The following items are risks that may affect the business performance, stock price, financial condition, etc., of our Group. Please note that the risk items listed below do not cover all risks related to our business. Matters concerning the future stated in this section are based on the judgment of our Group as of the date of submission of the Annual Securities Report.

Risks related to overseas sales, exchange rate fluctuations, and taxes

The ratio of overseas sales of our Group in the two most recent consolidated fiscal years was: 96.1% in the previous consolidated fiscal year and 96.3% in the current consolidated fiscal year. Therefore, our Group’s business performance is affected by trends in overseas markets.

Our Group’s policy is to mitigate the risk of exchange rate fluctuations through hedging transactions using derivatives, but risk cannot be completely avoided. In addition, our Group’s business performance may be affected by revisions of unit sales prices, increases or decreases in orders, and international tax risks such as transfer pricing taxation.

High percentage of purchases from specific suppliers

In some cases, our Group is dependent on specific suppliers for raw materials such as base fabrics and resins. Our Group strives for stable procurement while maintaining a close relationship with these specific suppliers. However, our Group’s business performance may be affected in the event of a shortage of raw materials due to a surge in demand, natural disasters, quality problems, or a serious impediment to procurement due to a change in policy, bankruptcy, business failure, merger, etc., of a specific supplier, or in the event of a sharp rise in procurement prices.

Product development

Our Group is constantly required to develop new products through research and development and respond to customer demands. Therefore, regardless of fluctuations in our Group’s earnings, it is necessary to constantly invest in product development. On the other hand, our Group’s business performance may be affected if manufacturers in the Asian region begin to stably supply products of a similar quality to our Group’s products but at lower prices, rather than high-quality, high-value-added products that we develop and produce.

Risk of product defects

Our Group supplies the market with high performance, high quality polyurethane leather that has met the requirements of our quality control systems. However, group earnings could be affected if product defects were to arise that triggered large costs related to client compensation.

In addition, products for which we have contracted production out to our partner companies must conform to the same quality standards as our Group products. We must therefore ensure our technical guidance and inspection systems are sufficiently robust to mitigate such risks.

Occurrence of disasters

The occurrence of disasters such as earthquakes, typhoons, fires, wars, infectious disease, etc., in the environment surrounding our Group’s business, and damage to our Group or business partners, could hinder the business activities of our Group’s bases and affect our Group’s financial position and operating performance.

Production equipment

(a) Legal restrictions

Although there are no legal restrictions directly governing our Group’s products, there are legal regulations and government ordinances related to our facilities and production activities, including land subsistence monitoring, VOC (volatile organic compound) emissions, organic waste, fuel consumption controls governed by the Act on the Rational Use of Energy, and hazardous material handling. Any tightening of these regulations in the future could increase capital investment and related costs, which in turn could affect our Group’s financial position and business performance.

(b) Production facility operation

Our Group carries out manufacturing in accordance with production targets based on the status of raw materials procurement and demand trends conveyed by our sales division. We also prepare and implement a maintenance schedule to help ensure stable operations. Should equipment issues result in a suspension of production operations and interrupt outward supplies, our Group’s financial position and business performance could be affected.

(c) Power outages due to disasters, etc.

Our Group’s products are manufactured at two bases in Japan, Gyoda City in Saitama Prefecture and Ora-machi in Gunma Prefecture. For this reason, in the event of a disaster at the production facilities of each base, if manufacturing equipment is damaged or material suppliers suffer catastrophic damage due to power outages or other events, operations may be halted and production and shipping activities may be suspended. In addition, our production activities may be significantly affected in the event that restrictions are imposed on the use of electricity, gas, or other energy supplies, such as total volume restrictions due to future disasters.

(d) Securing of human resources and transfer of technology

Our Group’s products are manufactured and developed by employees who have specialized knowledge and experience in advanced technology. However, in the event of an outflow or inflow of human resources due to employment mobility for some reason, our Group may not be able to provide education and training for a certain period of time in order to pass on the technological skills, knowledge, and experience, and as a result, our Group’s business performance may be affected.

(e) Fixed asset investment

Our Group carries out sustained and planned investment in fixed assets as required to maintain and improve production activity, from plant buildings to production equipment and tools and fixtures. The investment is based on capital expenditure plans initially proposed by the production facilities and passed through appropriate consideration procedures during the budgeting process. Failure to keep to the fixed asset investment schedule, for any reason, would affect our production targets, and could consequently have an impact on our Group’s financial position and business performance.

Impairment of goodwill, etc.

Our Group has recorded a considerable amount of goodwill and trademark rights arising from corporate acquisitions in the consolidated statement of financial position. We believe that the goodwill and trademark rights appropriately reflect our future earning capacity. However, in the event that the valuation of goodwill and trademark rights falls below their book value due to changes in the business environment or other factors, our Group may record an impairment loss on such goodwill and trademark rights, which may affect our Group’s financial position and operating performance.

Inventory risk

Our Group places orders for raw materials and carries out planned production based on sales plans. We store products in consignment warehouses so that our products can be shipped according to customer needs in an effort to avoid shortages. However, in the event that there is a discrepancy between the sales plan and the actual results, and surplus or slow-moving inventory remains, our Group may incur valuation losses, etc., and as a result, this may affect our Group’s financial position and operating performance.

Dependence on specific customers

It can be assumed that our Group will record a certain scale of sales from specific customers, and that the degree of dependence on certain customers will increase. In this case, our Group’s business performance may be affected depending on trends in orders received from such customers.

The effect of price movement for raw materials, fuel, transportation costs, and other factors

Our Group acquires various raw materials, components, fuel, packaging materials, and other inputs from domestic and overseas suppliers for use in production. We aim to offset any negative impact from movement in prices for raw materials, fuel, and transportation services by raising production efficiency. However, these costs could rise further than anticipated owing to various factors, including: the impact on supply chains from rising geopolitical risks such as intensifying regional conflict, unforeseen natural disasters, and accidents; supply restrictions or production suspensions caused by deteriorating operating conditions at suppliers; and growth in market demand outstripping supply. In such a case, Group earnings could be affected. To mitigate this risk, our Group gathers market data from our suppliers on an ongoing basis, and works to secure stable supply, for example by front-loading orders, while also raising sales prices of certain products or arranging that clients bear a portion of the transportation costs.

Interest rate movement

We obtain funding for working capital and capital expenditure needs mainly through bank loans. A period of rising interest rates could weigh on our net financing income via higher interest payments, which could affect Group performance. To address this issue, we have minimized interest-rate risk by taking out interest rate swaps to hedge against long-term borrowing. In addition, if we were to breach the financial covenants in our loan agreements, we could be asked to pay a higher interest rate or forfeit profits for a period. This would potentially affect our Group borrowing costs and future access to financing.