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To Our Shareholders

Refining Our Core Strengths, Hajime Sato President and CEO

In fiscal 2014, the year ended February 28, 2014, the Star Micronics Group underwent another year of significant change between the two halves of the year, with a first half continuing to face a challenging business climate, but recovery of sales in the Machine Tools Segment through the latter half of the year.

Review of Business Performance

NET SALES

Economic conditions tended to improve during fiscal 2014 as a mild recovery continued in the U.S. and growth returned in a previously slumping Europe. Although growth in Asian markets centering on China slowed, Japan showed a gradual recovery as the exchange rate moved toward depreciation of the yen.

Amid this environment, the Star Micronics Group's Machine Tools Segment sales increased due to firm results in the U.S. and East Asian markets, post-summer recovery in main European markets that had lagged in the first half of the year and the impact of exchange rates. Our Special Products Segment also increased sales due to a robust performance in the North American and Japanese markets by the likes of Point of Sale (POS) thermal printers in addition to the effect of currency rates, in spite of slumping demand for dot-matrix printers in European and Asian markets. In the Precision Products Segment, sales decreased due to low demand in the first half of the year for wristwatch components, which had been impacted by wristwatch makers' inventory adjustments, but started to recover from the latter half of the year. In non-wristwatch components, overall sales increased as robust sales of air conditioner- and automobile-related components offset the contraction in sales of hard disk drive (HDD) components.

As a result, the Star Micronics Group reported a 14.9% increase in consolidated net sales to ¥43,482 million in fiscal 2014. Due mainly to increased sales, operating income rose significantly by 64.9% to ¥2,606 million. Meanwhile, in the absence of an insurance income such as the one reported as an extraordinary gain in the previous year, net income decreased significantly by 50.3% to ¥1,143 million, including the posting of an other expenses of ¥650 million, which was a settlement package made in connection with the execution of patent rights.

To compensate our shareholders, Star Micronics has decided to pay a full-year dividend of ¥34 per share.

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Fiscal 2015 Outlook

NET SALES AND OPERATING INCOME

In view of all this, Star Micronics as a basic policy will keep emphasizing the Asian market in enhancing business development overseas. This will be done even as the European and North American markets remain important to the Company.

We expect economic conditions during fiscal 2015 to continue to recover in the U.S., Europe, Asia, domestically and globally.

Amid such an environment, I forecast sales will increase in the next period on the back of increased orders in the Machine Tools Segment, mainly centering on the European and Asian markets. Sales in the Special Products Segment will increase mainly in European and North American as well as Chinese markets and upswings of sales can also be forecast in the Precision Products Segment and for wristwatch components.

Consequently, for the year ending February 28, 2015, Star Micronics is projecting ¥46,500 million in net sales, ¥4,700 million in operating income and ¥3,600 million in net income.

To provide you with a reference point, our projections are based on the assumption of the yen's exchange rate averaging ¥100.00 to the U.S. dollar and ¥135.00 to the euro.

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Initiatives by Business Segment

Special Products:

In the Special Products Segment, we aim to strengthen software of our POS printers to differentiate and enhance the competitiveness of our products. Our Group's mobile printers combined with original software development kits (SDK) are highly regarded and increasing share in growth markets such as those for settlement systems using smartphones and tablet terminals.

Going forward, we intend to continue focusing on mobile printers as they are expected to continue growing in a variety of ways, as well as move ahead on creating new systems utilizing such tools as cloud computing.

Machine Tools:

Our foot will remain firmly planted in the mainstay North American and European markets of our Machine Tools Segment as we strive to establish beachheads in the heady emerging markets of Asia. We are strategically introducing products in accordance with market requirements, enhancing our complex machine lineup, and we will also work on enhancing the product lineup of our fixed headstock automatic lathes. We aim to cultivate the market for this new type of lathe going forward, because it is more than twice the size of our existing markets for sliding headstock automatic lathes. Apart from this, we will start up production at our new factory in Thailand to establish a manufacturing framework consisting of three production bases in Japan, China and Thailand for the Machine Tools business. These three production bases will be utilized to their fullest in building an efficient manufacturing and distribution framework going forward.

