Business Risks

The major risks recognized by the management to have a significant impact on our corporate value, financial condition, results of operations, and cash flow of our group (referred to collectively as "results of operations, etc." in the remainder of this document) are as described below.
Matters related to the future appearing in this text have been judged as of the last day of the current consolidated fiscal year, and may be influenced by the economic conditions in and out of Japan, and the risks of businesses, etc. are not limited to the ones described below.

1.Risks related to business activities

Changes in the Business Environment

Since its foundation, our group has contributed to monozukuri in the world by supplying products such as coating equipment and air compressors, as well as services incidental to them, to the markets. As a result, the overseas sales ratio has become predominant, so that, while the flows of human resources, products and services, and funds diversify, the rate at which we are affected by the rapidly changing business environment is ever increasing.
For this reason, if we stay with the existing markets, products, business models, and so on, we may not be able to achieve sustained growth due to, for example, decreasing demand for current products attributable to market structure changes. This may have a significant impact on the results of operations, etc. of our group.In expanding global businesses, the sales, material procurement, and other transactions in our group include foreign currency dominated transactions, so that any unexpected, sudden currency exchange fluctuations can also affect the results of operations, etc. of our group.
To prevent such a risk, we need to develop new businesses and create pillar businesses, not to speak of continuing constant effort to improve quality in our existing business, as well as the development of products leading to solving social issues through monozukuri from a global viewpoint and, to that end, we will cultivate a corporate culture to dauntlessly take on a challenge with no fear of failure and, at the same time, promote changes of the mindset and behavior of all employees to collaborate with various outside companies. Our group will aim to further reinforce inter-group company exchanges and information collection, endeavor to determine market needs, and identify the importance of the needs in each country and market first and then create a system and establish management strategies so that we can accommodate changes in business environment in a flexible and prompt manner. In addition, to secure a system for supplying products stably even if a demand increase or a logistics cost increase occurs, we endeavor to reinforce the supply chain by, for example, purchasing from multiple suppliers and reviewing the logistics network.
If we ever get into a situation where we cannot achieve sustained growth, adversely affecting our results of operations, etc., we will immediately discuss through the board of directors and the management meeting, for example, to turn around the business strategy.

Product Quality

If any product not meeting the quality standard is supplied to the market, with any defect being overlooked in the procurement, processing, assembly, etc. of products, causing damage attributable to the defect, the loss arising from compensation, the handling of complaints, product recovery, product replacement, etc. will cost a great deal of money and, at the same time, we may lose customers' trust on products, which may have a significant adverse impact on the results of operations, etc. of our group.
Thus, in order to prevent such situations from happening, our group complies with the necessary rules, such as raw material standards and product standards, and the quality assurance division intervenes by taking an objective view right from the initial stages of product development to eliminate potential issues. Furthermore, by preparing an appropriate quality control system on production sites not only in Japan but also overseas by the use of, for example, techniques for promoting ISO9001, our group ensures product quality that meets the market needs and quality standards in the respective countries.
If any contingency occurs, this will be immediately reported to the board of directors and the management meeting of our company and, at the same time, the quality assurance division will promptly take the necessary measures including recalls.

Business expansion with M&As

In order to accelerate the reinforcement of our business foundation and ensure sustained growth, our group actively promotes comprehensive business tie-ups with partners, including capital tie-ups with, and acquisitions of, companies that we recognize are necessary.
If we lose customers' trust in a specific sales area due to a failure to smoothly proceed with the sharing of the future direction or we fail to obtain the initially anticipated effect or benefit, resulting in the poor results of operations of the target company or if we fail to maintain the expected profitability, causing the real value to decrease remarkably, this may have a significant impact on the results of operations, etc. of our group.
In M&As, therefore, we have clarified the items to confirm, and we conduct M&As after going through the advance, careful examination of risks and returns, as well as the financial conditions, contractual relationships, etc. of the target company, and due diligence to judge whether sufficient synergetic effect can be obtained. In addition, we conduct PMI appropriately and ensure that the management and the business division in charge provide management assistance in an effort to prevent such risks from occurring.
If such a risk occurs for an inevitable reason, we will promptly proceed with management decisions by, for example, deciding whether the contract can be continued and determining losses.

Damage to corporate value due to an act of hostile large-scale purchase of company shares

Our group, as a listed company, upholds the free trade of company shares. We, therefore, do not flatly deny acts of large-scale purchase of company shares as long as they benefit corporate value and the common interests of shareholders. Nevertheless, large-scale purchases of shares include quite a few that could damage corporate value and the common interest of shareholders remarkably judging from their purposes, etc. and that could practically compel shareholders to sell their shares. In the event of such an act, this could have a significant impact on the results of operations, etc. of our group and greatly damage sustainable growth due to business split and transfer. For this reason, we have introduced a "policy for dealing with acts of large-scale purchase of company shares (takeover defense measures)" for the purpose of protecting corporate value and the common interests of shareholders and securing the time necessary for shareholders to judge appropriately whether to accept the purchase offer. This policy is intended to secure the common interests of shareholders under the conditions that the policy is placed before an ordinary general shareholders' meeting and approved every year.

