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Consolidated Financial Results for the year ended March 31, 2017

(Rounded down to the nearest million)

Consolidated Operating Results for the Year Ended March 31, 2017

RESULTS OF CONSOLIDATED OPERATIONS

(Percentage figures denote year-over-year changes.)
  Net
sales
Operating
income
Ordinary
income
Net income attributable to equities of parent
Million yen % Million yen % Million yen % Million yen %
Year ended
March 31, 2017
40,714 -13.4 1,048 1,374 502
Year ended
March 31, 2016
47,004 -13.0 -894 -749 -1,676

(Note) Comprehensive income
Year ended March 31, 2017: ¥599 million (-%)
Year ended March 31, 2016: ¥-1,812 million (-%)

   Net income
per share
Diluted
net income
per share
Net income to
shareholders’
equity ratio
Ordinary
income to total
assets ratio
Operating
income to net
sales ratio
Yen Yen % % %
Year ended
March 31, 2017
34.01 1.7 2.9 2.6
Year ended
March 31, 2016
-113.41 -5.5 -1.5 -1.9

(Reference) Equity in earnings of affiliates:
Year ended March 31, 2017: ¥- million
Year ended March 31, 2016: ¥- million

CONSOLIDATED FINANCIAL POSITION

  Total assets Net assets Shareholders’
equity ratio
Net assets
per share
Million yen Million yen % Yen
Year ended
March 31, 2017
46,828 29,151 62.3 1,971.96
Year ended
March 31, 2016
47,139 29,291 62.1 1,981.38

(Reference) Shareholders’ equity
Year ended March 31, 2017: ¥29,151 million
Year ended March 31, 2016: ¥29,291 million

CONSOLIDATED CASH FLOWS

  Cash flows from
operating activities
Cash flows from
investing activities
Cash flows from
financing activities
Cash and equivalents,
end of period
Million yen Million yen Million yen Million yen
Year ended
March 31, 2017
9,339 -1,696 -2,938 14,062
Year ended
March 31, 2016
-4,710 -2,511 4,065 9,358

Dividends

  Annual dividends
First
quarter-end
Second
quarter-end
Third
quarter-end
Year-end Annual
Yen Yen Yen Yen Yen
Year ended
March 31, 2016
10 40 50
Year ended
March 31, 2017
10 40 50
Year ended March 31, 2018
(Forecast)
10 30 40
   Total dividends
paid (annual)
Payout ratio
(Consolidated)
Dividends paid
to net assets
(Consolidated)
Million yen % %
Year ended
March 31, 2016
739 2.4
Year ended
March 31, 2017
739 147.0 2.5
Year ended March 31, 2018
(Forecast)
  135.3  

Forecast earnings for the year ending March 31, 2018

(Percentage represents changes from the prior year)
  Net sales Operating
income
Ordinary
income
Net income
attributable to
owners of parent
Net income
per share
Million yen % Million yen % Million yen % Million yen % Yen
First half ending
September, 2017
19,000 -5.9 100 -83.5 100 -85.8 50 -84.8 3.38
Entire – year 39,000 -4.2 1,300 24.0 1,300 -5.4 800 59.1 54.12

