of upgrading perpetual inventory systems. The effect of this treatment was to increase income before income taxes and minority interests for the year ended March 31, 2010 by ¥4,859 million ($52,225 thousand). The effect of the change to segment information are discussed in Note 17. (X) New Accounting Pronouncements Business Combinations On December 26, 2008, the ASBJ issued a revised accounting standard for business combinations, ASBJ Statement No. 21, “Accounting Standard for Business Combinations”. Major accounting changes under the revised accounting standard are as follows; (1) The current accounting standard for business combinations allows companies to apply the pooling-of-interests method of account- ing when certain specific criteria are met such that the business combination is essentially regarded as a uniting-of-interests. The revised standard requires that for such business combinations be accounted for by the purchase method and the pooling-of-interests method of accounting is no longer allowed. (2) The current accounting standard accounts for research and development costs to be charged to income as incurred. Under the revised standard, in-process research and development costs (IPR&D) acquired in a business combination is capitalized as an intangible asset. (3) The current accounting standard accounts for a bargain purchase gain (negative goodwill) to be systematically amortized within 20 years. Under the revised standard, the acquirer recognizes a bargain purchase gain in profit or loss on the acquisition date after reassessing whether it has correctly identified all of the assets acquired and all of the liabilities assumed with a review of such procedures used. This standard is applicable to business combinations undertaken on or after April 1, 2010 with early adoption permitted for fiscal years beginning on or after April 1, 2009. Unification of Accounting Policies Applied to Foreign Associated Companies for the Equity Method The current accounting standard requires the unification of accounting policies within the consolidation group. However, the current guid- ance allows the application of the equity method for the financial statements of its foreign associated company which have been prepared in accordance with generally accepted accounting principles in their respective jurisdictions without unification of accounting policies. On December 26, 2008, the ASBJ issued ASBJ Statement No. 16 (Revised 2008), “Revised Accounting Standard for Equity Method of Accounting for Investments”. The new standard requires adjustments 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 adjustments. In addition, financial statements prepared by foreign associated companies in accordance with either International Financial Reporting Standards or generally accepted accounting principles in the United States 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: 1) amortization of goodwill; 2) scheduled amortization of actuarial gain or loss of pensions that has been directly recorded in equity; 3) expensing capitalized development costs of R&D; 4) cancellation of the fair value model of accounting for property, plant, and equipment and investment properties and incorporation of the cost model of accounting; 5) recording the prior years’ effects of changes in accounting policies in the income statement where retrospec- tive adjustments to the financial statements have been incorporated; and 6) exclusion of minority interests from net income, if included. Notes to Consolidated Financial Statements This standard is applicable to equity method of accounting for investments effective on or after April 1, 2010 with early adoption permit- ted for fiscal years beginning on or after April 1, 2009. Asset Retirement Obligations On March 31, 2008, the ASBJ published a new accounting standard for asset retirement obligations, ASBJ Statement No. 18, “Accounting Standard for Asset Retirement Obligations,” and ASBJ Guidance No. 21, “Guidance on Accounting Standard for Asset Retirement Obliga- tions”. Under this accounting standard and guidance, an asset retirement obligation is defined as a legal obligation imposed either by law or contract that results from the acquisition, construction, development and the normal operation of a tangible fixed asset and is associated with the retirement of such tangible fixed asset. The asset retirement obligation is recognized as the sum of the discounted cash flows required for the future asset retirement and is recorded in the period in which the obligation is incurred if a reasonable estimate can be made. If a reasonable estimate of the asset retirement obligation cannot be made in the period the asset retirement obligation is incurred, the liability should be recognized when a reasonable estimate of asset retirement obligation can be made. Upon initial recognition of a liability for an asset retirement obligation, an asset retirement cost is capitalized by increasing the carrying amount of the related fixed asset by the amount of the liability. The asset retirement cost is subsequently allocated to expense through depreciation over the remaining useful life of the asset. Over time, the liability is accreted to its present value each period. Any subsequent revisions to the timing or the amount of the original estimate of undiscounted cash flows are reflected as an increase or a decrease in the carrying amount of the liability and the capitalized amount of the related asset retirement cost. This standard is effective for fiscal years beginning on or after April 1, 2010 with early adoption permitted for fiscal years beginning on or before March 31, 2010. DENSO Corporation Annual Report 2010 43


