Business Risks and Other Risk Factors

The Executive General Manager of the Corporate Planning and Management Office is designated as the officer in charge of monitoring risks and promoting risk management for the Kurita Group (the Group). The officer seeks to regularly analyze and assess risks facing Kurita Water Industries and Kurita Group companies, and to continue monitoring risks to prevent problems from materializing. The officer is also responsible for comprehensively managing risks related to climate change.

The following are summaries of major foreseeable risks present in the business environments in which the Group operates.

Forward-looking statements herein are based on judgments made by management as of March 31, 2022.

1. Impact of the COVID-19 Pandemic

Countries worldwide continue to roll out vaccination programs, but the global COVID-19 pandemic has shown no signs of subsiding, with the number of new infections continuing to fluctuate as new COVID-19 variants emerge. Against this backdrop, countries and regions worldwide are likely to periodically implement various measures to prevent the spread of infection and the collapse of healthcare systems, including calls to stay at home and requests for businesses to close temporarily or reduce operating hours, mainly in the food service sector. Due to uncertainties regarding the duration of the pandemic and the outlook for the global economy, lower capacity utilization at customer plants, decisions by customers to postpone capital expenditure plans and delays to the Group's business activities could impact the Group's financial results. Instead of requiring employees to physically attend business offices, customers' plants or other worksites, the Group is using digital technologies to add remote capabilities to business-critical processes and constructing backup systems at manufacturing sites to support business continuity. The Group has also formulated COVID-19 response guidelines and implemented measures to prevent the spread of infection, contributing to the continued operation of customer businesses and the maintenance of social and industrial infrastructure.

2. Overseas Business Development

The Group is working to expand its business outside Japan. In contrast to the Japanese market, conducting business in overseas markets involves a number of inherent risks, including the risk of unexpected changes to local laws and regulations, the risk of political and economic instability, and the risk of conflict or terrorist incidents. If such risks materialized, the Group's financial results could be affected. In regions where the Group operates, the Group obtains information about the local security situation and other conditions from the Ministry of Foreign Affairs or consultants, and uses local legal counsel, accountants and other experts to verify the legal and regulatory framework in local markets. The Group also uses a guidebook for overseas deployments to provide safety training and advice to employees being sent overseas, provides medical and emergency support services to employees based overseas and publishes safety information as part of efforts to ensure the safety of all officers and employees. In addition, the Group is potentially exposed to an impact from US-China trade friction and tighter regulations and sanctions related to Russia's invasion of Ukraine, as well as any associated deterioration in the economy.

3. Large-Scale Natural Disasters

A large-scale natural disaster or other similar event that directly or indirectly disrupts the Group's business execution could affect the Group's business activities, financial results and financial condition. The Group has established the Kurita Group Business Continuity Management (BCM) Policy to prepare for earthquakes, typhoons, severe rainstorms or other large-scale natural disasters. In line with the policy, the Group develops business continuity plans, conducts water damage risk assessments of Group facilities, offices and officer and employee residences and implements response measures, establishes safety verification systems, reinforces buildings against earthquakes, builds stockpiles of disaster prevention supplies and conducts disaster response drills for officers and employees.