Precision Products:

Few competitors operate on a scale comparable to the Star Micronics Group in machine processing precision products, or indeed are capable of integrating the production of these products through the plating and heat treatment stage, for that matter. These advantages will serve us well in responding to a broad range of market needs, and steadily raise our performance in this business as a result. Looking ahead, I want to expand business in wristwatch components within Japan and non-wristwatch components overseas. Our medium-term vision for this segment is for our operating bases in Dalian and Shanghai (China), and Ayutthaya (Thailand) to each achieve ¥1,000 million in sales. More to the point, this means that our aim is to increase the segment's annual sales overseas by 1.5 times to ¥3,000 million total. Including Japan, we aim to achieve sales of ¥5,000 million.

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Medium-Term Issues

NET SALES AND OPERATING INCOME

New business development and future growth are major issues currently facing the Star Micronics Group.

Looking back at the five years since I was appointed president in May 2009 makes it feel as though it was a period of tumultuous change and a challenging business environment including such events as the global economic slowdown sparked by the U.S. financial crisis, the Great East Japan Earthquake and the debt and financial problems in Europe. Amid that environment, we managed with the intent of building an even stronger corporate framework. In the fiscal year ended February 28, 2011, we decided not to pursue sales unduly as the global economy faltered badly and instead moved forward on contracting the balance sheet by thoroughly reducing inventories and retrieving trade notes and accounts receivable to create a structure in which it would be easier to generate profits. Since then, we have not aimed to merely expand sales, but implemented initiatives aimed at enhancing our business strengths such as developed new products and built the factory in Thailand. In the fiscal year under review, we transferred the Micro Audio Components Segment, which had long faced harsh price competition that stifled earnings, and ended this business. I believe these initiatives improved corporate strength.

However, in the current three businesses, the business portfolio balance and future growth remain issues. In addition to keeping business fluctuations to a minimum and seeking to develop long-term business going forward, I feel it is necessary to make headway in new territories by such means as M&A. The Star Micronics Group's standing management policy is not to merely pursue expansion of business size, but to promote growth strategies with an emphasis on profitability in the global niche markets we serve and we will continue using this as the basic policy of building new growth over the upcoming years it is forecast to take for global economic recovery.

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Enhancing Corporate Value

Corporate Governance

President and CEO Hajime Sato Photo

At the Star Micronics Group, our basic approach to corporate governance is based on fulfilling our social responsibilities as a company by working to increase corporate value in a sustained manner through appropriate and efficient management, and appropriately distributing the resulting profits to shareholders and other stakeholders.

One aspect of reinforcing governance and supporting a management structure with a decision-making process based on a diversity of values will be the appointment of an outside director at the General Meeting of Shareholders on May 22, 2014.

Capital Policy

CASH DIVIDENDS PER SHARE AND DOE

We aim to be an attractive company in the eyes of our shareholders and other investors, particularly for those who are seeking long-term shareholdings.

We base our decisions regarding the distribution of profits on a target consolidated dividend payout ratio of at least 40% while taking into account our consolidated dividend on equity (DOE). Consequently, we decided to raise our annual dividend by ¥4 to ¥34 per share in the year ended February 28, 2014. We emphasize the return of profits to shareholders and are working to achieve a stable and consistent increase in dividends, taking business results into consideration. Our policy is to aim for a DOE in excess of 4.5%.

We have treasury stock of roughly 5 million shares and plan to continue examining M&A transactions involving the exchange of equity as a method for utilizing this. In the event of not finding a suitable proposition, we may examine retiring this stock, taking business performance into consideration. We plan to maintain a close look at circumstances and examine whether to acquire further treasury stock.

While the global economic environment is gradually moving toward recovery and the business environment is turning upward, I forecast that conditions will not be easy. Under these circumstances we will strive sincerely to become an attractive company. I ask for the continued support of shareholders and other investors.

May 2014
Hajime Sato
President and CEO

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