The following section describes certain risks which could potentially have a material impact on our business, financial condition and the results of our operations, but it is not intended to be an exhaustive list of the risks we face. In addition, it is possible that risks which are currently considered immaterial or even unknown could turn out to be material in the future as the business environment changes.
This section includes forward-looking statements and future expectations as of June 21, 2019.
(1) Intensified Competition
The markets for our products are subject to significant competition. Our competitors may have advantages over us in areas such as research and development, production capacity, financial strength and human resources. Customers of our products such as the manufacturers of displays and assembled products, who also face severe competition in their respective markets, may among other things terminate or reduce orders for our products, whether to adjust product quality or reduce costs, or as a result of their corporate reorganization or a change in their business strategies. If we are unable to compete effectively in the markets in which we sell our products, our market share could decrease and this could result in a material adverse effect on the results of our operations.
(2) Our International Operations
We conduct our business globally with production bases in Japan, China, Europe and the United States, and we are actively looking to expand our operations throughout the world, and a substantial portion of our net sales is derived from international sources. As a part of our future growth strategies, we are aiming to further increase our net sales derived from international sources. Our international operations and business are subject to risks accompanying international business in general, including:
- risks related to political instability and uncertainties in the business and economic environment;
- governmental regulations, including environmental and safety regulations and other regulations related to the import, export, production and use of our products;
- difficulties associated with managing local personnel and increases in labor costs;
- higher tariffs and duties, and stricter trade regulations;
- unexpected enactments and changes in laws, regulations, policies and taxation, and divergences in the interpretation and application thereof;
- unstable infrastructure leading to disruptions or delays in basic services such as electricity, transportation and communication;
- fluctuations in foreign currency exchange rates;
- varying standards and practices in the legal, regulatory and business cultures in which we operate; and
- acts of terrorism, war, epidemics, boycotts stemming from international political relations and other sources of social disruption.
Any one or more of the foregoing factors or others could increase our costs, reduce our income or disrupt our operations, resulting in a material adverse effect on the results of our operations.
(3) M&A, Business Alliance, and Other Strategic Investments
We consider M&As, business alliances, and other strategic investments as one of our growth strategies; therefore, we may conduct M&As, business alliances and other strategic investments for the purpose of entering into a new market, developing our operations in new business areas and others. Although we will carry out detailed research on the investment target, such as target companies and new business areas, and conduct sufficient risk analysis upon our M&As, business alliances and other strategic investments, nevertheless unforeseen issues may arise or additional payment may be required. Additionally, our operations in new business areas may not develop as we originally planned, because the development of our operations in new business areas depends on various factors such as changes in market circumstances. As a result of any of the foregoing events, the results of our operations and our financial condition could be materially and adversely affected.
(4) Economic Conditions
Since we are actively looking to expand our operations throughout the world, demand for our products may be materially affected by worldwide economic conditions and financial crises. Related end-product markets for many of our products, such as the markets for smartphones and tablet PCs in which our products are used, are influenced by changes in the economic environment and are subject to inherent cyclicality. An economic slowdown experienced by one or more significant economies, including China or other developing economies, economic turmoil triggered by lower crude oil prices, continued instability in the financial or banking sectors in Europe or elsewhere, the failure or premature termination of government stimulus or monetary easing programs (particularly by Japan or other developed economies), lower consumer spending in Japan as a result of a proposed increase in the consumption tax rate, or political instability in the Middle East, Southeast Asia or other regions, could cause or contribute to a broader and longer global economic downturn. The nature of our business as a manufacturer makes it difficult to rapidly adjust our fixed costs downward when demand for our products declines, which could have a material adverse effect on the results of our operations.
(5) Supplies of Raw Materials
While we have established our manufacturing and processing operations based on our ability to obtain adequate supplies of raw materials on a timely basis, we rely on the limited number of third-party suppliers with respect to a portion of our raw materials. Despite of our efforts to reduce risks of not being able to obtain key raw materials, by among other things entering into supply agreements with two or more third-party suppliers, it is difficult for us to obtain all types of raw materials from two or more suppliers. If any of our suppliers are unable to meet their obligations under our present or future supply agreements due to any factors such as delays, or insufficient supply in their supply chains, or increases in the prices of the raw materials to be provided to us, or if any of our key supply agreements is terminated earlier than we anticipate, we may be forced to postpone delivery dates for our products or be forced to purchase raw materials in the open market or from alternative suppliers, and no assurances can be given that we would be able to make those purchases or make them at prices or quality levels that would allow us to remain competitive or deliver our products as anticipated. Our business may also be impacted by sudden increases in raw material prices or fuel surcharges, and we may not be able to adjust our prices and thereby pass along such rising costs to our customers. In addition, natural disasters, accidents, customer bankruptcies and other factors that may impact our suppliers or transportation networks, including unexpected supply limitations or increased costs for key raw materials, as well as short supply or price increase related to the electricity, may negatively impact our operations. Any or all of such events could have a material adverse effect on the results of our operations.