4. Economic and Market Conditions

The Group's businesses are affected by economic conditions in Japan and in other countries and regions where it operates. Demand in the Water Treatment Chemicals business fluctuates in response to factory capacity utilization rates in industries such as steel, petroleum refining and petrochemicals, and pulp and paper – the main areas of demand for the business. Such demand fluctuations may affect the Group's financial results. Demand in the Water Treatment Facilities business fluctuates in response to trends in capital expenditure in the manufacturing sector – the main area of demand for the business – and also due to changes in business conditions at customers with which the Group has long-term ultrapure water supply contracts. Such fluctuations in demand could affect the Group's financial results. Furthermore, rising US-China trade friction may lead to stricter customs tariffs or restrictions on the activities of overseas companies in domestic markets, which could impact the business operations of the Group's customers, leading to an indirect impact on the Group's financial results. The Group's financial results may also be affected by the response to climate change, including moves by customers to shrink or exit from fossil fuel-related businesses, a shift to alternative fuels and water resources, and the introduction of or an increase in carbon taxes on CO2 emissions generated by the Group's facilities or products. The Group provides solutions for issues related to water and the environment, so its customers are spread across a wide range of industries. In addition, the Group is working to generate stable earnings by developing business models such as the ultrapure water supply business, which minimize the earnings impact of fluctuations in investment activity at customers. The Group also manages the operations of affiliated companies. Specifically, the Group verifies earnings and progress with the implementation of strategies and measures at affiliated companies on a monthly and quarterly basis, monitors internal audits, financial reporting and other matters related to internal controls, and makes decisions on important matters at affiliated companies, in line with the Group's Internal Decision Approval and Review Rules. In addition, increasing competition with rivals in the Group's business domains could lead to declines in the price of products and services, which could lower the Group's profitability. However, as noted in 7., the Group is working to secure competitive advantages.

5. Exchange Rate Fluctuations

The ratio of overseas sales to total consolidated sales in the Group is 44.7%, reflecting overseas acquisitions and other factors. The local currency-denominated financial statements of each overseas subsidiary are reflected in the consolidated financial statements after conversion to Japanese yen. Therefore, exchange rate fluctuations may affect the Group's business results and financial condition. To hedge against exchange rate risk, the Group may use forward exchange contracts, currency swap contracts and other types of derivatives.

6. Impact on Materials and Parts Procurement from Soaring Prices for Raw Materials, Parts and Materials and Energy, and Supply Chain Disruption

The Group procures raw materials and parts from outside the Group for the manufacture of products and the construction of facilities. The Group also procures external services to support various business processes. The Group conducts these procurement activities with respect for human rights, in accordance with the Kurita Group Code of Conduct, and also complies with laws and regulations and takes into account economic, social and environmental factors, as set out in the Kurita Group Procurement Policy. The prices of raw materials, parts and services fluctuate based on changes in market conditions, and this may affect the Group's financial results. Meanwhile, the COVID-19 pandemic and Russia’s invasion of Ukraine have led to soaring prices for raw materials for water treatment chemicals and for parts and materials used in water treatment facilities, as well as higher logistics costs amid surging energy prices and supply chain disruption. In response, the Group is raising prices to pass on higher costs and working to secure inventories.

7. Development of New Technologies, Products and Services and Transformation of Business Processes

The Group operates CSV businesses that help to significantly cut CO2 emissions, save water and reduce industrial waste compared with previous approaches and also develops new technologies, products and services to improve and expand its range of total solutions, which leverage chemicals, facilities and maintenance technologies, products and services. In addition, the Group has established a Digital Strategy Division to actively drive the Group's digital transformation (DX) by introducing IoT and AI into new products and services and by digitizing business processes. However, the success of new technology and product development efforts and business transformation cannot be guaranteed. The Group may not be able to offer new technologies or superior products, services, or solution models that meet the needs of its customers in a timely fashion. The Group may also fail to keep pace with rapid technological innovation, changing customer needs and advances in digital technologies. Failure to develop superior new products, services or solution models, delays to DX initiatives, or slow progress with measures to reduce greenhouse gas emissions from customers' operations could limit future growth and profitability or otherwise affect the Group's financial results.

