The following matters may have a significant impact on investor judgment in matters relating to the business and accounting status written in the Securities Report. It should be noted that matters in the manuscript concerning the future were judged by the company group (the company and its consolidated subsidiaries) as of the end of the current consolidated fiscal year (March 31, 2021).
(1) Matters related to management strategy and business
① About overseas expansion
The company group included globalization and mergers and acquisitions (M&As) as priority strategies in Medium-term Management Plan Ortus Stage 2 up to the fiscal year ending March 2021, is actively expanding on-site business overseas and undertaking M&As, and is currently expanding its business in the United States, Europe, Asia and Oceania. When undertaking capital investment and M&As, although the company group scrutinizes market trends, customer needs, contracts, etc. in advance, its business activities, business results and financial position may be affected depending on market trends, politics, economics, customs, religion, terrorism, large-scale disasters and other factors in these countries and/or regions.
② About capital investment
The company group has industrial gas manufacturing bases in Japan and overseas, and installs air separation devices, etc. at the customer's premises or on adjacent land for large customers, and supplies gas (on-site plant method) via piping. The profits of the company group may be affected due to the decrease in the operating rate of its main customers such as steel, chemical, semiconductor, automobile, and other manufacturers due to changes in industrial structures and demand trends, consolidation of production bases, overseas relocation, etc. The on-site plant method has the merit of securing a stable supply to customers and securing a strong earnings base; however, if all or a part of the equipment is no longer needed and cannot be covered by compensation under the contract, business performance may be affected due to equipment abandonment loss, etc.
③ About manufacturing costs
Among the manufacturing costs incurred in manufacturing oxygen, nitrogen and argon, the company group’s main products, electrical costs account for a large proportion, and may be increase significantly due to factors such as increasing crude oil and LNG prices and exchange rate fluctuations, affecting the group’s business performance and financial position if it cannot be absorbed in the selling price.
Also, mainly in Europe, the electrical energy market is heavily affected by transition to renewable energy. The impact of this transition on manufacturing costs is difficult to predict, and may affect the group’s business performance and financial position.
④ About laws and regulations
Although the company group is expanding its business in the United States, Europe, Asia and Oceania, if there are unexpected legislative changes, enactment of new laws and/or regulations, or administrative guidance in the country into which the group is expanding, it may affect business performance due to handling costs.
In addition, although the company group conducts environmentally friendly business activities at home and abroad, when regulations are tightened due to the revision of environment-related laws and regulations, it may affect business performance due to increased response costs. Also, the company group exports products and services that are subject to laws and regulations that govern exports in each country. When the export restrictions of a given country are tightened due to changes in international affairs, the group may be required to reduce exports of goods and services to that country. If this is the case, it may affect business performance due to the reduction in exports.
Further, the company group, in the execution of its business both at home and abroad, is at risk of being investigated by regulatory bodies in charge of not only laws and regulations governing the industrial gas business, but also laws and regulations relating to competition law, environmental protection, export regulations, etc., and when a decision is made against the company group, such as an order to pay a fine or fines, an order to suspend business, revocation of permits, or other punitive measures as a result of an investigation, this can have a significant impact on the company group’s business development, business results, financial position and credit.
⑤ About securing human resources
Talented people in each field of business, including production, R&D, marketing, sales, logistics, management, etc., are essential to the achievement of the company group’s goals, and securing personnel with the qualifications and skills required by the relevant legislation is essential to conducting business operations. Also, when expanding overseas, global personnel responsible for the management and business operations of local subsidiaries are essential, but when securing such personnel does not proceed as planned due to changes in the employment situation and the supply and demand of labor, it may affect the business activities and business results of the company group.
(2) Matters related to technology and security
① About technological development
The company group actively conducts technological development activities to further expand its business, but there are risks associated with the development of new products and technologies. For example, when a new product or technology takes time to commercialize or put into operation, the timing of its market launch may be delayed as a result of major changes in related market conditions and the decline of competitiveness of the company group’s products due to the advent of new technology, new products, and alternative products produced by other companies. Also, in industry-academia-government collaborations and joint company development projects, when cooperation does not progress well, the company group may not be able to obtain the intended results.
② About intellectual property
Although the company group is promoting the acquisition of necessary intellectual property rights based on business development through proprietary technology, there is no guarantee that it will be sufficient to protect the technology and products of the company group. There is also the possibility of illegal use by third parties that infringes the intellectual property rights of the company group.
Meanwhile, regarding fields in which the company group is developing business, the company group strives to prevent infringement by continuously investigating and monitoring the intellectual property rights of third parties, avoiding the use of valid third parties’ intellectual property rights by developing alternative technologies, or taking measures to avoid such property rights infringement and measures such as obtaining right to use from third parties, with the result that there are very few cases in which proceedings have been filed against the company group for infringement of the intellectual property rights of a third party.
However, there is no guarantee that the company group will not infringe the intellectual property rights of other companies in the future, and when a proceeding is filed, it may affect business performance.
③ About product safety and security
The company group is engaged in the business of manufacturing and selling high pressure gases and equipment relating thereto, and although it appropriately manages product-related risks by carrying out thorough quality control, record keeping, and safety inspections prior to the sale of these products, there is no guarantee that all products will be free from faults, quality defects and malfunctions. In the unlikely event that a product is defective, is of poor quality, or malfunctions, the business performance and financial position of the company group may be affected due to a decline in customer trust and the burden of compensation for damages.