(6) Financial Condition of Customers and End-Product Manufacturers
We are exposed to credit risk in relation to our customers and to the end-product manufacturers that purchase our customers’ products, including insolvency and bankruptcy risks, which may be caused by a drastic change in business environments or other factors. Although we have programs in place to monitor and mitigate those risks, such programs may not be effective in reducing our exposure. To the extent one or more of our customers becomes insolvent or seeks protection from its creditors, we may not be able to collect money due to us, which may negatively impact our operating results. Also, the loss of an end-product manufacturer due to insolvency or bankruptcy could cause for us the loss of one or several of our customers, which may negatively impact our operating results.
(7) Research and Development
The business areas in which we operate are subject to significant competition in connection with technologies and costs, and we engage in continuous research and development and make the capital investments that we believe are necessary and appropriate to develop new technologies and new products, identify new uses for existing products and technologies, develop new markets for our products and enhance our manufacturing processes in keeping with our mid-term development strategies. However, it is difficult for us to predict what events and conditions may occur in the future that could affect our business because the market conditions for our products have been changing, and will be change, very rapidly. We also may be unable to produce desired results (such as meeting sales targets) in connection with the products newly developed by us. If any of our competitors develop new technologies or products that are more attractive to our customers, our products could be rendered obsolete or demand for our products could decrease. Similarly, end-products may evolve or be replaced by other new types of end-products in a manner that reduces the need for our products as components and materials, or the standards for products like ours or the needs of our customers may change to an extent that is beyond our capacity to adapt. In addition, because most of our customers and end-product manufacturers have very specific needs regarding specifications for product performance, we frequently collaborate with our customers to develop customized products that meet such needs. If we are unable to continue to offer products that meet the specifications of our customers or end-product manufacturers, our customers may choose alternate suppliers. Demand for our products is also affected by our ability to meet our customers’ expectations in terms of the pricing for our products, our ability to quickly respond to new orders and produce and deliver the desired quantities of products according to schedule, and our ability to provide long-term and high quality after-sale support. As a result of any of the foregoing events, the results of our operations could be materially and adversely affected.
(8) Dependence on Limited Number of Products, Including Display-Related Products
We rely heavily on our ability to sell components for use in displays. While we are currently endeavoring to expand the uses for our products to include applications in end-products other than displays, there is no assurance that we will be successful in creating new demand for our products through such initiatives. If demand levels decline for the display industry as a whole, or with respect to the display products in which our products are used, before we become successful in creating new demand or identifying new uses for our products, the results of our operations may be materially and adversely affected. In addition, we have continuously derived a significant portion of our net sales and operating income from sales of certain key products. Any adverse development relating to those products, including the use of technologies that could replace those products, or the introduction of superior products by our competitors, could have a material adverse effect on the results of our operations.
Certain factors relating to display manufacturers, such as changes in their business or sales strategies, may also affect the results of our operations. Furthermore, the number of established smartphone and tablet PC manufactures in the market is limited, and the timing of their respective new product introductions and the demand for their products, as well as the changes in their business or sales strategies, could affect, in turn, the demand for our products.
We are manufacturing highly functional materials, especially, optical materials and electronic components. Due to the nature of our operations, we are subject to business trends that impact middle-size and small-size displays and certain types of electronic components used in end-products such as smartphones, tablet PCs and laptop PCs. The results of our operations may be affected by the timing of releases of new models and the sales of end-products that include our products and the related orders of our key customers. We generally experience higher demand in the three-month periods ended September 30 and December 31 due to the impact of the production of end-products targeting the holiday shopping season at the end of the year and the Chinese New Year. As a result of these factors, our product sales may vary significantly on a year-to-year or quarter-to-quarter basis and the results of our operations may be influenced accordingly.