8. Impairment Loss on Fixed Assets

  1. (1)  Impairment Loss on Goodwill and Intangible Assets
    The Group has acquired companies to obtain a foundation for overseas business and to gain access to competitive technologies and business models. As a result, the current balance of goodwill is ¥62,992 million (13.4% of consolidated total assets). Goodwill is not amortized, and is tested for impairment annually, or whenever there are signs of possible impairment. If, because of changes in the business environment, an acquisition does not yield expected benefits, or if there is a difference between the estimated future cash flows obtained by the impairment test and actual cash flows, impairment losses on goodwill or other impairment losses may occur. Impairment tests estimate recoverable amounts based on value in use, and value in use is calculated using a discount rate for future cash flow referencing the weighted average cost of capital (WACC) for each cash-generating unit. Future cash flow forecasts have a five-year horizon and are formulated based on historical trends and external data. The forecasts form the basis of business plans approved by management. Forecasts for periods longer than five years are calculated based on average long-term growth rates, taking into account conditions in markets for each cash-generating unit. Five-year cash flow estimates, longer-term growth rates and discount rates are used by the Group as key assumptions, and any change in these assumptions could have an impact on the Group's financial results and financial condition. The Company has established an Investment Committee to strengthen the Group's investment and lending screening functions. The committee is chaired by the Deputy Executive General Manager of the Corporate Control and Administration Division. The committee conducts pre-screening of investment and lending projects to be discussed by the Board of Directors or the Executive Committee, focusing on business plans, investment amounts, adequacy of risk assessments, profitability, competitive advantages, legality and other criteria. The results of the screening and key points for discussion are presented to the Board of Directors and the Executive Committee, ensuring corporate acquisitions are only conducted after careful consideration and discussion by the Company. In addition, all acquired companies are subject to business management procedures for affiliated companies explained in 4. above.
  2. (2)  Impairment Loss on Property, Plant and Equipment
    The Group's ultrapure water supply business and other businesses install equipment at customer plants. In cases where a customer withdraws from a business or suspends operations at a plant, impairment losses on fixed assets may occur, which may affect the Group's financial results and financial condition. When making investment decisions on installing equipment at customer plants, the Group carefully considers factors such as the customer's business conditions, customer contract terms and return on investment.

9. Risk of Unprofitable Projects

The installation of water treatment facilities may lead to additional costs if the Group fails to meet contractual obligations to customers for raw water and other criteria, or due to defects with products or services arising from faults with design or engineering work, or as a result of accidents. The Group may also face requests for compensation for damages incurred by customers as a result of these issues. The Group rigorously carries out design and engineering work in accordance with design and engineering procedures, and prior to the issue of project budget documents, establishes an engineering review meeting to verify various aspects of project design, including quality, cost, delivery, safety and environmental criteria. In addition, the Group holds monthly business process review meetings from when the order is received until the project is delivered to confirm engineering progress and manage the profitability of each project component, allowing total project costs to be estimated using the latest information. Overseas Group companies follow similar procedures, and the Company also provides them with design and engineering management support for large projects. In this way, the Group aims to prevent any problems before they occur by sharing information about project issues and other areas.

10. Laws and Compliance

In the event that the Group's officers or employees fail to comply with laws or regulations or are responsible for conduct that contravenes social ethics, the Group may face restrictions on its business activities, fines, damage to public trust or other issues, which could affect the Group's financial results and financial condition. The Group has established an Environmental & Social (E&S) Committee, chaired by a director, and a Group E&S Committee, made up of representatives from Group companies. These committees are tasked with rigorously ensuring all the Group's activities are underpinned by socially ethical behavior, rather than conducting compliance activities simply to meet legal requirements.

11. Product and Service Quality and Water Treatment Facility Operational Errors

The supply or discharge of water that falls short of required standards due to human error or other operational issues at customer or Group water treatment facilities may lead to claims for damage compensation or a loss of public trust. The Group's financial results may be affected if its obligations exceed the scope of liability insurance coverage, or if there is a loss of public trust. As explained in 9. above, the Group has created a quality management system and continuously implements improvements to increase customer satisfaction.

12. Intellectual Property

Given the wide scope of the Group's business, there is potential for the Group's intellectual property rights to be infringed and potential for the Group to infringe rights held by third parties. While such actions could affect the Group's financial results, the Group recognizes the importance of intellectual property and continually seeks to register its own intellectual property while avoiding infringements of rights held by third parties, both in Japan and overseas.

13. Information System Security

The Group's use of information systems is increasing, as is the importance of information systems to the Group's business. If a computer virus or other factor were to obstruct the functions of the Group's information systems, the Group's business activities, financial results and financial condition could be negatively affected. In accordance with the Kurita Group Information System Management Policy, the Group is strengthening measures against computer viruses by installing antivirus software and providing information security education and awareness training to officers and employees, including training about targeted email attacks.