  • Page 46

    Accounting Changes and Error Corrections In December 2009, ASBJ issued ASBJ Statement No. 24, “Accounting Standard for Accounting Changes and Error Corrections,” and ASBJ Guidance No. 24, “Guidance on Accounting Standard for Accounting Changes and Error Corrections”. Accounting treatments under this standard and guidance are as follows; (1) Changes in Accounting Policies: When a new accounting policy is applied with revision of accounting standards, a new policy is applied retrospectively unless the revised accounting standards include specific transitional provisions. When the revised accounting standards include specific transitional provisions, an entity shall comply with the specific transitional provisions. (2) Changes in Presentations When the presentation of financial statements is changed, prior period financial statements are reclassified in accordance with the new presentation. (3) Changes in Accounting Estimates A change in an accounting estimate is accounted for in the period of the change if the change affects that period only, and is accounted for prospectively if the change affects both the period of the change and future periods. (4) Corrections of Prior Period Errors When an error in prior period financial statements is discovered, those statements are restated. This accounting standard and the guidance are applicable to accounting changes and corrections of prior period errors which are made from the beginning of the fiscal year that begins on or after April 1, 2011. Segment Information Disclosures In March 2008, the ASBJ revised ASBJ Statement No. 17, “Accounting Standard for Segment Information Disclosures,” and issued ASBJ Guidance No. 20, “Guidance on Accounting Standard for Segment Information Disclosures”. Under the standard and guidance, 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 determining 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. This accounting standard and the guidance are applicable to segment information disclosures for the fiscal years beginning on or after April 1, 2010. Notes to Consolidated Financial Statements 44 DENSO Corporation Annual Report 2010


  • Page 47

    3. Short-term Investments and Investment Securities Short-term investments consisted of time deposits not classified as cash equivalents in the amount of ¥31,912 million ($342,992 thousand) and ¥23,102 million, at March 31, 2010 and 2009, respectively, and debt securities. Investment securities consisted of equity securities and debt securities. The carrying amounts and aggregate fair values of available-for-sale securities included in short-term investments and in investment securities at March 31, 2010 and 2009 were as follows: Thousands of Millions of yen U.S. dollars Unrealized Unrealized Unrealized Unrealized Cost Gain Loss Fair Value Cost Gain Loss Fair Value 2010 2010 Equity securities ¥177,731 ¥256,516 ¥(3,731) ¥430,516 $1,910,264 $2,757,051 $(40,101) $4,627,214 Debt securities 117,774 1,395 (23) 119,146 1,265,843 14,993 (247) 1,280,589 Others 61 – – 61 656 – – 656 Total ¥295,566 ¥257,911 ¥(3,754) ¥549,723 $3,176,763 $2,772,044 $(40,348) $5,908,459 Millions of yen Unrealized Unrealized Cost Gain Loss Fair Value 2009 Equity securities ¥177,758 ¥163,372 ¥(13,644) ¥327,486 Debt securities 88,960 591 (1,037) 88,514 Total ¥266,718 ¥163,963 ¥(14,681) ¥416,000 The carrying amounts of available-for-sale securities whose fair value was not readily determinable included in short-term investments and in investment securities at March 31, 2010 and 2009 were as follows: Thousands of Millions of yen U.S. dollars 2010 2009 2010 Equity securities ¥12,214 ¥12,613 $131,277 Debt securities – 59 – Total ¥12,214 ¥12,672 $131,277 4. Inventories Inventories at March 31, 2010 and 2009 were as follows: Thousands of Millions of yen U.S. dollars 2010 2009 2010 Finished products ¥104,860 ¥103,773 $1,127,042 Work in process 72,635 69,831 780,686 Raw materials and supplies 88,769 81,922 954,095 Total ¥266,264 ¥255,526 $2,861,823 Notes to Consolidated Financial Statements DENSO Corporation Annual Report 2010 45