(10) Intellectual Property
We own, maintain and manage various forms of intellectual property. If we are not able to adequately protect any of our intellectual property as a result of, among other things, any disruption or insufficient protections in certain jurisdictions, or the unauthorized duplication or replication of our intellectual property, the results of our operations could be materially and adversely affected. In addition to intellectual property owned by us, we have also entered into license agreements with manufacturers, including our major competitors. However, there is a possibility that such arrangements will be unexpectedly terminated or may only be available in the future on less favorable terms for us, or our competitors may obtain licenses on more favorable terms than we do. Additionally, from time to time, we may be subject to intellectual property disputes, legal proceedings and claims which could cause us to incur significant costs and may prevent us from developing or manufacturing our products. A business combination or partnership between us and a third party could also result in our business becoming subject to new restrictions under license agreements to which such third party is bound.
(11) Issues Pertaining to Product Quality
While we constantly strive to implement international-standard quality control measures in our operations, and our products are generally sold to other manufacturers (not individual consumers), product failures could cause us to incur substantial expenses to repair or replace defective products, or to compensate our customers for defects caused in end-products. If we deliver products with errors or defects, our credibility, customer relations and business reputation could be harmed and the sales and market share of our products could decline. Although we carry product liability insurance, there is no guarantee that our insurance will adequately cover us against potential liability. If not, the results of our operations could be materially and adversely affected. In addition, any product liability claims brought in connection with any alleged defect of our products, whether with or without merit, could increase our product liability insurance rates or prevent us from securing continuing coverage at rates we could afford. In particular, in connection with new domains such as the Automotive and Life Sciences, our group may be subject to massive recalls or reputational risks resulting from product liability claims, which could adversely affect the results of our operations and our financial condition.
(12) Environmental Problems
Our handling, processing, storage, transportation and disposal of hazardous materials are subject to extensive environmental laws and regulations at the local, national and international level. Such environmental laws and regulations include those governing the discharge of pollutants into the air, global-warming greenhouse gases, and the management and disposal of hazardous materials and wastes. While environmental preservation is one of our important group policies and we voluntarily establish and make efforts to implement appropriate action plans, we cannot assure that such plans will be adequate or effectively implemented as we expect. If any environmental pollution occurs in connection with our operations due to an accident or natural disaster, or if any contaminant is found on sites currently or formerly owned or operated by us, the results of our operations could be materially and adversely affected. In addition, any changes in environmental laws or regulations could restrict our ability to operate as we are currently operating or, impose additional costs, which could adversely affect the results of our operations. Our non-compliance with applicable environmental laws and regulations also could have a negative impact on the results of our operations.
(13) Compliance and Regulations
Our business is operated not only within Japan but also outside Japan, and we are subject to the regulatory regimes of each country in which we operate, including, among others, those relating to anti-trust, anti-corruption, corporate governance, labor, consumer safety, energy generation and taxation. Although we have internal control and compliance systems in place for the purpose of complying with such laws and regulations, there can be no assurance that such systems and our other efforts to promote compliance will be effective. If we violate any applicable law or regulation or fail to satisfy the conditions or comply with the restrictions imposed by our licenses, permits and governmental approvals, or the restrictions imposed by any statutory or regulatory requirements, we may become subject to regulatory enforcement actions or be subject to fines, penalties or additional costs or revocation of governmental approvals, permits or licenses. We may also incur significant costs associated with enhancing our compliance functions as regulations and laws change in the countries in which we operate, which may have a material adverse effect on the results of our operations.
We may become a party to various types of litigation or other claims and legal proceedings that arise from time to time in the ordinary course of our business. Since we operate our business throughout the world, we may be subject to the risk of unexpected litigation in jurisdictions within and outside of Japan. If the cost to defend such litigation is significant, or if any adverse judgments are rendered with respect to any or all of those legal matters, the results of our operations may be materially and adversely affected.
(15) Leaks of Confidential Information
We store and manage confidential information regarding technology, research and development, manufacturing, sales and operating activities, relating to both our company and our customers, in various forms. While we have implemented systems to protect and manage confidential information, there can be no assurance that our systems will continuously prevent unauthorized access or leaks of confidential information in the future. If any confidential information stored or managed by us is improperly disclosed, or if third parties improperly use or gain access to such confidential information, we may be subject to claims for damages, and our reputation and credibility and the results of our operations could be materially and adversely affected.
