Listed below are items that, among those relating to the review of operations and accounting, etc. stated in the Annual Securities Report, may significantly influence investor decisions. The following includes forward-looking statements determined on the filing date of the Annual Securities Report on June 28, 2012.
The electronics industry, the TDK Group’s field of operations, is highly susceptible to economic trends in the U.S., Europe, Asia, particularly China, and Japan, which are the main markets for end products. In addition, markets in these countries and regions are constantly exposed to various risk factors such as international issues and economic fluctuations. If changes beyond our expectations occur in such business environments, such changes could significantly affect business results.
The TDK Group conducts our business activities in countries around the globe. Sudden fluctuations in foreign currency exchange rates affect company transactions between regions and prices of our products and service costs at overseas bases, which consequently have effects on business results such as net sales as well as income and loss. Such fluctuations also give rise to conversion differences with respect to our investments in overseas assets and liabilities, which are converted into Japanese yen in our consolidated financial statements. Measures are taken against fluctuations in foreign currency exchange rates; however, significant fluctuations in foreign currency exchange rates beyond our expectations could have a significant adverse effect on business results.
The TDK Group’s operations extend to most countries across the globe. Overseas sales account for more than 80% of total sales on a consolidated basis.
In many of our target markets, the TDK Group may be exposed to international political risks such as war, terrorism and other events, economic risks such as fluctuations in currency exchange and trade imbalance and social risks including labor problems stemming from differences in cultures and customs and diseases. Such risks may give rise to changes of a far greater magnitude than we anticipate. There may be unknown risks in building relationships with trading partners due to differences in commercial and business customs. If elicit, these risks could reduce or halt manufacturing activities, force the stagnation of sales activities and have a significant adverse effect on business results.
Especially, the TDK Group has many manufacturing bases in China, which is a country in the midst of strong economic growth. The Group has also established a system for supplying both customers and local companies that have been setting up operations in China. If unexpected events occur in China due to political factors (such as changes in laws and regulations), economic factors (such as the continuity of high growth and status of infrastructure development such as electric power supply) and social environment, there could be a significant effect on business results.
The TDK Group supplies electronic components in a broad range of fields in an electronics industry where the competition is intensifying. These fields include information technology and communications devices such as digital home appliances, PCs and mobiles phones. Price is one of the main competitive factors differentiating us from other companies in the industry in which leading Japanese companies and Asian companies in South Korea and Taiwan have fueled intense price competition.
As downward pressure from the market on prices continues to intensify, in the event that the fall in prices far exceeds our expectations or becomes protracted, there could be a significant effect on business results.
In the TDK Group, the launch of new valuable products on a timely basis contributes to boosting our profitability. We therefore believe ongoing new product development is key to our survival. The Group believes that our ability to increase sales by developing appealing, innovative products has an important role to play in our growth and we place suitable importance on this in our management strategies.
However, it is extremely difficult to predict future demand in the rapidly changing electronics industry. The TDK Group may fail to continue to develop and supply in a timely manner attractive, new products with innovative technologies for this industry and our markets. In such a situation, sales and profits could decrease from a loss of sales opportunities resulting in loss of not only future markets, but also existing markets. This may have a significant adverse effect on business results and growth prospects.
The TDK Group conducts quality control of various products at domestic and overseas manufacturing bases in accordance with ISO (International Organization for Standardization) quality management standards (ISO 9001) and the strict standards required by customers in the remarkably technologically innovative electronics industry.
However, the TDK Group cannot be fully certain that defects in quality (including cases where products contained restricted substances) and recalls due to those defects will not occur. Should a recall or a product liability claim against us occur, it could result in recall costs or damage claims and lower sales. Furthermore, it is supposed that a defect in quality in one of the TDK Group’s name-bearing products would have a negative impact on our reputation and brand, and endanger the continued existence of the company. In such a way, a major quality problem could have a significant effect on business results.
The TDK Group’s growth depends to a great extent on patents, licenses and other intellectual property rights covering TDK’s products’ functions, designs and manufacturing processes (hereinafter “intellectual property rights”). We therefore work hard to manage and acquire intellectual property rights.
However, there are cases where our intellectual property rights cannot be fully protected in a particular region for reasons unique to that region. We may suffer damages resulting from the manufacture by a third party of similar products to our own with the unauthorized use of our intellectual property rights.
There may be cases where it is alleged that our products infringe on the intellectual property rights of third parties that may sue for damages as a result of such alleged infringement. This would require either settlement negotiations or legal processes. If our defenses against such claims are not accepted in such disputes, we may have to pay damages and royalties and suffer losses such as the loss of markets. Significant disputes over intellectual property rights could have a significant effect on business development and business results.
