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Consolidated Financial Results for the year ended March 31, 2018

(Rounded down to the nearest million)

Consolidated Operating Results for the Year Ended March 31, 2018

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, 2018
34,093 -16.3 1,192 13.8 1,390 1.2 785 56.2
Year ended
March 31, 2017
40,714 -13.4 1,048 1,374 502

(Note) Comprehensive income
Year ended March 31, 2018: ¥839 million (39.9%)
Year ended March 31, 2017: ¥599 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, 2018
53.11 2.7 3.1 3.5
Year ended
March 31, 2017
34.01 1.7 2.9 2.6

(Reference) Equity in earnings of affiliates:
Year ended March 31, 2018: ¥- million
Year ended March 31, 2017: ¥- million

CONSOLIDATED FINANCIAL POSITION

  Total assets Net assets Shareholders’
equity ratio
Net assets
per share
Million yen Million yen % Yen
Year ended
March 31, 2018
43,564 29,251 67.1 1,978.72
Year ended
March 31, 2017
46,828 29,151 62.3 1,971.96

(Reference) Shareholders’ equity
Year ended March 31, 2018: ¥29,251 million
Year ended March 31, 2017: ¥29,151 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, 2018
2,921 -2,411 -739 13,832
Year ended
March 31, 2017
9,339 -1,696 -2,938 14,062

Dividends

  Annual dividends
First
quarter-end
Second
quarter-end
Third
quarter-end
Year-end Annual
Yen Yen Yen Yen Yen
Year ended
March 31, 2017
10 40 50
Year ended
March 31, 2018
10 30 40
Year ended March 31, 2019
(Forecast)
10 30 40
  Total dividends
paid (annual)
Payout ratio
(Consolidated)
Dividends paid
to net assets
(Consolidated)
Million yen % %
Year ended
March 31, 2017
739 147.0 2.5
Year ended
March 31, 2018
591 75.3 2.0
Year ended March 31, 2019
(Forecast)
  73.9  

Forecast earnings for the year ending March 31, 2019

(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, 2018
15,000 -16.7 450 20.0 500 1.3 300 1.3 20.29
Entire – year 35,000 2.7 1,300 9.0 1,400 0.7 800 1.9 54.12

Analysis of Operating Results

Operating results for this period

The Japanese economy in general remained on the track of moderate recovery during this consolidated fiscal year against a backdrop of improved employment and income environments, and corporate earnings, although there were concerns over uncertainties in the overseas situation. The pachinko industry, in which the Daikoku Denki Group (“the Group”) is engaged, faced a severe business environment with a continuing cautious stance for capital investment due to uncertainty about the impact on pachinko hall business caused by “Regulations on the Partial Revision of Regulations Regarding the Enforcement of the Act on Control and Improvement of Amusement Business, etc. and Regulations Regarding the Certification of Game Machines and Examination of Model” (hereinafter referred to as “new regulations”) enforced on February 1, 2018 as part of responses to the problem of addiction at pachinko parlors. According to the “2017 White Paper on Adult Entertainment Business and Moral Offense Control” issued by the Community Safety Bureau of the National Police Agency, the number of installed game machines totaled 4,436,841 units, with a decrease of 83,601 units in pachinko game machines and a decrease of 4,792 units in pachislot game machines; thus the number of installed game machines per parlor increased by 6.8 units to 418.7 units. In this market environment, new products, the information publication terminal “BiGMO PREMIUM II”, and the call lamp “IL-X3”, were launched in the market in December 2017 in the Information System Segment, and the Group focused on suggesting mainly that flagship stores replace old products. The Group also tried to strengthen the proposal of the industry’s first fan trend data publication service “Fan-SIS”, and worked hard for the spread of MIRAIGATE service. In the Control Systems Segment, the Group tried to collect the latest trend of pachinko machine manufacturers, while reviewing the model development schedule and sales plan accordingly. The Group also made efforts to create new gaming properties while curbing the passion for gambling, and focused on the acquisition and proposal of new technology and content. As a result, during the consolidated fiscal year, the net sales amounted to 34.093 billion yen (down 16.3% year-on-year). The operating income was 1.192 billion yen (up 13.8% year-on-year), and the ordinary income was 1.390 billion yen (up 1.2% year-on-year). The net income attributable to parent company shareholders amounted to 785 million yen (up 56.2% year-on-year).

Business results by segment are as follows.

Information System Segment

The effect of new products, the information publication terminal “BiGMO PREMIUM II” and “IL-X3” boosted demand during the consolidated fiscal year, and the number of units sold of the said series exceeded that for the previous consolidated fiscal year. However, the number of the sold CR unit consisting mainly of a new product, “VEGASIA III”, which was launched in the market in June 2017, and the number of hall computer/prize customer systems sold fell below those for the previous consolidated fiscal year, since their sales were largely affected by a decrease in new parlor openings and large-scale renovation. As a result, the net sales in this segment were 24.827 billion yen (down 8.9% year-on-year) and the segment income was 2.435 billion yen (down 19.1% year-on-year).

Control System Segment

Amidst sluggish sales of new machines in the overall game machine market during the consolidated fiscal year, the number of display units and control units sold fell below that for the previous consolidated fiscal year due to postponement of the development schedule and launch date because of a specification change by game machine manufacturers in light of new regulations. Approximately 5,500 pachislot game machines (approximately 12,300 units for the previous year) were launched in the market in July 2017. In terms of expenses, selling, general and administrative expenses were down compared to the previous consolidated fiscal year due to a decrease in R&D costs resulting from a review of the sales strategy for the said segment, and the reversal of an allowance for doubtful accounts resulting from a termination decision made in July 2017 for bankruptcy proceedings that commenced in April 2015 of a game machine manufacturer who was a business partner. As a result, the net sales in this segment were 9.322 billion yen (down 31.0% year-on-year) and the segment income was 433 million yen (previous year’s segment loss of 306 million yen).