2.Risks related to human resources

Securing human resources

Our group recognizes that it is vital to secure and train human resources that have diverse personalities and abilities to achieve sustained growth and accommodate market environment changes. In Japan, therefore, in line with the principle of hiring all employees as full-time employees, our group conducts recruiting activities throughout the year.
However, if we continue to stick to our existing hiring strategies, as well as the training policy and the personnel evaluation system for hired human resources, without making any improvements based on changes in business environment and so on, we may not be able to secure sufficient human resources toward future sustained growth, stagnating business activities and making sustained growth impossible.
For this reason, under legal labor management, we will focus on the development of human resources for placing the right people at the right place, the preparation of diversity management with the creation of a personnel evaluation system from a global viewpoint, intensification of hiring multinational human resources, and education of evaluators, among others. In addition, we will work on the effective use of labor force to accelerate operational reforms by promoting the automation and digitization of various business operations.

Labor Issues

A majority of the employees of our group are locally hired people on sites overseas.
Under the circumstances in which a way of working suitable for the social situation and labor environment in each country is demanded, labor issues regarding working conditions, etc. may be raised between us and organizations in and out of the country, such as labor unions. If any labor dispute occurs, and cannot be settled promptly, the stability and continuity of business operations will be impaired. If the dispute becomes serious, this will have a significant impact on the supply of products and, at the same time, we may lose the trust of our customers, thereby adversely affecting results of operations, etc.
Thus, through the promotion of the spread of "ANEST IWATA Corporate Philosophy", with our corporate policy, "Makotono kokoro" (Trustworthy & Sincere), at the core, we improve our employees' sense of belonging to our group and, at the same time, grant powers to the representatives on overseas sites in accordance with the employment conditions and evaluation system suited for the systems and realities in their respective countries, based on the administrative authority of the representatives on overseas sites, thereby endeavoring to prevent dissatisfaction with the working conditions and the labor environment.

3.Risks related to IT

IT investment

We consider that to steadily promote the reinforcement of competitiveness in global expansion, it is vital to change our business model, develop high-value-added products, and improve business efficiency by introducing IT, in which constant innovations are under way.
If the execution of an IT strategy stagnates because of the loss of knowledge or now-how about IT from the company due to a contingency or if there occurs a delay in the development of a product that matches the latest IT trend, this may adversely affect results of operations, etc. because of declining competition in the market or impaired management efficiency.
Thus, in combination with a management plan, our group formulates mid- to long-term IT strategies and regards IT investment as a key element for driving corporate growth and, at the same time, continually verifies the contribution to corporate growth.
If such a risk occurs, we will start active personnel employment, as well as partnerships with new partner companies and, at the same time, rebuild our management foundation by depreciating obsolete IT assets.

Information security

To promote business activities in a stable and sustainable manner, the importance of maintaining the safety and reliability of an information system is ever increasing. We exercise strict control over confidential information related to technology development and sales that are acquired in the process of expanding business activities, as well as personal information.
If information leakage, falsification, or a system fault occurs due to a natural disaster, unexpected cyberattack, unauthorized access attributable to the entry of a computer virus, etc. or if information is leaked by an employee intentionally or negligently and such information is misused, this may adversely affect the results of operations, etc. because we need to bear liability for compensation.
Thus, our group prepares an appropriate information security system to take necessary and sufficient security measures such as acquiring appropriate backups of important data and, at the same time, conducts education for employees.
If such a risk occurs, we will create a system to promptly determine the cause and the details and take appropriate measures and, at the same time, disclose information about the damage, if necessary, thereby endeavoring to minimize secondary damage and restore trust.

4. Risks related to laws and regulations, etc.

Conformance to regulations and standards about the earth's environment and climate change

Amid increasing global awareness of the earth's environment and climate change, Japan and other countries have a tendency to establish new environmental laws and regulations and tighten existing ones. If there occurs a delay in complying with laws and regulations or putting products that satisfy such laws and regulations, this may cause the business activities to be restricted and revenue opportunities to be lost, adversely affecting the business and the results of operation of our group.
The details of such regulations differ depending on the country or area, and we proceed with the preparation of systems by, for example, transferring the necessary functions, so that the local subsidiaries located in each country can collect information and meet regulations. If, for example, laws and regulations are revised unexpectedly and are further tightened in the future, we will judge whether to further invest in the relevant items or withdraw from them by considering whether meeting the laws and regulations is economically reasonable.
We also recognize the importance of information disclosure based on the framework of the TCFD (Task Force on Climate-related Financial Disclosures), and will make the necessary efforts, mainly at the Sustainability and CSR Committee, so as to implement appropriate information disclosure.

Fraudulent acts by violating laws and regulations, etc.

