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Message to Investors

Sustained by ambitious capital investment by the manufacturing industry, we recorded the highest ever levels of both orders and sales

Looking at the state of the global economy during the past consolidated fiscal year, the US economy expanded, as seen in stock market advances against the background of the improving employment situation and corporate performance, even though there are uncertainties about the trade policies of the current administration. In Europe, despite unease arising with important elections in each country, the economy expanded gradually, helped by recovery of the climate for consumer spending. In Asia, while geopolitical risks have been rising, the economy in China remained firm backed by strong consumer spending. The Japanese economy also saw gradual expansion, as the employment climate improved, consumer spending was firm, and corporations maintained high performance levels.

For our Group, the business climate was favorable, supported by a strong desire to invest in automation and labor-saving, aimed at boosting production capacity and raising productivity, mainly in the manufacturing industry. As a result, orders were well above the previous fiscal year, rising to an all-time high.

By application area, orders for products used in industrial robots saw a large increase, especially for use in small robots doing assembly work on production lines that make products such as home appliances and smartphones. Demand also grew for collaborative robots, which differ from traditional industrial robots in being able to operate safely side-by-side with human workers. Orders were strong for products used in semiconductor manufacturing equipment due to demand growth for semiconductors. Among the factors behind this growth were increased demand for memory incorporated in smartphones and other consumer electronics, as well as advances in functions such as voice recognition applying AI, image analysis in crime prevention, and sensing and control for selfdriving vehicles. Orders increased for equipment used to manufacture flat panel displays, as adoption of OLED screens grew in new smartphone models and other products, and manufacturers invested in equipment for making high-resolution LCD panels for large TVs.

Given this earnings climate, our Group carried out initiatives aimed at achieving the targets for the final year of the Mid-term Management Plan (fiscal years 2015-2017).

On the marketing front, as robot technology continues to advance, we worked to build up our technical support services to enable timely recognition of ever more sophisticated and diverse customer needs, and proposal of optimal solutions.

On the quality front, we took steps to improve cooperation and quality at our production sites in Japan, Germany, North America, and South Korea, in order to raise the level and uniformity of products supplied to customers throughout the world.

On the R&D front, the focus was on developing next-generation technologies, by seeking to establish new principles and theories, pursue new technologies and in other ways expand and deepen basic research. In June, we opened new offices in Silicon Valley for research purposes, building a foothold in this region where the world’s leading-edge IT and robotics technologies are concentrated. In the joint development project that we have been carrying out since the previous fiscal year with leading US research institution SRI International, we advanced development toward commercialization of a new type of transmission adopting a "pure rolling cycloid" motion principle. Application development is also going forward, aimed at reflecting market needs in products. The CSD Series/SHD Series of strain wave gearing devices, featuring extreme flatness and hollow structure, saw the addition of new models with 1/80 and 1/120 reduction ratios, further enhancing the lineup. Among mechatronics products, we completed development and market introduction of the FLA Series of extremely flat brushless DC actuators, as part of plans to expand sales for wheel drives of unmanned carriers and for drives of power-assisted suits.

In the production area, our initiatives were aimed mainly at raising production capacity of the entire Group to meet sharply rising demand. Specific measures included implementing capital investment plans ahead of the original schedule, making extensive additions to personnel involved in production, going from singleshift to two-shift production, and introducing more highly automated lines, in such ways moving to increase operating time and improve production efficiency. We also acquired new factory properties neighboring our main production site (Hotaka Factory in Azumino-shi, Nagano), as we seek to expand our production base in view of expected demand growth for precision speed reducers. We further began construction of a new production facility in Matsumoto-shi, Nagano, aimed at fundamentally raising production capacity of crossed roller bearings, a core component. Additionally, we made efforts to raise production capacity overseas, at our German and North American subsidiaries.

As a result of such measures and the business environment described above, for the consolidated fiscal year we achieved net sales of 54,339 million yen (up 80.7% yearon-year), and operating income of 12,598 million yen (up 61.2% year-on-year). Net income attributable to owners of the parent was 8,059 million yen, a year-on-year decline by 59.2%. This decline reflects the booking of extraordinary income of 13,963 million yen in the previous fiscal year from revaluation of equity holdings in our German subsidiary, whereas no such income was booked in the current term.

Emphasis on enhancement of corporate value over the medium to long term

The figure below shows the trend of HDS’s net sales since its foundation and its relationship with application into new fields that lead to such results.

History of Sales(Non-consolidated basis) Million ¥ Demand Drivers Working Machines Robotics Semiconductor Equipment Flat Panel Display Manufacturing Equipment

Most of the HDS Group’s products are built into industrial products, such as machine tools and robots.

Therefore, our short-term sales are strongly influenced by the trend of capital investment in Japan and overseas. However, we have achieved growth over the medium to long term by shifting to application into new fields capable of spearheading growth in line with the progress of technology.

The Group’s performance inevitably will fluctuate in the short term depending on the capital investment trend. Nevertheless, by emphasizing enhancement of corporate value over the medium to long term, we are endeavoring to strengthen competitiveness as a highly skilled precision engineering specialist delivering Total Motion Control.

For this purpose, we are strengthening collaboration among HDS Group companies in Japan, Europe, the U.S., and China and implementing globalization strategies covering all aspects of sales, development, and production.

On the quality front, having set out a clear policy of giving highest priority to quality improvement, we are carrying out management initiatives emphasizing quality, while strengthening the quality management structure of the Group to enable stable provision of high-quality products to increasingly global markets. On the research and development front, through advanced application of our existing technologies, we are working to develop high added value products in a short time, and to expand our product variations to meet diverse customer needs. We also seek to make our existing products significantly more competitive, by taking on highly challenging development themes and further strengthening our core technologies. In the sales and marketing area, recognizing rapidly growing Asian markets as key targets for our products, we are carrying out an integrated marketing and sales strategy for Japan and Asia, enhancing our problem-solving ability and introducing new products, in order to raise our competitiveness in major markets. As for production, our aims are to increase the superiority of our skills, while making efforts to further improve quality and cost-competitiveness and shorten delivery times.

As we move forward, we greatly appreciate your continued support.

May 11, 2018
Mitsumasa Ito, Chairperson
Akira Nagai, President and CEO