Investor Relations

Business Risks

The Nippon Kayaku Group (hereafter “the Group”) works to mitigate risk by preventing the various kinds of risk that accompany the operation of our business from arising, dispersing risk, and other means.
 The following have been identified as risks that could have a significant effect on the operating results and financial position of the Group at the end of FYE March 2018. These do not cover events that go beyond our forecasts, and are not a comprehensive list of all risks facing the Group.

1. Risks Related to Changes in the Business Environment

1. Overall Business

The Group is working to ensure more stable business operations by managing various businesses based on our basic management policy. To this end, we have established business strategies, development strategies, and other plans, and are managing our business in a way that is adapted to changes in the business environment. However, the functional chemicals business, which accounts for a large percentage of our sales and operating income, is a business area that is highly susceptible to the effects of economic fluctuations. Domestic and international economic fluctuations, and changes in the business environment such as sluggish demand and intensifying competition, as well as the resulting changes to our business configuration, may have a significant effect on the operating results and financial position of the Group.

2. Functional Chemicals Business

In the functional chemicals business, the technological revolution in the central field of information and communications is happening fast, while product life cycles are becoming shorter. The potential for an inability to provide new products that satisfy market needs in a timely manner due to delays in new technology or product development, as well as for an inability to keep pace with the radical technological innovations of other companies, represents a major risk to the Nippon Kayaku Group’s operating results and financial position.
 In addition, supply instability and rising prices from Chinese raw materials manufacturers incur risk in our procurement of raw materials. These risks could have a significant effect on the operating results and financial position of the Group.

3. Pharmaceuticals Business

In the pharmaceuticals business, reforms of drug pricing systems that include a downward revision of drug prices, and measures to promote the use of generic drugs, are being carried out both in Japan and overseas as part of government policies aimed at reducing medical expenses. In addition, our business for contracted production of active pharmaceutical ingredients will also be affected by factors that include sales trends in our customers’ markets and customer production adjustments. Government policies aimed at reducing health care costs, customer market environments, and similar factors could have a significant effect on the operating results and financial position of the Group.

4. Safety Systems Business

In the safety systems business, we engage in the sales of automotive safety components. In the event of a change in the demand for automobiles due to factors such as changes in the economic conditions or economic policies of the countries and regions where the Group’s products are sold, or in the event of a large change in the quantity of automobiles produced due to factors such as disruption in the supply chain required for automobile production as a result of a natural disaster, accident, or other cause, such factors could have a significant effect on operating results and the financial position of the Group.

5. Other Businesses

The agrochemicals business is affected greatly by crop-growing conditions, which are subject to climate changes and other phenomena, as well as by the infestation of harmful insects. The business is also affected by tightening governmental regulations related to food safety and environmental effects. Climate conditions and government regulations could have a significant effect on the operating results and financial position of the Group.

2. Rising Interest Rates

When determining the methods for procuring the funds necessary for operations, and the amounts required, the Group considers its financial position as well as the monetary environment. Rising interest rates trigger higher interest costs and are a potential obstacle to the procurement of funds. This could have a significant effect on the operating results and financial position of the Group.

3. Exchange Rate Volatility

To minimize the risk to overseas operations and export-related transactions due to exchange rate volatility, the Group takes a number of steps, such as maintaining a balance of transactions denominated in foreign currencies. However, there is still potential for gain or loss on foreign exchange translations.
 Moreover, the line items in the financial statements of overseas consolidated subsidiaries are translated into yen when producing our consolidated financial statements, and are consequently are impacted by fluctuations in exchange rates. This could have a significant effect on the operating results and financial position of the Group.

4. Retirement Benefits

The Group calculates its employee retirement benefit expenses and obligations based on calculated retirement benefit obligations and forecasts of pension plan assets. Accordingly, changes in the retirement bonus and pension system, changes to the discount rate used for actuarial calculations, changes in the current value of pension assets, and changes in the operating environment could have a significant effect on the operating results and financial position of the Group.

5. Valuation of Inventories

The Group applies accounting standards related to inventory valuation. When the net selling price of inventories is below the book value, a valuation loss is incurred. This could have a significant effect on the operating results and financial position of the Group.

6. Fixed Asset Loss

The Group applies accounting standards related to fixed asset loss. In the event of a large decline in profit potential or a drop in real estate prices, a fixed asset loss is incurred. This could have a significant effect on the operating results and financial position of the Group.

7. Valuation of Securities

The Group holds shares in other companies with which we do business, primarily to maintain our relationships with these companies. A valuation loss on those shares could be incurred in the event of a large drop in stock prices, or a substantial decline in the value of shares held due to a decline in a specific issuer’s financial position. This could have a significant effect on the operating results and financial position of the Group.

8. Changes in Laws or Regulations

The business activities of the Group are conducted in accordance with the laws and regulations of Japan and all overseas countries where we operate. Business activities could be restricted or costs could increase due to future changes in laws, regulations, or policies. This could have a significant effect on the operating results and financial position of the Group.

9. Overseas Business

The Group is working to increase the ratio of its overseas business activities but these business activities could potentially be impacted by unexpected changes to laws, regulations, or policies in overseas countries, or by events such as terrorism, wars, or other social chaos. These could have a significant effect on the operating results and financial position of the Group.

10. Lawsuits

As the Group conducts business in a wide variety of areas, the Group could potentially become the target of lawsuits, legal contests, or other legal actions. This could have a significant effect on the operating results and financial position of the Group.

