Operational Risks
The following are the major risks that the management recognizes as having the possibility of materially affecting the financial position, operating results, and the status of cash flows of the consolidated companies (the parent company and its consolidated subsidiaries), out of matters related to the business and the state of accounting, etc., described in the Annual Securities Report.
Forward-looking statements in this document are judgments made by the Company’s group (“the Group”) as of the end of the fiscal year under review (March 31, 2024).
(1) Procurement of raw materials
The Group purchases raw materials, sub-materials, supplies, equipment, equipment parts and others. In selecting suppliers, the Group comprehensively evaluates them in terms of production capacity, lead time, quality control ability, costs, and R&D capability as well as customer service and other aspects and pursues the policy of ensuring multiple supplying sources. However, the Group purchases some items from only one supplier. Therefore, there is a possibility that the Group may not be able to receive sufficient amounts due to events such as quality abnormalities that the supplier suffers and a surge in demand.
Regarding purchases from multiple suppliers, on the other hand, there are some raw materials and supplies, sources of which concentrate on only one country. Accordingly, there is a possibility that the Group may not secure sufficient amounts in such a case that countries with natural resources adopt the policy of prioritizing fulfilling their domestic needs.
In the case of the inability of securing such purchases for a long term, there is a possibility that the Group’s production activity may be delayed, which will affect the Group’s financial results. In response, the Group will take measures such as pushing suppliers to certify replacement raw materials.
(2) R&D
The Group has maintained a high market share and profit margin in the field of ultra-precision polishing materials until now. Nonetheless, in the event that the Group is unable to swiftly provide products that satisfy customers’ technological needs due to the rise of changes that exceed its projections in technologies and markets, such a situation may lower future growth and profitability and give a significant effect to the Group’s financial results.
To address such risks, the Group has established research bases in the U.S. and Taiwan, in addition to Japan, and is driving the development of new products as one team with customers in locations just close to them so that the Group is able to provide customers with products that they need, in a timely manner. In addition, the Group does not confine itself to in-house R&D, but it is also stepping up cooperation with universities, research institutes and corporations in diverse fields in order to respond to a drastically-changing market environment.
(3) Business acquisitions
The Group considers M&A to be an effective method for accelerating the pace of business growth if a case contributes to acquiring technologies and establishing superiorities in markets. However, in the event that a drastic change occurs to the market environment and competitive conditions after acquisitions, such a situation may make the collection of invested capital difficult and give a significant effect to the Group’s financial results.
In considering the implementation of M&A, the Group takes into account risk analysis outcomes of such M&A cases and others in addition to the movement of relevant markets, customer needs and the financial results, financial conditions, technological superiority, market competitiveness, and future business plans of targeted companies as well as synergy. Moreover, before acquisition, the Group investigates the actual state of the targeted company and the existence of issues through due diligence that enlists experts. After acquisition, the Group will build and foster a new management team and a governance system that bolster corporate value enhancement and long-term growth.
(4) Product assurance
The Group has established a product quality assurance system and has its products covered by product liability insurance. Nonetheless, in the event that damage resulting from its products occurs, it may give a significant effect to the Group’s financial results.
In order to prepare for those risks, the Group not only upgrades its quality assurance system continuously and strives to improve quality to meet new requirements from customers, but it also has a system in place that satisfies increasingly sophisticated quality requirements from customers by taking actions such as thoroughly preventing recurrences of quality-related complaints through counter-measures to the root causes, once the Group receives such complaints.
(5) Intensifying competition
The Group retains the world’s number one market share in its core business field of ultra-precision polishing materials for semiconductor substrates, and maintains its market superiority as the leading company in the ultra-precision polishing. However, since there are a variety of competitors operating in Japan and overseas, there are risks that the Group’s competitive superiority may be threatened or that new products that outperform its offerings may be developed and launched to the market by competitors.
To respond to these risks, the Group is striving to improve the polishing performance by designing liquid agents, which are a key component of polishing materials, on its own, following the scientific analysis of the polishing mechanism. Furthermore, the polishing process of semiconductor substrates consists of multiple stages from rough polishing to final polishing. The Group produces polishing materials for all the stages and provides optimum polishing materials and procedures for each stage in a way that realizes the high-quality final finishing surface efficiently in response to requests from customers.
(6) Price of raw material
Some of the polishing materials manufactured by the Group use natural resources imported from overseas as raw materials. With the price of such raw materials surging in recent years, a further spike in the price of those materials may lead to a further decline in profits and eventually to impairment of fixed assets, which may give a significant effect to the Group’s financial results.
In order to deal with those risks, the Group is taking measures for mitigating the impact, such as the promotion of procuring from multiple sources.