In addition to the dangers of high pressurization and cryogenic temperatures, high-pressure gas manufactured and sold by the company group contains toxic and flammable gases for products related to liquid crystal and semiconductor production etc. Regarding the manufacture and supply of these products, the company group provides application-type education for employees to handle such products in addition to stratified training. In particular, in an effort to foster a safe culture, danger experience training is included at the technical academy, and thorough education aimed not only at equipment accidents but also the eradication of occupational accidents, and the company group is doing its best to ensure safety and security. However, it is impossible to eliminate the danger of the gas itself. In the event of any accidental and significant damage to personnel or equipment due to leakage, ignition, explosion, etc., business operations, operating results and the company group’s financial position may be affected due to suspension of operations, etc.
(3) Matters related to finance
① About exchange rate fluctuations
The company group procures raw materials from overseas and exports products related to special gases and equipment. Also, the company group is importing products from overseas such as Thermos products. Since there are transactions that are denominated in foreign currencies in connection with such transactions, although the company group is trying to avoid the risk of exchange rate fluctuations through exchange contracts, etc., sudden exchange fluctuations may affect business performance when the company group is unable to cope with them. Also, since the foreign currency financial statements of subsidiaries consolidated overseas are converted into yen when being prepared for consolidated financial statements, the business performance and financial position of the company group may be affected if exchange rates fluctuate significantly beyond expectations.
② About fluctuations in interest rates
The company group conducts aggressive capital investment and M&As based on the priority strategies set forth in the Medium-term Management Plan, and the funds to do so are procured mainly by borrowing from financial institutions and the sale of corporate bonds. Procurement for the acquisition of the European business arm of US Praxair, Inc., carried out during the fiscal year ending March, 2019, was mainly conducted by floating rate borrowing and hybrid financing, changed from a fixed interest rate to a floating interest rate after a certain number of years, and this may affect the business performance and financial position of the company group, depending on future interest rate fluctuations.
③ About capital ties with Mitsubishi Chemical Holdings
Mitsubishi Chemical Holdings Corporation owns 50.59% of the total number of issued shares of the company group. Also, the Corporation agreed to maintain this shareholding ratio with the company group in a letter of understanding with the goal of further strengthening the capital and business alliance concluded on May 13, 2014 and improving corporate value. The company group recognizes that there is no policy for increasing or decreasing the above holding ratio under the current circumstances.
However, if changes occur in the Corporation’s capital relationship with the company group, it may have a significant impact on the business operations, operating results and financial position of the company group.
④ About goodwill and intangible assets
The company group records goodwill and intangible assets (hereinafter termed “goodwill, etc.”) in the Consolidated Statement of Financial Position with the acquisition of companies. There is a possibility that new goodwill will be recorded when the company group acquires new companies in the future. The company group conducts and evaluates impairment tests every term for goodwill and intangible assets with indeterminable life expectancies. In a case where the growth rate of a target business drops significantly due to a significant deterioration in the economy, and the discount rate used to calculate fair value and utility value after the deduction of disposal costs due to rising market interest rates, etc. rises significantly, the recoverable amount decreases significantly and an impairment loss occurs, which may affect the business performance and financial position of the company group.
① About large-scale natural disasters
When a large-scale natural disaster such as an earthquake occurs, the company group’s business bases may be severely damaged. Although domestic manufacturing bases with a particularly high possibility of earthquake occurrence are dispersed all over the country, if a large-scale manufacturing base is damaged, a significant decline in the labor force and production capacity, and the incurrence of significant restoration costs, etc. become unavoidable, and may affect business performance. Also, when other unforeseen circumstances, including human factors (the occurrence of serious accidents, large-scale spread of infectious diseases, etc.) occur, they may affect the business activities and business results of the company group. In preparing for such emergencies, the company group established an information gathering system based on a Business Continuity Plan (BCP), proceeding with actions to protect the lives and safety of executives, officers and employees, and continue the core businesses and make the necessary effort recover as quickly as possible.
② About information management
The company group has important information about sales and technology, customer information and other personal information of related parties, etc.
The company group strives to reduce the risk of information leakage of business information, including this important and personal information, through cloud and server management, and the promotion of crime prevention and theft measures at its business bases. Also, the company group is strengthening its management system through the development of rules and standards related to information security, appointment of personnel in charge of and involved in information management, and continuous training for employees.
However, when information leaks occur due to unforeseen circumstances, the business performance and financial position of the company group may be affected due to damage to its corporate value, loss of social credibility, compensation for customers and other related parties affected by the leak, and its decline in competitiveness in the market, etc.
③ About environmental issues such as climate change
There is an increasing demand for disclosure of the efforts taken on environmental issues such as global warming and risks such as climate change as part of corporate financial information. The company group promotes environmental management across all companies, and has expressed its support for the “Task Force on Climate-related Financial Information Disclosure (TCFD)” proposal. When greenhouse gas emission regulations, represented by the imposition of carbon taxes and emissions trading systems, are introduced in a country where the company group is conducting business, the operating results of the industrial gas business may be affected by high indirect greenhouse gas emissions.
Also, the increase in natural disasters due to climate change, and insufficient water resources due to drought etc., may affect the company group's manufacturing bases. If the average temperature in the world rises, the power of raw air compressors in air separation will increase, incurring the risk of increased power usage.
④ About the effects of the COVID-19 pandemic
Since its main products, industrial gases, are used in the medical field as well as manufacturing processes for daily necessities and safety and security measures for various types of factories, industrial gas is not assigned as a target of restrictions on business activities, and the group has continued its business activities while working to prevent the spread of the infection to related parties, including manufacturing and logistics workers. In future, the business environment is expected to improve as vaccinations in each country progress, but the world economy will slow down again due to the spread of variants for which the vaccine is not effective, and when industrial gas shipments decrease, it may have a significant impact on the business results and financial status of the company group.