The Group's operating results are influenced by the economic situation in the markets where we offer our product sales and services. The following risks may affect our operating results, share price and financial condition.
Forward-looking items in this document reflect our Group’s judgment as of June 21, 2018, the submission date of the Securities Report for the fiscal year ended March 31, 2018.
1. Economic situation and business trends
While our Group focuses on providing a product lineup characterized by the most advanced technology, as a manufacturer of general rolled aluminum products we respond broadly to a variety of demands. Although we have attempted to establish a base of business that is relatively impervious to the strength of specific areas of demand, our operating results are affected by interruptions or reductions in product demand due to climatic factors such as unusually cool summers/warm winters in the regions where we sell, as well as to economic recession in Japan and the rest of the world.
2. Material procurement
Our Group's procurement of certain auxiliary materials, such as magnesium and silicon, is over concentrated in China, mainly due to highly advantageous production costs. Also, aluminum ingots are our main raw material, and the supply of some of the high-purity ingots we use for special purposes is limited due to factors faced by the producers themselves, such as limitations on the part of their suppliers, quality, etc. This can cause the suppliers’ costs to rise and supply constraints to occur.
3. Fluctuations in material and fuel prices
The prices of aluminum and copper ingots—the main raw materials consumed by the Group—are determined on the commodities markets and can fluctuate beyond expectations due to global conditions and market trends. Selling prices basically consist of "primary ingot price + processing fees," and while according to rules decided in advance, we anticipate being able to pass on most costs resulting from spot market fluctuation to customers. However, in the event of sudden fluctuations, depending on the aforementioned rules and amounts purchased at that time, not all of these costs can be passed on in the short term. Additionally, there are a few customers to whom the above fluctuation rules do not apply. So price adjustments may not occur on time. At the same time, rises in the price of the metal materials that make up alloy content, as well as fuel price increases, not to mention higher prices for the various secondary materials used in making alloys, result in higher costs to us of fuel and electricity inputs, as well as increased processing costs. This can have an adverse effect on Group performance and financial condition.
4. Exchange rate fluctuations
Currently, the elements of our business affected by exchange rates include the purchase of materials, mainly aluminum and copper ingots and export sales. Our Group seeks to make sure the effect on operating results of fluctuations in the forex markets is minor by entering into forex futures contracts, but greater-than-expected market fluctuations that exceed our efforts to minimize their impact on our operating performance may have an adverse effect on our Group’s operating results.
5. Interest rate risk
Our interest-bearing that is at a variable rate of interest is covered by interest swaps taken in response to interest rate fluctuations, so the majority of our interest-bearing debt is at a fixed rate of interest, but it is still impossible to avoid rate fluctuation risk entirely. Interest rate fluctuations may have an adverse effect on our Group’s operating results.
6. Infringement of intellectual property and other third-party rights
Our Group strives to avoid infringing on third-party intellectual property or other rights in the course of developing our products and software, manufacturing, using or selling products, or any of our other business activities. Our efforts include preliminary investigation, and when necessary we also employ means such as the purchase of usage rights. Nonetheless, there is no guaranty that disputes among third parties, such as lawsuits claiming infringement of third-party intellectual property or other rights, will not arise. Infringement of third-party rights may cause cessation of production and sales, as well as the payment of large damages or settlement monies. When such is unavoidable there is the possibility of an adverse effect on our Group’s performance and financial condition.
7. Product defects
Our Group provides products and services in accordance with the regulations and standards of Japan and other countries as well as the quality control standards we have developed over our many years in operation. Nonetheless, there is no guaranty that all of our products and services will be defect-free, or that we will not be forced to pay compensation for losses resulting from defects in the future. Defects in products such as drink cans and auto parts in particular may result in large additional costs. While we hold product liability insurance covering foreseeable risk, there is no guaranty that it will be sufficient to cover the final amount of damages. Product defects associated with large-scale compensation for loss or product liability may result in huge costs and have a serious effect on Group valuation, and may have an adverse effect on our Group’s performance and financial condition.
8. Asset impairment
Marked decreases in market prices for assets held by our Group as well decreases in the earning capacity produced from our assets may occur as a result of a worsening of the market situation or business environment. Such cases may result in impairment losses for those assets.
9. Response to environmental issues
Our Group strives to use materials and maintain production environments in compliance with the environmental regulations of every area in which we operate, both within and outside Japan. Nonetheless, in certain cases we are compelled to bear costs associated with new cleanup or removal measures, such as dealing with soil contamination or asbestos removal resulting from past manufacturing practices. In such cases, we make improving the environment in such areas our priority. Also, waste and byproducts are produced in the course of production. Our Group handles these items properly in compliance with all laws and regulations, but the strengthening of environmental laws may have an adverse effect on performance.
10. Effect of accidents on operation
We conduct high-temperature, high-pressure operations using our main equipment, such as casting furnaces and hardening furnaces. We take all possible precautions to prevent accidents during the use of such equipment, but a serious accident could impair production and may have an adverse effect on performance.
11. Changes in overseas political environments
The Furukawa-Sky Group carefully examines the operating environment and the possibility for business continuity when developing business in overseas countries. Nonetheless, shifts in political direction may cause changes in exchange rate policy and tax incentives, as well as operational problems caused by social unrest. The manifestation of such unforeseeable risks may have a serious effect on the performance of our subsidiaries, as well as on the Group’s investment in them.
12. Fluctuation in prices of investment securities
Fluctuations in the prices of investment securities accompanying changes in the prices of listed stocks may have an adverse effect on our Group’s performance.
13. Natural disaster
A large-scale disaster such as an earthquake or typhoon may cause damage to Group’s facilities, equipment, or personnel, as well as similarly cause damage at affiliate companies, and depending upon the severity of that damage may have a serious adverse effect on our Group’s performance.
The occurrence of phenomena other than those listed above which are currently unforeseeable may have an adverse effect on our Group's performance and financial condition.