  • Page 48

    5. Long-lived Assets The Group reviewed its long-lived assets for impairment. As a result, relating to unused land, building and structures in Japan, the Group recognized impairment losses of ¥385 million ($4,138 thousand) and ¥17 million for the years ended March 31, 2010 and 2008, respectively. In addition, the Group recognized a total of ¥129 million ($1,387 thousand) of impairment losses as other expense for long-lived assets used for production due to deterioration of the Group’s business environment. The loss was recognized for the small motor group mainly in Brazil and Korea and for the electric systems group mainly in Korea, in the amounts of ¥88 ($956 thousand), ¥41 million ($441 thousand), respectively. The carrying amounts of the relevant long-lived assets were written down to the recoverable amounts and a ¥127 million ($1,365 thousand) loss on machinery and equipment was recognized for the year ended March 31, 2010. The recoverable amounts of the asset groups were measured at net sales value or its value in use. The discount rate used for computation of the present value of future cash flows was 5.2% in Korea. The Group recognized a total of ¥27,293 million impairment loss as other expense for long-lived assets used for production due to deterioration of the Group’s business environment for the year ended March 31, 2009. The loss was recognized for the powertrain control systems group mainly in the U.S and Hungary, for the small motor group mainly in the U.S. and Italy, for the electric systems group mainly in Korea, for the electronic systems group in Spain, and for the information and safety systems group mainly in the U.S., in the amounts of ¥21,317 million, ¥2,674 million, ¥1,251 million, ¥265 million, and ¥1,786 million, respectively. The carrying amounts of the relevant long-lived assets were written down to the recoverable amounts and a ¥21,265 million loss on machinery and equipment and a ¥6,028 million loss on buildings and structures were recognized. The recoverable amounts of the asset groups were measured at net sales value or its value in use. The discount rates used for computation of the present value of future cash flows were 9.0% in the U.S., 10.1% in Hungary, 8.0% in Italy, and 5.8% in both Korea and Spain. The Group recognized an impairment loss of ¥750 million for machinery and equipment in Italy due to the change of business environ- ment for small motors equipment products in Italy and the carrying amount of the relevant long-lived assets were written down to the recoverable amount for the year ended March 31, 2008. The recoverable amount of the asset group was measured at its value in use and the discount rate used for computation of the present value of future cash flows was 4.8%. 6. Income Taxes The Company and its domestic subsidiaries are subject to Japanese national and local income taxes which, in aggregate, resulted in normal statutory tax rates of approximately 40 % for the years ended March 31, 2010, 2009 and 2008. The tax effects of significant temporary differences that resulted in deferred tax assets and liabilities at March 31, 2010 and 2009 were as follows: Thousands of Millions of yen U.S. dollars 2010 2009 2010 Deferred tax assets: Depreciation ¥ 76,949 ¥ 79,560 $ 827,053 Retirement benefits 68,266 66,183 733,727 Tax loss carryforwards 24,666 60,403 265,112 Accrued bonuses to employees 19,094 18,359 205,224 Notes to Consolidated Financial Statements Warranty reserve 17,235 17,991 185,243 Other 75,584 90,238 812,382 Less: Valuation allowance (33,398) (34,267) (358,964) Total deferred tax assets ¥248,396 ¥298,467 $2,669,777 Deferred tax liabilities: Unrealized gain on available-for-sale securities ¥ 99,741 ¥ 59,777 $1,072,023 Prepaid pension cost 25,470 34,739 273,753 Other 23,844 26,866 256,277 Total deferred tax liabilities ¥149,055 ¥121,382 $1,602,053 Net deferred tax assets ¥ 99,341 ¥177,085 $1,067,724 46 DENSO Corporation Annual Report 2010


  • Page 49

    Net deferred tax assets presented in the consolidated balance sheets at March 31, 2010 and 2009 were as follows: Thousands of Millions of yen U.S. dollars 2010 2009 2010 Current assets–Deferred tax assets ¥ 59,826 ¥ 61,819 $ 643,014 Investments and other assets–Deferred tax assets 49,944 120,977 536,801 Current liabilities–Other current liabilities (119) (451) (1,279) Long-term liabilities–Deferred tax liabilities (10,310) (5,260) (110,813) Net deferred tax assets ¥ 99,341 ¥177,085 $1,067,723 The reconciliation between the normal effective statutory tax rate and the actual effective tax rate reflected in the accompanying consolidated statements of operations for the years ended March 31, 2010, 2009 and 2008 was as follows: 2010 2009 2008 Normal effective statutory tax rate 39.89% 39.89% 39.89% Overseas withholding tax 1.35 – – Tax credit of R&D expenses and other – – (3.16) Tax effect not recognized on operating loss of subsidiaries 17.49 (14.43) 0.59 Income taxes–current for prior years – (7.28) – Impairment loss on investment securities – (3.32) 0.20 Dividends received from foreign subsidiaries 2.92 (6.87) 1.54 Items permanently non-taxable such as dividends received (0.86) 3.23 (0.82) Lower income tax rates applicable to income in certain foreign countries (15.52) 12.13 (8.04) Equity in losses/income of affiliates – (1.83) (0.26) Foreign tax credit – – (1.57) Other 0.75 (1.53) (0.88) Actual effective tax rate 46.02% 19.99% 27.49% 7. Short-term Borrowings and Long-term Debt Short-term borrowings at March 31, 2010 and 2009 consisted of notes to banks and bank overdrafts. The weighted average interest rates applicable to short-term borrowings at March 31, 2010 and 2009 were 1.0% and 2.8%, respectively. Long-term debt at March 31, 2010 and 2009 consisted of the following: Thousands of Millions of yen U.S. dollars 2010 2009 2010 Unsecured 1.11% yen bonds due 2012 ¥ 50,000 ¥ 50,000 $ 537,403 Unsecured 1.37% yen bonds due 2013 100,000 100,000 1,074,807 Unsecured 0.81% yen bonds due 2014 40,000 – 429,923 Secured 1.40% U.S. dollar bonds due serially to 2019 – 230 – Lease obligations 350 276 3,762 Notes to Consolidated Financial Statements Other long-term debt (weighted average interest rates of 1.3% in 2010 and 1.2% in 2009) 189,560 174,624 2,037,403 Total ¥379,910 ¥325,130 $4,083,298 Less: Current portion 15,807 18,944 169,895 Long-term debt, less current portion ¥364,103 ¥306,186 $3,913,403 Annual maturities of long-term debt at March 31, 2010 were as follows: Thousands of Year ending March 31, Millions of yen U.S. dollars 2011 ¥ 15,807 $ 169,895 2012 42,041 451,859 2013 65,832 707,567 2014 143,178 1,538,887 2015 72,567 779,955 2016 and thereafter 40,485 435,135 Total ¥379,910 $4,083,298 DENSO Corporation Annual Report 2010 47


