Among the matters related to the business and accounting status described in the financial statement, matters that may have a significant influence on the judgement of investors are as follows. The matters regarding the future in the document are those determined by our group (our company and its consolidated affiliates) as of the end of the current consolidated fiscal year (March 31, 2020).
(1) Management Policy/Business
① About capital investment
Our group has industrial gas manufacturing bases in Japan and overseas, but for large customers, we install an air separation unit on the customer’s premises and adjacent area to supply gas by piping (on-site plant method). The advantage of the on-site plant method is that a stable gas supply to customers is ensured and a robust profit base is secured.
However, if all or part of the equipment is no longer necessary due to such reasons as a decline in the operating rate of customers at a supply destination, elimination and consolidation of manufacturing bases, and overseas relocation, and if contractual compensation cannot cover the burden, our business performance may be affected by losses due to retirement of the equipment.
② About manufacturing cost
Electric power costs account for a large portion of the main production costs of oxygen, nitrogen, and argon. If they rise significantly due to factors such as soaring crude oil/LNG prices and exchange rate fluctuations, and if these cannot be passed on to customers, our business performance and financial status may be affected.
③ About overseas expansion
Our group has set “Globalization” and “M&A” as key strategies. By actively expanding overseas on-site businesses and conducting M&As, we are currently developing our business mainly in the United States, Europe, and Asia/Oceania.
When executing capital investment and M&A, we examine market trends, customer needs, contracts, etc. in advance, but some factors such as market trends, politics, economy, customs, religion, terrorism, and large-scale disasters in these countries and regions may affect the group’s business activities, performance, and financial status.
④ About laws and regulations
Our group is developing businesses mainly in the United States, Europe, and Asia/Oceania. In the case of unexpected changes in laws and regulations, and the establishment of new laws and administrative guidance in such countries, our business performance may be affected by the resulting costs.
In addition, our group conducts environmentally friendly business activities both in Japan and overseas.
However, if regulations are tightened due to the revision of environment-related laws and regulations, the increase in costs to deal with new situations may affect business performance. Our group also exports specialty gases, equipment, and equipment-related products overseas, therefore we must comply with the “Foreign Exchange and Foreign Trade Act.”
Consequently, in order to prevent legal violations, our group has established a security program of export control, and adopted some measures such as e-learning and training for employees.
Nevertheless, if any officers or employees of our group violate laws and regulations and are subject to fines and administrative sanctions (prohibition of exports or cancellation of comprehensive permits), or if regulations are tightened, our group’s business development and performance may be affected.
Furthermore, our group has risks related to lawsuits and investigations/dispositions by regulatory authorities in executing our business in Japan and overseas. If any decisions detrimental to us are made, there may be a significant impact on our group’s business development, business performance, and financial position and credit.
⑤ About securing human resources
In order to achieve the group’s goals, it is essential to have talented personnel in each business field such as production, R&D, marketing, sales, distribution, and management. Also, for business operations, securing human resources with the qualifications and skills required by relevant laws and regulations is necessary.
If we cannot secure such human resources as planned due to changes in the employment situation and labor supply-demand conditions, our group’s business activities and performance may be affected.
(2) Technology and Security
① About technological development
Our group is actively engaged in technological development activities to maintain its place as one of the world’s major companies, with unique and superior technologies for future business expansion, but there are risks that accompany the development of new products and technologies.
For example, if a technology takes time to commoditize or commercialize, we may miss the window for a product’s introduction into the market, or the product may become less competitive due to new technologies/new products or alternative products produced by other companies. In addition, in industry-academia-government collaborations and joint development with other companies, the expected result may not be obtained if cooperation does not progress well or there are major changes in the related markets.
② About intellectual property
Our group promotes the acquisition of necessary intellectual property rights based on business development by uniquely developed technologies. However, there is no guarantee that this is sufficient to protect our group’s technologies and products. Also, a third party may infringe on the intellectual property rights of our group and use them illegally.
On the other hand, for fields where our group develops our business, the intellectual property rights of third parties are constantly investigated and monitored. We are striving to prevent infringement by taking measures that will prevent us from using the valid intellectual property rights of third parties by developing alternative technologies or technical workarounds, or obtaining usage licenses from those parties.
Up till now, there have been very few cases of lawsuits filed against us for violating the intellectual property rights of third parties.
However, there is no guarantee that our group will not infringe on the intellectual property rights of other companies in the future, and that our business performance may not be affected if a lawsuit is filed.
③ About safety and security of products
The business of our group includes manufacturing and sales of high-pressure gas and related equipment. We maintain strict quality control and thorough record keeping, and conduct pre-sale safety inspections for all products to properly eliminate and manage risks caused by products.
However, there is no guarantee that all products will be free of defects, quality control problems, and failures. If by any chance our products suffer from defects, quality control problems, or failures, our business performance and financial status may be affected due to the loss of customer trust and the burden of damage compensation.
Also, the high-pressure gas we manufacture and sell may be dangerous in high pressure and extremely low temperature conditions. Toxic and flammable gases are also used for products related to liquid crystals and semiconductors. Regarding the manufacturing and supply of these products, we provide application-based training in addition to rank-based training for employees. In particular, the technical academy incorporates danger experience learning.
Through education, we aim to eradicate not only equipment accidents, but also workplace accidents, making every possible effort to ensure safety. However it is impossible to eliminate the danger of the gases themselves. If serious damage to people or equipment occurs due to gas leakage, fire, or explosion, our business management, performance, and financial status may be affected by the suspension of business.
