FINANCIAL HIGHLIGHTS MANAGEMENT PERSPECTIVE TOPICS REVIEW OF OPERATIONS FINANCIAL SECTION CORPORATE DATA 17 Outlook Overview Defense Sales (% of net sales, ¥ billion) Reflecting the significant role economic reform initiatives took in the Japanese government’s market recovery oriented budget for fiscal 2001, a substantial increase of 3.8% com- pared with the previous year was noted. However, because the defense budget remained the same, at ¥4.93 trillion, no significant improvement in business conditions was gained. Fiscal 2002 is the first year in the government’s new five- year New Mid-Term Defense Program. Although this plan represents an approximate 3.8% increase in total spending compared with the previous defense plan, it also includes a minor 1% cut in frontal armaments. Frontal armaments spending for fiscal 2002 is budgeted at ¥767.0 billion, a 0.6% decrease from the previous term, an indication that business conditions will most likely remain severe. Although increases in spending on ammunition and guided missiles— which are supplied by Daikin—have been budgeted for, future business conditions remain uncertain, and manage- ment will need to keep a watchful eye on future government budget trends. In fiscal 2001, an accidental explosion at one of Daikin’s subcontractors caused net sales in defense-related opera- tions to decline 24.3%, to ¥14.8 billion. We will make up In 1996, Daikin first applied its defense-related technologies to the private sector market by developing Japan’s first FRP composite vessels. Since then, they have found a wide range of uses, including home oxygen therapy, demand oxygen con- trollers, and breathing apparatus cylinders for use in fire fighting, and have steadily increased in sales. In the months and years ahead, we will do our utmost to develop such new private sector businesses into major pillars of our operations on a par with defense. •New Private Sector Business •Defense this loss in fiscal 2002 and it is not expected to have any substantial effect on performance for fiscal 2002 and fiscal 2003. Despite efforts to expand demand for fiber-reinforced plastic (FRP) composite vessels and demand oxygen con- trollers, sales declined slightly during the term due to changes in business conditions. From fiscal 2002, in the manufacture of ammunition, processes formerly used for ammunition will be switched to mass production. Seizing this opportunity, we will configure efficient production systems and work to strengthen our business capacity. We will strive to expand business in new private sector operations and convert our operational structure to suit the changing needs of the market. Starting in fiscal 2002, Daikin will receive purchase orders from Japan’s Self Defense Agency for new types of ammunition that can be used in training drills even in the cramped confines of the Japanese archipelago. Because these will be mass- produced, we will consolidate and streamline our production systems and convert our operations into a stable business struc- ture capable of fulfilling the requirements of the cost reductions demanded by the Self Defense Agency. We will also pursue greater efficiency in the development of high-value-added products and strive to maximize Self Defense Agency purchase orders. 12.3 26.2 21.9 19.5 14.8 ’97 ’98 ’99 ’00 ’01 2.8% In fiscal 2001, Daikin’s defense-related sales declined 24.3%, to ¥14.8 billion, due to an explosion during the term at one of its subcontractors. This figure represented 2.8% of consolidated net sales, down from 4.2% in the previous term. 