  • Page 50

    8. Pledged Assets The following assets were pledged as long-term borrowings including current portion of ¥779 million ($8,373 thousand) at March 31, 2010: Thousands of Millions of yen U.S. dollars Buildings and structures, net of accumulated depreciation ¥464 $4,987 Land 452 4,858 Total ¥916 $9,845 9. Liability for Employees’ Retirement Benefits Employees are generally entitled to lump-sum severance indemnities determined by current basic rates of pay, length of service, and the conditions under which the termination occurs. The Company and its domestic consolidated subsidiaries have unfunded retirement benefit plans and funded non-contributory pension plans for employees. Under the unfunded retirement benefit plans, the amount of severance indemnities to be paid by the Company and domestic subsidiaries is, in most cases, reduced by the benefits payable under the funded pension plain. The foreign consolidated subsidiaries do not recognize such cost. However, certain foreign subsidiaries adopted individual pension plans. According to the enactment of the Defined Contribution Pension Plan Law in October 2001, the Company implemented a defined contribution pension plan in October 2002 by which a portion of the severance lump-sum payment plan was terminated. Similarly, domestic subsidiaries including ASMO CO., LTD., implemented a defined contribution pension plan in October 2003, by which a portion of the severance lump-sum payment plan was terminated. In October, 2008, certain domestic subsidiaries including ASMO CO., LTD., imple- mented the DENSO Group funded pension plan by which existing funded pension plans were transferred to the new group pension plan. The Company contributed certain available-for-sale securities to the employee retirement benefit trust for the Company’s pension plan. Certain domestic subsidiaries contribute to a multi-employer pension plan under industry-wide collective agreements. The liability (asset) for employees’ retirement benefits at March 31, 2010 and 2009 consisted of the following: Thousands of Millions of yen U.S. dollars 2010 2009 2010 Projected benefit obligation ¥ 609,876 ¥ 601,712 $ 6,554,987 Fair value of plan assets (467,987) (420,032) (5,029,955) Unrecognized actuarial loss (82,100) (153,205) (882,416) Unrecognized prior service benefit 36,149 45,061 388,532 Net liability 95,938 73,536 1,031,148 Prepaid pension cost 84,452 107,781 907,696 Liability for employees’ retirement benefits ¥ 180,390 ¥ 181,317 $ 1,938,844 The components of net periodic retirement benefit costs for the years ended March 31, 2010, 2009 and 2008 were as follows: Thousands of Millions of yen U.S. dollars 2010 2009 2008 2010 Service cost ¥23,563 ¥ 23,843 ¥ 24,446 $253,257 Interest cost 12,906 13,712 12,004 138,715 Notes to Consolidated Financial Statements Expected return on plan assets (5,408) (12,697) (12,622) (58,126) Recognized actuarial loss 27,002 16,523 10,942 290,219 Amortization of prior service benefit (8,318) (9,056) (9,247) (89,402) Net periodic retirement benefit costs ¥49,745 ¥ 32,325 ¥ 25,523 $534,663 Loss on termination of the retirement benefits program due to the liquidation of a subsidiary – 8,146 – – Loss on change in pension plans of subsidiaries 994 – – 10,684 Contribution to defined contribution pension plan funds 3,348 3,285 3,206 35,984 Total ¥54,087 ¥ 43,756 ¥ 28,729 $581,331 Assumptions used for the years ended March 31, 2010, 2009 and 2008 were set forth as follows: 2010 2009 2008 Discount rate mainly 2.0% mainly 2.0% mainly 2.0% Expected rate of return on plan assets mainly 1.5% mainly 3.0% mainly 3.0% Amortization period of prior service benefit 10 years 10 years 10 years Recognition period of actuarial gain/loss 10 years 10 years 10 years 48 DENSO Corporation Annual Report 2010

  • View More

Get the full picture and Receive alerts on lawsuits, news articles, publications and more!