(3) Finance and Others
① About exchange rate fluctuations
Our group is engaged in the procurement of raw materials from overseas and the export of products related to special gases and machinery/equipment. We also import products from overseas including household items. Because some business transactions are dealt with in foreign currencies, we are striving to avoid the risk in exchange rate fluctuation, with measures including exchange contracts.
However, business performance may be affected if we cannot cope with sudden exchange fluctuations. In addition, the amounts in the financial statements of overseas consolidated affiliates denominated in foreign currencies are converted into Japanese yen in the process of preparing consolidated financial statements. Therefore, our group’s business performance and financial status may be affected if exchange rates fluctuate more than expected.
② About changes in interest rates
Our group proactively carries out capital investment and M&A based on the key strategies set out in the medium-term management plan, and raises funds mainly through leverage from financial institutes and corporate bonds.
Most of the financing for the acquisition of the European business of Praxair, Inc. in the United States in the fiscal year ending March 31, 2019 was carried out by borrowing at a variable interest rate or hybrid finance, where the fixed interest rate becomes a floating interest rate after a certain number of years. Depending on interest rate fluctuations in the future, our business performance and financial status may be affected.
③ About natural disasters, unexpected accidents, and infectious disease
In the event of natural disasters such as earthquakes, our business site may be seriously damaged. Especially in Japan with its high earthquake probability, a significant decrease in production capacity is unavoidable if a large-scale manufacturing base is damaged, even though we have manufacturing bases dispersed throughout the country. Business performance may be affected due to the decrease in sales revenue and significant repair costs.
Additionally, in the event of a serious accident or large-scale infectious disease caused by unforeseen circumstances such as human factors, our business activities and performance may be affected. In preparation for these emergencies, our group has established an information gathering system based on the Business Continuity Plan (BCP) for continuation of the core business and early recovery of business.
④ About medium-term management plan
The targets of the medium-term management plan may not be achieved due to changes in the business environment and various other factors.
⑤ About capital relationship with Mitsubishi Chemical Holdings Corporation
Mitsubishi Chemical Holdings Corporation owns 50.59% of our issued shares. In addition, the company has agreed to maintain that shareholding ratio with us in the basic agreement concluded on May 13, 2014 for the purpose of further strengthening the capital and business alliance and the enhancement of corporate value.
We recognize there is currently no policy to increase or decrease the shareholding ratio.
However, our group’s business management, performance and financial status may be affected if the capital relationship with Mitsubishi Chemical Holdings Corporation changes in the future.
⑥ About goodwill and intangible assets
Our group records goodwill and intangible assets (hereinafter referred to “goodwill etc.”) in the consolidated statement of our financial position in connection with corporate acquisitions. New “goodwill etc.” may be recorded as we acquire new corporations in the future. Our group evaluates goodwill and intangible assets with indefinite useful lives by performing impairment tests in each period.
When the growth rate of the target business is greatly reduced due to a significant deterioration in the economy, or when the discount rate used to calculate fair value and value in use after deducting disposal costs is significantly increased due to an increase in market interest rates, our group’s business performance and financial status may be affected because of the significant reduction of the recoverable amount causing an impairment loss.
⑦ About information management
Our group holds important information regarding sales/technology, customers, and other personal information of related parties.
We are working to reduce the risk of information leaks by managing business information, including important and personal information, in the cloud and on servers, and by promoting crime prevention and theft countermeasures in our business bases.
We are also working to strengthen our management system by establishing regulations and standards related to information security, arranging managers and persons in charge of information management, and continuous education for employees.
However, in the event of information leakage due to an unforeseen situation, our business performance and financial status may be affected because of the damage to corporate value, loss of social credibility, compensation for customers and other parties affected by the leakage, and deterioration of market competitiveness.
⑧ About environmental issues such as climate change
There is an increasing demand for companies to disclose efforts relating to global warming and risks such as climate change as financial information. Our group promotes environmental management at the company level, and has declared its support for the “Task Force on Climate-related Financial Disclosures (TCFD).”
The performance of the industrial gas business, which has large indirect greenhouse gas emissions, may be affected if greenhouse gas emission regulations such as carbon tax imposition or an emission trading system are introduced in each country where we operate.
In addition, an increase in natural disasters due to climate change and a shortage of water resources due to droughts may affect our manufacturing bases. If the world average temperature rises, there is a risk that the power of the raw air compressor in the air separation unit will increase, causing the amount of electricity used to increase.
⑨ About influence of COVID-19
Our group’s main product, industrial gas, is used in the manufacturing processes of daily necessities, for the security of various factories, and at medical sites. Therefore, we are continuing our business activities in each region while working to prevent the infection of related parties so as not to become subject to business activity restrictions by national authorities.
However, as industrial gas shipments are expected to decrease due to a decline in the operating rate of customer factories, we are expecting our group’s business performance for the fiscal year ending March 2021 to show a 2.4% decrease in sales revenue and 12.7% decrease in operating profit compared to the previous consolidated fiscal year. However, this forecast is premised on there being the greatest impact on shipments in the first quarter of the fiscal year ending March 2021, gradually recovering from the second quarter, and almost normalizing after the third quarter.
Therefore, if the shipment of industrial gas decreases more than expected due to a second wave of COVID-19 infections, it may have a significant impact on the group’s business performance and financial status.