Analysis of Operating Results

Operating results for this period

During this consolidated fiscal year, the Japanese economy was on a moderate recovery track as evidenced by a pickup in personal consumption due to improved corporate earnings and employment on the back of economic and monetary policies taken by the government and the Bank of Japan. The economic outlook, however, remained uncertain impacted by, among other factors, the economic deceleration in China and the policies of the new US administration. The pachinko industry, in which the Daikoku Denki Group (the “Group”) is engaged, faced a severe business environment with heightened uncertainty, such as a decreased appetite to invest in peripheral equipment, dampened by the removal and callback of “pachinko machines whose performance may differ from that of inspected units” and the pressing task of addressing the issue of addiction at pachinko parlors due to the enactment of the Draft Bill for Integrated Resort Promotion. According to the “2016 White Paper on Adult Entertainment Business and Moral Offense Control” issued by the Community Safety Bureau of the National Police Agency, the total number of installed game machines was 4,525,253 units, as a result of a decrease of 85,258 units in pachinko game machines and an increase of 30,314 units in pachislot game machines. Consequently, the average number of installed game machines per parlor increased by 6.9 units to 411.9 units. Under this market environment, the Information System Segment promoted partial installation of “REVOLVA,” a new information publication terminal equipped with a beautiful LCD that provides information on game machines in an easily understandable manner, to popular pachinko game machine areas and proposed improved convenience to pachinko fans with new integrated ball storage functions for “VEGASIA” (CR unit). In order to respond quickly to expected changes in the environment, the Control System Segment worked on the collection and analysis of proper information and focused on timely proposals and sales activities while reorganizing development and production functions where flexible and quick responses are required. In addition, regarding sales of game software engaged by a subsidiary, an impairment loss of 227 million yen on fixed assets of contents was recorded under extraordinary loss as the result of shorter sales periods in the game industry and examining the collectability of future cash flows. As a result, during the consolidated fiscal year, the net sales amounted to 40,714 million yen (down 13.4% year on year). The operating income was 1,048 million yen (operating deficit of 894 million yen in the previous year), and the ordinary income was 1,374 million yen (ordinary deficit of 749 million yen in the previous year). The net income attributable to shareholders of the parent company amounted to 502 million yen (net deficit attributable to shareholders of the parent company of 1,676 million yen in the previous year).

Business results by segment are as follows.

Information System Segment

During the consolidated fiscal year, on the back of sluggish demand for hall computers due to a decrease in new store openings and depressed motivation to invest in peripheral equipment of existing pachinko parlors, unit sales of “VEGASIA” (CR unit), “BiGMO PREMIUM,” information publication terminal, and “IL-X2” decreased year on year. On the other hand, sales of new information publication terminal “REVOLA” and MIRAIGATE services were robust, leading to stronger relationships with customers and higher margins. On the expense front, research and development expenses declined significantly compared to the previous year in which research and development expenses increased temporarily. As a result, the net sales in this segment were 27,260 million yen (down 20.0% year on year) and the segment-operating income was 3,011 million yen (up 32.2% year on year).

Control System Segment

During the consolidated fiscal year, the sales volume of display units and peripheral components decreased year on year since pachinko machine manufacturers revised their sales plans significantly due to voluntary restraint on replacing game machines in relation to holing of the G7 Ise-Shima Summit as well as the status of model test results, coupled with market changes associated with the removal and callback of “pachinko machines whose performance may differ from that of inspected units.” As for pachislot game machines, approximately 12,300 units (2 models) were brought to the market, which is an increase compared to approximately 5,100 units (1 model) in the previous year. As a result, the net sales in this segment were 13,515 million yen (up 4.1% year on year) and the segment-operating deficit was 306 million yen (a segment-operating deficit of 1,319 million yen in the previous year). (Note) Business segment results include intersegment transactions.

Overview of Financial Position

Current assets at the end of the consolidated fiscal year were 29,888 million yen, an increase of 306 million yen from the end of the previous consolidated fiscal year. The increase was driven by a significant rise in cash and deposits, despite decreases in inventory and trade receivables due to sales of pachislot game machines. Fixed assets at the end of the consolidated fiscal year were 16,939 million yen, a decrease of 618 million yen from the end of the previous consolidated fiscal year. This result was attributable to a decrease in tangible fixed assets due to the sale of idle assets, cancellation of insurance funds and a decrease in deferred income tax assets, despite an increase in software resulting from new products and the construction of internal systems. As a result, total assets at the end of the consolidated fiscal year were 46,828 million yen, a decrease of 311 million yen from the end of the previous consolidated fiscal year. Total liabilities at the end of the consolidated fiscal year amounted to 17,676 million yen, a decrease of 172 million yen from the end of the previous consolidated fiscal year. The main factors for this include repayment of short-term loans, despite an increase in notes and accounts payable-trade due to many purchases recorded in the second half of the consolidated fiscal year. Net assets at the end of the consolidated fiscal year were 29,151 million yen, a decrease of 139 million yen from the end of the previous consolidated fiscal year. The factor for this was decreased retained earnings due to the payment of dividends, which was larger than the net income attributable to shareholders of the parent company. Consequently, the Group’s equity ratio was 62.3% (a rise of 0.2 points when compared to that at the end of the previous consolidated fiscal year).