(16) Accidents and Natural Disasters
We operate our business with an emphasis on safety, implementing safety, security and business continuity plan measures in the hope of reducing the likelihood of accidents and harm from natural disasters. However, not all threats to safety or their consequences can be fully avoided. In particular, Japan is a location that experiences frequent earthquakes, and large earthquakes may result in physical damage to our facilities as well as human injury caused by the fires, radiation and other harmful effects of earthquakes. If we choose to consolidate to a larger extent our operations in Japan, such risks may increase. Large natural disasters such as earthquakes, tsunamis and floods could also endanger or make more costly power and gas supplies, transportation networks and other infrastructure, which might damage one or more portions of our supply chain, including with respect to our procurement of raw materials necessary for the production of our products and delivery of our products to our customers, all of which may disrupt our business operations.
Furthermore, due to the locations of our own operations, and those of our customers, in places within and outside of Japan, we may be subject to business disruption risks. In addition to the risks related to natural disasters, we may subject to other risks such as computer viruses, riots and labor disputes, wars and the like, any or all of which could severely reduce our business prospects. Although we carry disaster and accident insurance, our coverage is limited and therefore a serious disaster or accident may materially and adversely affect the results of our operations. Factors that adversely affect the world economy, such as pandemics involving lethal diseases, may also harm the results of our operations.
(17) Decreases in Prices for Our Products
We are continuously making efforts to add value to, and improve the quality of, our products, and we work to maintain and increase the price competitiveness of our products. We are also trying to offset a necessary decrease in the prices of our products through the cost-cutting measures such as by streamlining our manufacturing processes to improve manufacturing yield. However, due to constant pricing pressures from our customers, as well as overproduction or demand decreases in the market for optical materials and electronic components, or the entrance into the market of high quality products by other manufacturers, or requests by customers for price reductions, the sustainable price for our products may fall beyond the savings achieved through our cost-cutting measures, or our sales of higher-margin products may decrease, as a result of which our profitability and the results of our operations may be materially and adversely affected.
(18) Currency Exchange Rate Fluctuations
We conduct business in various regions throughout the world, and the prices for our products and services and our costs that are denominated in foreign currencies such as U.S. dollars are influenced by fluctuations in exchange rates, and therefore, currency exchange rate fluctuations may adversely affect the results of our operations. We may engage in hedging transactions and other arrangements to minimize exchange rate risk, but there can be no assurance that such arrangements will be sufficient to protect us against adverse movements in foreign exchange rates. In addition, since we convert the foreign currency-based figures (including the assets and liabilities) of our foreign group companies into Japanese yen in the process of preparing our consolidated financial statements, currency exchange rate fluctuations may also materially and adversely affect our financial condition.
(19) Retirement Benefit Plans
Costs and obligations related to our retirement benefit plans have been calculated based on the actuarial assumptions and expected returns relating to our pension plan assets. If the actual results differ from our assumptions or if there are any changes in those assumptions, the results of our operations may be adversely affected.
(20) Impairment of Fixed Assets
We have various fixed assets including tangible fixed assets and goodwill. We regularly review fixed assets to assess the probability of recovering the remaining carrying value of such assets from the cash flow generated from such assets. If we find that any of our assets no longer generate a sufficient amount of cash flow, for example due to intensifying competition in our industry or other factors that are expected to negatively affect our profitability, we would be required to recognize an impairment loss. Any impairment of fixed assets would negatively impact our financial condition and the results of our operations.
(21) Securing Human Resources
It is important for our business operations to secure qualified researchers, engineers and highly skilled production facility operators. The loss of the services of any of our key personnel, or an inability to attract new qualified personnel, could have a material adverse effect on the results of our operations. In addition, if key personnel were to leave us to work for a competitor, to the extent they take their knowledge and technical know-how to the competitor, such knowledge and know-how could improve such competitor’s ability to compete with us, as a result of which the results of our operations may be materially and adversely affected.
(22) Recoverability of Deferred Tax Assets
Deferred tax assets are recognized to the extent that it is probable that future taxable income, which we estimate on a reasonable basis, will be available against which deductible temporary differences and net operating loss carryforwards can be utilized. From time to time, we re-estimate our future taxable income taking into account certain factors such as changes in our business environment, and, through such re-estimation process, we may determine that all or part of our deferred tax assets will be unrecoverable. In such a case, the amount of our deferred tax assets may decrease and the results of our operations and financial condition may be materially and adversely affected.