(Note) Business segment results include intersegment transactions.

Overview of Financial Position

Current assets at the end of the consolidated fiscal year were 26.901 billion yen, a decrease of 2.987 billion yen from the end of the previous consolidated fiscal year, due to a decrease in trade receivables resulting from a sales decrease, a decline in inventories due to sales of pachislot game machines, and a decrease in accounts receivable resulting from no refund of consumption tax. Fixed assets at the end of the consolidated fiscal year were 16.662 billion yen, a decrease of 276 million yen from the end of the previous consolidated fiscal year, due to a decrease in bankruptcy claims and reversal of an allowance for doubtful debts resulting from the termination of bankruptcy procedures of a business partner, decreases in tangible fixed assets and deferred tax assets resulting from the recording of depreciation cost, although construction in progress and software increased due to internal system construction in the Information Systems Segment. As a result, total assets at the end of the consolidated fiscal year were 43.564 billion yen, a decrease of 3.264 billion yen from the end of the previous consolidated fiscal year. Current liabilities at the end of the consolidated fiscal year were 13.196 billion yen, a decrease of 3.305 billion yen from the end of the previous consolidated fiscal year, due to a decrease in electronically recorded debts resulting from the recording of purchases for the second half of the consolidated fiscal year, and a decrease in accounts payable resulting from the recording of R&D costs and acquisition of tangible fixed assets. Fixed liabilities at the end of the consolidated fiscal year were 1.115 billion yen, a decrease of 58 million yen from the end of the previous consolidated fiscal year, due to a decrease in the reserves for the directors’ retirement benefits, although the asset retirement obligation increased. As a result, total liabilities at the end of the consolidated fiscal year were 14.312 billion yen, a decrease of 3.364 billion yen from the end of the previous consolidated fiscal year. Net assets at the end of the consolidated fiscal year were 29.251 billion yen, an increase of 99 million yen from the end of the previous consolidated fiscal year, due to an increase in retained earnings resulting from the fact that the recorded amount of net income attributable to the parent company shareholders was large. As a result, the Group’s equity ratio was 67.1% (a rise of 4.8 points when compared to that at the end of the previous consolidated fiscal year).

Overview of Cash Flows

Cash and cash equivalents (hereinafter referred to as “cash”) at the end of the consolidated fiscal year amounted to 13.832 billion yen, a decrease of 229 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 flows in operating activities) Cash provided by operating activities amounted to 2.921 billion yen (an income of 9.339 billion yen for the same period last year). The main factors for this were net income before taxes of 1.281 billion yen as income, a depreciation cost of 2.085 billion yen, and a decrease in trade receivables, 1.072 billion yen, although there was a decrease in trade payables, 2.314 billion yen, as a large expenditure.

(Cash flows in investment activities) Cash used in investing activities amounted to 2.411 billion yen (an expenditure of 1.696 billion yen for the same period last year), whose breakdown was mainly expenditures for acquisition of fixed assets.

(Cash Flows in financing activities) Cash spent for financing activities amounted to 739 million yen (an expenditure of 2.938 billion yen for the same period last year), whose breakdown was mainly dividend payments.

Future outlook

The Japanese economy is expected to remain on the track of moderate recovery, with continuing recovery in the employment and income environments, but concern about the future is likely to persist due to uncertainty over the world economy, such as trade issues triggered by the US, and policy developments in Europe. The environment surrounding the pachinko industry, in which the Group is engaged, is expected to remain challenging, including the impact of revised regulations, amidst a slight decreasing trend in operations at pachinko halls, but demand for the replacement of peripherals is expected to be vigorous, to attract customers, as game machines that comply with new regulations are launched in the market. In this market environment, the Group is trying to collect information in order to respond quickly to movements in industry reorganization, such as M&A of companies that manage pachinko halls, and is making an effort to enhance the function that is focused on “easy to understand and easy to see” in information publication terminals, such as “BiGMO PREMIUM II”, “REVOLA” and “IL-X3” in the Information Systems Segment. The Group also anticipates net sales in this segment to be 26 billion yen (up 4.7% year-on-year) through a proposal for the fan trend data publication service, “Fan-SIS”, and enhancing sales of “VEGASIA III”, which is necessary for the introduction of the said service. In the Control Systems Segment, the Group is continuing its efforts to promote the streamlining of the development process, and anticipates net sales in that segment to be 9 billion yen (down 2.9% year-on-year) by creating new gaming properties consistent with an era of new regulations, accelerating planning with new technology and unit proposals, and focusing on acquiring high value-added hardware. As a result, the Group anticipates consolidated net sales of 35 billion yen (up 2.7% year-on-year), consolidated operating income of 1.3 billion yen (up 9.0% year-on-year), consolidated ordinary income of 1.4 billion yen (up 0.7% year-on-year), and consolidated net income attributable to parent company shareholders of 800 million yen (up 1.9% year-on-year).

* Important notice concerning forecasts Forecasts in this report are determined on the basis of information available at the time the report was prepared, and may thus contain potential risks and uncertainties. As for business performance, the Group will continuously collect and analyze data. If the earnings forecast must be revised, the Group will immediately announce the revision.

Basic Approach to Selection of Accounting Standards

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