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Securities code: 5384

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Management Policies

Operational Risks

The operational and accounting related information contained in our financial reports listed below can potentially have a signficant impact on the decisions made by investors.

Factors contributing to unusual fluctuation in financial and business conditions for the company include:

(1) Dependence upon a specific industry

The Group's sales are highly dependent on the semiconductor industry, and changing conditions for this industry tend to have a major impact on results. The percentage of sales to the semiconductor industry during FY3/2015 was 60.0%. Of this, 29.1% was related to semiconductor wafer products and 30.9% to CMP-type products.

(2) The impact of change in foreign currency rates

The Group actively pursues overseas business activities and holds 6 consolidated subsidiaries located overseas. The percentage of consolidated sales generated overseas in FY3/2014 was 73.8% and 76.2% in FY3/2015, and this figure is expected to remain high in the future. Foreign exchange forward contracts are used to hedge foreign currency denominated transactions, but it is possible for fluctuation in exchange rates to have an impact on business results for the Group.

(3) Natural disasters

The company has its headquarters as well as manufacturing facilities located in the central parrt of Japan, and it is possible for these locations to sustain damages in earthquakes that are predicted to occur in the Tokai or Eastern Nankai regions. In the event of a large-scale earthquake, the Group has taken steps to minimize damages through a BCP (Business Contingency Plan) and an Earthquake Response Manual designed to ensure a speedy recovery. However, if the scale of any earthquake exceeds the magnitude estimated by a wide margin, buildings, production equipment, inventories, and other assets that are held by the Group at each production facility could sustain damages that make normal operations impossible, and this could affect operating results for the Group.

In addition, the company has ultra-precise manufacturing and measuring equipment as well as clean rooms for R&D activities at its R&D facilities that have been designed and outfitted with equipment to withstand an earthquake of a certain magnitutde. However, if an earthquake occurs that is larger than predicted, R&D and other utility equipment could be damaged, and the length of time for restoration is unknown and this could result in delays in R&D activities.

(4) Impact from technological innovation

The Group makes constant efforts to maintain and improve its competitive expertise in the abrasives field and has succeeded in developing cutting-edge technologies. It has rapidly introduced products including abrasive and polishing materials and related processes to market, and this has enable it to achieve high market share and profit margins. However, it is possible for the Group's results to be impacted by unforeseen technological change or market developments. Results would also be adversely impacted if the Group could no longer readily satisfy the technological needs of its customers.

(5) The impact of rising material prices

Many of the abrasive materials produced by the Group are made from materials derived from imported natural resources. The price of some of these materials has spiked in recent years, and further dramatic increases in raw material prices could possibly weigh on profits and affect the financial performance of the Group.

(6) Impact of environmental regulations

Products made by the Group use a number of chemical compounds. As the social awareness of the harmful effects of chemical compounds on the human body grows stronger, the company will continue to respond appropriately and rapidly to changes in regulation for chemical compounds, but in the unlikely event the company cannot respond, it could be forced to cease production or sale of certain products, and this could possibly have an impact on its financial performance.

(7) Intellectual property rights

The company has been able to develop its own proprietary technologies by acquiring and maintaining intellectual property to differentiate its technologies and strengthen the competitiveness of its products. However, the cutting edge technologies used by the company are revolutionized at a rapid pace, and the public disclosure system could also result in time lags and this could cause products developed and taken to market by the company to contain technologies produced by other companies. Such a development could have a potential impact on the business results of the Group.

Continuation of transactions with counterparties the company is highly dependent on.

(1) Procurement of various assets

The Group procures raw materials, other materials, consumables, equipment, and parts. Venders are selected based on production ability, shipment period, quality management, cost, technological, and the level of overall service. The Group's policy is to maintain relationships with a number of venders, but certain products are purchased from only one vender. As a result, it is possible that sufficient supply of a product is not available owing to poor quality control by the supplier or an unusual surge in demand. In addition, for parts purchased from multiple venders, the venders for certain raw materials and consumables are concentrated in a single country. It is possible for the country in which these raw materials are located to implement a policy that favors the domestic supply of the material, and this development may disrupt sufficient supply for the Group.

(2) Production outsourcing

The production of certain abrasive materials for the company is outsourced to subcontractors. The company has long-term relations with subcontractors and has determined that stable supple of materials can be maintained, but serious problems could arise at a subcontractor that disrupt supply of a product.

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