In recent years, an increasing number of misconduct cases, etc. by companies have been reported. If such an act should be committed in our group, this may have a short-term impact on the results of operations, etc. due to compensation. Not only that, but we may get into a situation in which the corporate value of our group worsens over an extended period of time or the existence of our group as companies is threatened because, for example, the sales activities and the recruitment activities are hindered by remarkable damage to the trust in our group.
For this reason, our group creates systems and structures for ensuring that officers and employees commit no fraudulent acts and promotes healthy management assistance for group companies and, at the same time, establishes a whistle-blowing system including overseas subsidiaries and creates a monitoring system for conducting audits with audit & supervisory committee members and the internal audit division, thereby endeavoring to prevent acts of violating laws and regulations, etc.
We have a system in place whereby if such an incident occurs, this can be promptly reported to our board of directors and we can take measures such as researching with third parties, disclosing facts, and punishing the relevant people properly, develop recurrence prevention measures, and promptly disclose them.

Intelligent property

Our group aims to become a development-oriented company full of vigor and novelty that is capable of providing high-performance, high-quality products and services to customers all over the world. As a result, we run the risk of having a third party imitate any of the products, technologies, business models, and so on that our group reserves at present or will develop in the future or of infringing on any of the intelligent property rights, patent rights, and trademark rights of third parties unintentionally. In that case, results of operations, etc. of our group may be adversely affected because, for example, costs are incurred due to damage compensation or a lawsuit or we are unable to use the technology itself or are obliged to use it in an unfavorable manner.
For this reason, our group will acquire intelligent property rights, patent rights, and trademark rights related to the functions and designs of products and reinforce their management and, at the same time, create a system whereby our group is not impacted by infringement or minimizes the impact, while receiving cooperation from outside organizations concerned.

International tax affairs

Our group possesses subsidiaries in major areas in the world, expanding business activities globally. In inter-group company transactions, we take meticulous care to the risks of international tax affairs by, for example, endeavoring to adhere to transfer price taxation and other regulations to set appropriate transaction prices. If any finding is received from tax authorities due to a difference of view, this will incur additional taxes, etc. and may adversely affect the results of operations, etc. of our group.
Our group will endeavor to prevent differences of view from tax authorities by understanding law correctly, while focusing on the developments of international financial affairs and receiving cooperation from outside organizations.

Accounting of impairment loss, etc. of non-current assets

Appropriate accounting of impairment loss, etc. of non-current assets requires a business plan that appropriately estimates a future cash flow. As mentioned in 3) of (1), our group makes investment in subsidiaries, etc. actively, including M&As. To make the following accounting decisions, in particular, an appropriate business plan for each subsidiary, etc. is necessary.
・Judgment on the impairment loss on shares, etc. of affiliates in our individual financial statements
・Judgment on the impairment loss on non-current assets of subsidiaries, etc., which is used as basic data for consolidated financial statements
・Calculation of the years of depreciation when posting goodwill in consolidated financial statements and judgment on impairment loss
We understand that if the business plan at the points of these judgments is not an appropriate one, we run the risk of losing the trust in us remarkably because that means that inappropriate accounting has been performed as a consequence.
For this reason, in establishing the business plan for each subsidiary, etc., the business division and account division of us, the supervising company, are actively involved. Such business plans are reported to the board of directors, of which independent directors, who are knowledgeable about management and accounting, account for a majority, to seek their guidance and supervision. With such transparent procedures, the appropriateness of the business plans is ensured.

5.Other risks

Novel coronavirus

As for coronavirus disease 2019 (Covid-19), which has spread throughout the world since the end of 2019 up to the present, if any of our customers and group employees is confirmed infected, this may hinder the business activities because of, for example, the business suspension or temporary closure of those concerned, adversely affecting the results of operations, etc. of our group.
Our group makes it a top priority to ensure the safety of our customers and employees and endeavors to prevent infection in accordance with administrative guidelines and, at the same time, promotes remote business meetings using IT tools, expands home working (teleworking), and thoroughly adheres to staggered commuting. At the same time, to minimum the impact on the production system, we continue to take measures such as expanding inventory and decreasing the dependence on specific suppliers.
If the situation where the global prevalence of the virus is not curbed is prolonged, this could have a severe impact on the corporate value and the results of operations, etc. of our group.
Thus, we will hold a crisis management committee with the president and chief executive officer as the chairperson to optimize the BCP (business continuity plan), and we will take the necessary measures by promptly and appropriately determining the management environment surrounding our group.

Unexpected events

Our group expands business operations to various countries in the world. If, in any of these countries and areas, an unpredictable political or economic change is made, a geopolitical risk becomes tangible resulting in an act of war or terror due to the rise of hegemony, an infectious disease spreads, or a natural disaster such as a large-scale earthquake and typhoon occurs, this may have an immense impact on the supply of products to various parts of the world because of damaged offices, the stagnation of raw material procurement and logistics, and so on. If such a situation is prolonged or if the measures for the increasing possibility of such a situation are not sufficient, this will increase the possibility of having a significant adverse impact on the results of operations, etc. of our group because of the impairment of non-current assets, decreased profitability, etc.
Our group makes a BCP and, at the same time, endeavors to make our business activities resilient so that we can establish a supply system where the impact of the above events can be minimized by, for example, distributing production functions and seeking a possibility of inter-group company product procurement.