Overview of Cash Flows

Cash and cash equivalents (“cash”) at the end of the consolidated fiscal year amounted to 14,062 million yen, an increase of 4,703 million yen from the end of the previous consolidated fiscal year. The situation of each cash flow for the consolidated fiscal year is as follows: Cash provided by operating activities for the consolidated fiscal year totaled 9,339 million yen (cash used of 4,710 million yen in the previous year) due to the net income before taxes recorded as the result of robust operating results during the consolidated fiscal year compared to the previous year, as well as an increase in depreciation, a decrease in inventory, and an increase in notes and accounts payable – trade. Cash used in investing activities for the consolidated fiscal year was 1,696 million yen, a decrease of 815 million yen year on year, due to proceeds from the cancellation of insurance funds and the sale of idle assets, which were absent in the previous fiscal year, as well as a decrease in the acquisition of tangible fixed assets for production facilities compared to the previous fiscal year. Cash spent for financing activities for the consolidated fiscal year amounted to 2,938 million yen (cash received of 4,065 million yen in the previous year) due to the repayment of short-term loans of 2,200 million yen during the consolidated fiscal year while a short-term loan of 5,500 million yen was taken out in the previous year.

Future outlook

The Japanese economy is expected to remain on a moderate recovery track with continued recovery in the employment and income environments, but concern about the future is likely to continue due to uncertainty over the world economy, such as policy developments in the US and Europe. The environment surrounding the pachinko industry, in which the Group is engaged, is expected to remain challenging as uncertainty is likely to continue for some time due to, among other factors, the task of addressing the issue of addiction at pachinko parlors, amid a declining trend in pachinko operations based on rental balls at 4 yen and continued sluggishness in operations of new standard pachislot game machines. Amid this market environment, the Group forecasts the Information System Segment to achieve net sales of 28.5 billion yen (up 4.5% year on year) by strengthening sales of “REVOLA,” which is highly valued in the market and increasing added value for the total system by launching new MIRAIGATE services, including “Fan-SIS” for analyzing assessment by fans, as well as the sales launching of a new CR unit “VEGASIA III,” which attracted attention with a test launching in the fourth quarter of the current fiscal year, and boosting sales of information publication equipment. As for the Control System Segment, the Group forecasts it to achieve net sales of 10.5 billion yen (down 22.3% year on year) by making all-out efforts to win projects for developing models and making proposals focusing on game machines that can be brought to the market in a short period of time in order to respond to changes in the market environment. As a result, the Group anticipates consolidated net sales of 39 billion yen (down 4.2% year on year), consolidated operating income of 1.3 billion yen (up 24.0% year on year), consolidated ordinary income of 1.3 billion yen (down 5.4% year on year) and consolidated net income attributable to shareholders of the parent company of 800 million yen (up 59.1 % year on year). * Forecasts in this report are judged based on information available at the time when this report was prepared and may therefore contain potential risks and uncertainties. As for the future outlook, the Group will continuously collect and analyze the data. If the earnings forecast needs to be revised, the Group will announce the revision immediately.

Policy for Returning Earning to Shareholders and Dividends for This and Next Fiscal Year

We believe that our most important management task is to return profits to shareholders while continuing to grow our business. Our policy is to provide stable and continuous dividends to all shareholders, closely monitoring the business environment, watching our performance, keeping tabs on the dividend payout ratio and other factors in a comprehensive manner. The amount of the dividends and the payment date will be determined after considered thoroughly by the Board of Directors. As for retained earnings, we will utilize this fund to invest in new business development with an eye toward long-term growth as well as for the promotion of business efficiency so as to further improve our trade competitiveness and profitability. In order to return profits to shareholders, we have decided on a payment of 50 yen per share for this fiscal year (40 yen year-end dividend plus 10 yen interim dividend). For the new fiscal year, we plan to pay 40 yen per share for this fiscal year (30 yen year-end dividend plus 10 yen interim dividend) given the continued uncertainty over the pachinko industry in which the Group is engaged.

Basic Approach to Selection of Accounting Standards

The Group applies Japanese accounting standards, as its operations are limited in Japan with no activity conducted outside Japan. However, the Group plans to examine application of the International Financial Reporting Standards (IFRS) based on the trend of IFRS application by other companies in Japan going forward.