(7) Fluctuations in the market environment
In the event that an economic downturn reduces consumer spending and capital investment in the private sector in markets including in Japan, North America and Europe, where the Group performs business activities, demand for products that the Group provides may fall, and price competition may intensify, which may give a significant effect to the Group’s financial results.
To deal with those risks, the Group takes appropriate measures such as grasping, analyzing market trends and preparing business strategies through collecting the latest information from customers and communicating with analysts and investors.
(8) Overseas business expansion
The Group runs a broad range of overseas activities in regions including Japan, North America, Asia, and Europe. Therefore, there are inherent risks such as a deterioration of political and economic conditions overseas, unforeseen changes to laws and regulations, and a worsening of public safety, which may give a significant effect to the Group’s financial results.
In order to prepare for those risks, the Group has established a chain of communication in case of emergency and a system that enables prompt sharing of information on a global basis. The Global Risk Committee is held twice a year to identify local risks and take countermeasures.
(9) Information security
The Group possesses confidential information related to technology, sales activities, and other operations as well as information on a large number of companies and individuals. Although the Group has a thorough information management system for such information in place, if an information leakage or a situation that the above information cannot be used is caused by computer viruses or other factors, they may give a significant effect to the Group’s financial results.
In order to deal with those risks, the Group has established and operated a set of regulations concerning information security and is disseminating the proper handling of information itself and information devices through education and training programs for officers and employees.
(10) Disasters, etc.
In the event of the infliction of major damage from massive natural disasters, such as an earthquake and a typhoon, and other events, normal production and R&D activities may be disrupted, which may give a significant effect to the Group’s business activities, financial results and financial conditions.
Additionally, if events such as a spread of a new infectious disease affects the supply chain of suppliers, buyers and the Group’s plants, etc. or due to events such as the suspension of operations by the spread of infections among employees, there is a possibility that similar impacts may occur.
To deal with such risks, the Group formulates business continuity plans (BCP) and disaster response manuals and conducts periodic drilling that enhances their effectiveness. Additionally, the Group has systems in place that enable important operations to continue and the immediate restoration of disrupted operations in case of a disaster.
(11) Exchange rate fluctuations
The Group is active about expanding overseas transactions and has five overseas consolidated subsidiaries. The ratio of overseas sales to consolidated net sales for the fiscal years ended March 31, 2023 and 2024, is 77.5% for both years, and the Group expects this ratio to remain high going forward. Although the Group hedges transactions denominated in foreign currency by forward exchange contracts as necessary, there is a possibility that FX fluctuations may have a significant effect on the Group’s financial results.
(12) Intellectual property rights
The Company is a technology-driven company. Positioning intellectual property as a key source for ensuring the competitiveness of excellent products, it strives to strengthen it continuously. However, there is a possibility that the Group’s intellectual property rights may be infringed by third parties or vice versa. That case may affect the business execution and competitiveness of the Group.
The whole of the Group including its overseas subsidiaries is improving the management and operational systems of intellectual property with the aim of ensuring unique technology for further technological differentiation and establishing a more solid intellectual property portfolio as well as executing surveys of and preventive activities against third parties’ intellectual property infringement. Moreover, the Group has built up a coordination network with experts of intellectual property and legal affairs stationed in Japan and foreign countries that have a major market so that the Group can also respond to the occurrence of lawsuits, etc. in a timely and effective manner.
(13) Human resources
In recognition that it is essential to acquire and develop excellent human resources required for future business development for keeping its competitiveness, the Group has been advancing necessary measures. In the event that the Group fails to acquire and develop such excellent human resources, there is a possibility that the business execution of the Group may be constrained, which may give a significant effect to the Group’s financial results.
In order to deal with such risks, not only is the Group visualizing business skills required for business execution and recruiting human resources that have high levels of expertise and abundant experience, but it also hires young talent continuously from the perspective of ensuring human resources for a long term and upgrades training opportunities that contribute to the acquisition of necessary business skills. In addition, the Group is driving diversity measures such as the promotion of women’s active participation and support for balancing work and family life and is stepping up a mechanism that accommodates the need of the working style of each employee.
(14) Impairment of fixed assets
The Group applies accounting standards for the impairment of fixed assets. In the case that incidents, such as a drastic deterioration of the business environment, a surge in prices of raw materials and intensifying competition, there is a possibility that impairment loss may be incurred, which may give a significant effect to the Group’s financial results.
To handle such risks, the Group takes measures as appropriate, as described in (2) R&D, (5) Intensifying competition and (6) Prices of raw materials, and others. However, the Group reported impairment loss due to a worsening of profitability for the consolidated fiscal year under review.