11. Infringement of Intellectual Property Rights

While the Group carefully controls its patents and other intellectual property, it may not be possible to fully prevent infringement by third parties. Conversely, some of the Group’s products or technologies could potentially be viewed as infringing upon the intellectual property rights of another company. Such infringements on intellectual property rights could have a significant effect on the operating results and financial position of the Group.

12. Research and Development

The Group recognizes that research and development is a driving force behind business growth, and is actively engaged in R&D activities. For the pharmaceuticals business and the agrochemicals business, a long R&D period is required to verify the effectiveness and safety of a product, and vast expense is required to develop a single product. For these reasons, it may not be possible to recover large R&D costs if research is abandoned during a later phase of development. In addition, both the pace of technological innovation and changes in customer needs are extremely fast in the functional chemicals business and safety systems business. This means that we may not be able to develop and supply new products in a timely manner.
 Failure to produce results from R&D activities could have a significant effect on the operating results and financial position of the Group.

13. Procurement of Raw Materials

To obtain stable procurement of raw materials, the Group disperses risk by securing multiple suppliers and other means. However, events such as an interruption in the supply of raw materials that could hinder production activities are possible. The price of raw materials could also rise rapidly, causing a major surge in costs. These could have a significant effect on the operating results and financial position of the Group.

14. Product Quality

The Group is manufacturing various products in accordance with the management standards set out in international regulations for quality assurance, including ISO 9001. Nonetheless, there is no guarantee that all of our products will be completely free of defects or that no problems will arise. A major recall or product liability is always a possibility. We have provisions against contingencies, including insurance policies, to cover product liability claims. However, in some cases, this may not cover the entire amount of the claim. In addition, in the pharmaceuticals business and the agrochemicals business, unpredictable side effects or the discovery of other problems after marketing is a possibility. These could have a significant effect on the operating results and financial position of the Group.

15. Accidents and Disasters

To prevent accidents in production facilities or distribution, and damage caused by natural disasters or other incidents, the Group conducts regular inspections, improves safety systems and firefighting equipment, conducts various safety activities, safety audits, and environment and safety diagnoses, and takes other actions aimed at ensuring safety in accordance with standards prescribed by law and by internal regulations. The Group has also formulated a BCP (Business Continuity Plan) and is working to ensure that appropriate recovery activities can be carried out in the event of an emergency. However, there is no guarantee that the effects of an accident or disaster can be fully prevented or mitigated. In the event of an accident or similar event that causes property damage or injury at a plant or in the surrounding area, or that results in a claim for compensation due to interference with production for Nippon Kayaku Group customers, there is the possibility of large costs being incurred and/or serious effects on the reputation of the Group. In addition, a natural disaster or similar circumstance that disrupts the supply chain, causing a shortage of raw materials that results in a production stoppage or delayed delivery of products to customers, could have a material impact on the operating results and financial position of the Group.

16. Risk Related to Limitations on the Electric Power Supply

The restrictions on operation of nuclear power plants in Japan has increased Japan’s reliance on thermal power generation and the CO2 emissions coefficient for electric power has increased substantially. If corporate activity increases more and electricity consumption grows, this could increase the amount of CO2 emissions from power sources. If greenhouse gas emissions are regulated in the future, the company might need to purchase carbon credits to offset CO2 emissions and the Group would incur an additional expense for this. This could have a material impact on the business results and financial position of the Group.
 Electric power companies are also increasingly purchasing power generated by renewable energy sources. An increase in renewable energy promotion charges could increase electricity rates. This could have a significant effect on the operating results and financial position of the Group.

17. Risk Related to Soil Contamination

To prevent soil contamination in accordance with standards prescribed by laws and internal regulations, the Group conducts regular inspections of facilities that store harmful substances, installs safety systems, carries out a variety of safety activities (safety audits and environment and safety diagnoses), and in other ways strives to prevent leakage. However, there is no guarantee that the effects of an accident or disaster can be fully prevented or mitigated. Moreover, as of the writing of this report, we have not yet completed surveys of all the land we possess. Consequently, some land could potentially be contaminated due to natural causes or due to the business activities of a company we acquired through a merger or other method. We therefore cannot rule out that some land could be found to contain harmful substances unrelated to the Group’s business activities, at a later date. In the event that soil contamination is found to have occurred, this could have a severe effect on the reputation of the Group, and could also involve large expense if soil contamination countermeasures are carried out.

18. Risk Related to Information Systems

The Group houses its enterprise system devices at an outside data center and is taking steps to ensure system safety and stable operations. We are also working to create redundant network lines for key locations. However, we cannot completely rule out the possibility of system interruption due to unforeseen failure or large-scale disaster. If such an interruption were to occur, instructions for procurement, production, product shipping, and other operations could be disabled or delayed, possibly obstructing delivery to our customers and others, and could have a significant effect on the operating results and financial position of the Group.

19. Information Security

In the course of business activities, the Group collects and uses financial, technical, personal and other information in electronic and other data formats. The systems and networks that manage this information undergo safety measures as needed, while employees engaged in business activities take information security training and are instructed on the proper handling of information. However, there is the possibility of information leaks, interrupted operations, legal claims, lawsuits, liability for damages or the like arising from third-party attacks by hackers or computer viruses, or from unauthorized usage, misuse or the like by employees or other individuals capable of accessing systems and networks that manage information.

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