Business Risks and Other Risk Factors

The Executive General Manager of the Corporate Planning and Control Division is designated the executive officer in charge of the Kurita Group's risk monitoring and management. In this role, the Executive General Manager is responsible for regularly analyzing and assessing risks to the Company and Group companies, as well as maintaining the monitoring systems in order to prevent the manifestation of latent risks. The following are deemed risks which may have a significant impact on investor decisions.

All forward-looking statements contained herein are based on information available and judgments made by the Group as of the end of March, 2020.

1. Impact of the Novel Coronavirus Pandemic

Nations around the world have taken measures to prevent the spread of the novel coronavirus infection, including lockdowns of cities, travel restrictions, and stay-at-home requests. Economic activity has been severely restricted as a result. The Kurita Group has taken its own measures to prevent the spread of the infection based on orders and requests of the authorities in each country, while continuing with its business activities to support the operations of its customers and make a contribution to the maintenance of social and industrial infrastructure. Given the uncertainty surrounding the timing of the containment of the infection and the recovery of global economic activity, the novel coronavirus pandemic may impact the Group's financial results due to lower capacity utilization rates at customer factories and delayed capital expenditures.

2. Economic and Market Conditions

The Group's Water Treatment Chemicals and Water Treatment Facilities businesses are affected by economic conditions in Japan and countries and regions outside Japan where the Group operates. Demand in the Water Treatment Chemicals business fluctuates in response to factory capacity utilization rates in industries such as steel, oil refining and petrochemicals, and pulp and paper—the main areas of demand for the business. Such demand fluctuations may impact the Group's financial results. Demand in the Water Treatment Facilities business fluctuates in response to trends in capital expenditures in the electronics and general industries—the main area of demand for the business—. Such demand fluctuations may impact the Group's financial results.

Furthermore, intensified competition with rivals in the Group's business domains could lead to declines in prices of products and services, which may lower the Group's profitability.

3. Overseas Business Development

The Group is striving to expand its business outside Japan. In contrast to the Japanese market, doing business in overseas markets involves a number of inherent risks, including the risk of unforeseen changes to local laws and regulations, the risk of political and economic instability, and the risk of foreign exchange rate fluctuations. If such risks materialize, the Group's financial results may be impacted.

4. Product and Service Quality

The Group operates a quality management system and implements continual improvement activities to raise customer satisfaction. Despite these measures, the Group cannot completely eliminate the risk of damages compensation caused by a defective product or service.

The Group's financial results may be impacted in the event that the Group becomes responsible for losses exceeding the limits of its damages compensation insurance.

5. Materials, Parts and Services Procurement

The Group procures raw materials and parts from outside the Group for the manufacture of products and fabrication of facilities. Additionally, in the course of its business activities, the Group procures various necessary services from outside the Group. The prices of raw materials, parts, and services fluctuate based on changes in market conditions, and this may impact the Group's financial results.

6. New Technology and Product Development

The Group continuously develops new technologies and products. The development of new technologies and products involves various uncertainties. There is the possibility that the Group fails to timely deliver new technologies that meet the needs of its customers or develop superior products, services, or solutions models, or that the Group cannot keep pace with technological innovation and changes in customer needs. In the event the Group failed to develop superior new products, services, or solutions models, its future growth and profitability would decline, and this may impact the Group's financial results.

7. Information Systems

In the course of its business activities, the Group increasingly relies on information systems, and these systems are increasingly important to its business. In the event the Group's information systems are obstructed by a computer virus or some other factor that impacts the information systems' functionality, the Group's business activities, financial results, and financial condition may be impacted.

8. Intellectual Property

The Group recognizes the importance of intellectual property and continually seeks to register its own intellectual property while avoiding infringement of the intellectual property rights of third parties, both in Japan and overseas. Given the wide scope of the Group's business, however, there is potential for the Group's intellectual property rights to be infringed and potential for the Group to infringe the rights held by third parties. Such occurrences may impact the Group's financial results.

9. Impairment Loss to Property, Plant, and Equipment

  1. (1)  Impairment loss to goodwill
    The Group engages in the acquisitions of companies to secure a stronger foundation for its overseas business as well as to acquire competitive technologies and business models. As a result, the balance of goodwill has increased to account for more than 10% of total consolidated assets. The Group does not amortize goodwill. Instead, it conducts impairment tests either annually or at times when there are indications that an impairment may be necessary.
    The Group recognizes an impairment loss to goodwill in cases where an acquisition does not generate the expected results due to changes in the business environment and other factors, or when an impairment test indicates a significant difference between the expected future cash flow and actual cash flows. In such occurrences, the Group's financial results and financial condition may be impacted.
  2. (2)  Impairment loss to property, plant and equipment
    In regard to investment decisions for facilities of ultrapure water supply business and other equipment the Group installs at customer factories, the Group makes cautious investment decisions by taking into consideration the customers' business conditions, stipulations in customer contracts, and return on investment. There may be situations, however, where the Group recognizes an impairment loss to property, plant and equipment as a result of a customer's decision to withdraw from a business or idle a factory. In such cases, the Group's financial results and financial condition may be impacted.

10. Foreign exchange rate fluctuations

The ratio of the Group's overseas sales to total sales has risen to nearly 40% as a result of acquisitions of overseas companies and other factors.

The financial statements of overseas subsidiaries are reflected in the consolidated financial statements after converting the local currencies to Japanese yen. Fluctuations in the foreign currency exchange rates between local currencies and Japanese yen may impact the Group's financial results and financial condition.

11. Large-Scale Natural Disasters

The Group has established the Kurita Group business continuity management (BCM) policy outlining the Group's response to earthquakes, typhoons, and other kinds of natural disasters. In accordance with this policy, company officers and employees take part in disaster-response training activities. Despite these measures, if a natural disaster were to directly or indirectly disrupt the Group's business execution, the Group's business activities, financial results, and financial condition could be impacted.