To prevail against fierce competition in the electronics industry, the TDK Group believes that it is necessary to retain and develop international personnel who possess advanced technical skills. We also strive to develop personnel with excellent management capabilities, such as those necessary for formulating management strategy and managing organizations, to a higher level.
However, the competition to recruit such international and skilled employees is intense. Moreover, in Japan, the change of employment environment progresses rapidly because of the falling birthrate, the aging population, and the decline of the workforce population. A similar change is occurring at our overseas bases in China and other countries.
These and other factors mean there is no guarantee that we will continue to be able to recruit and retain suitable employees. The inability to recruit and train personnel as planned could have a significant effect on business development, business results and growth prospects.
The TDK Group’s manufacturing system is premised on securing of raw materials and other supplies in adequate quality and quantity in a timely manner from multiple external suppliers. However, for major raw materials, we may rely on a limited number of difficult-to-replace suppliers. Because of this, there may be cases where supplies of raw materials and other products to us are interrupted by a disaster, an accident or some other event at a supplier, supply is suspended due to quality or other issues, or there is a shortage of supply due to a rapid increase in demand for finished products. If any of these situations becomes protracted, it could have a significant, adverse effect on production and prevent us from fulfilling our responsibilities to supply products to our customers. If the supply-demand balance in the market is disrupted, it may considerably increase costs of manufacturing through steep run-ups in the prices we pay for raw materials and rises in fuel prices, including oil, and there could be a significant effect on business results.
The TDK Group is subject to and required to comply with various regulations in Japan and other countries where we conduct business. These include approval for conducting business and making investments, the safety of electric and electronic products, national security between nations, and export/import-related, as well as commercial, antitrust, patent, product liability, environmental, consumer and taxation laws and regulations.
In the event that laws and regulations become more stringent in the future and our business development is significantly affected, we may incur various additional operating costs, and if we are unable to respond appropriately to these laws and regulations, we may be forced to partially withdraw from certain businesses or take other actions. In this way, the strengthening of government laws and regulations in their various forms could have a significant adverse effect on business results.
The TDK Group has financial assets and liabilities that are exposed to the risk of interest rate fluctuation. Measures are taken against interest rate fluctuation; however, fluctuation in interest rates beyond our expectations could affect the interest income, interest expense and the value of financial assets, which could have a significant effect on business results.
The TDK Group is developing on a global scale business to business transactions, whereby we supply electronic components to a variety of electronics manufacturers, personal computer makers and other customers.
Supplies to these customers are significantly affected by various factors that are beyond our control such as changes in each customer's business results and management strategies. In addition, a drop-off in purchasing demand due to poor business results at major customers, discounting pressure from customers due to changes in customers' purchasing plans and policies, unexpected termination of contracts or other occurrences could result in excess inventory or reduction in profit margins.
In the event that our customers go through reorganization caused by mergers and acquisitions effected by enterprises of different business types or by competitive enterprises domestically or abroad, this situation could have a significant effect on TDK’s sales. Particularly, if a particular customer on whom our primary sales depend was bought up by a competitor, orders by that customer could significantly decrease or all business transactions could be ceased.
Customers' business results, changes in management strategy and other factors could thus have a significant effect on business results.
The TDK Group has many production factories and research and development facilities in Japan and overseas.
These facilities and plants have taken disaster-protection and infection-control measures in preparation for unexpected natural disasters and infection outbreaks. However, significant damage could be incurred at these facilities and plants due to a force majeure event beyond business continuity planning (BCP) assumptions, such as a large earthquake, tsunami, typhoon, flood or volcanic eruption, or due to an outbreak of an unknown infectious disease such as a new strain of influenza. In the event of interruption to manufacturing, disruption of transportation routes, damage to or disconnection of information and communications infrastructure, impairment of central functions, or significant damage to our customers themselves due to the impact of such an occurrence, orders and supply could be affected for a long period of time. This situation could have a significant effect on business results.
With respect to specified hazardous chemical substances used in the products, the TDK Group is subject to various environmental laws and regulations with respect to industrial waste and emissions into the atmosphere and water from our production processes in Japan and overseas. Furthermore, from the perspective of global environmental conservation, as environmental regulations become more stringent in the future, our cost of compliance with such regulations could increase.
The TDK Group complies with environmental regulations prescribed by law and is engaged in a wide range of environmental conservation activities. If a situation occurs where we are forced to withdraw from certain business activities when the adoption of such laws and regulations exceeds our ability to respond or social trust in the TDK Group is lost due to our delay in responding to such adoption, it could have a significant effect on business results.
The TDK Group has conducted mergers and acquisitions (M&A) to develop business bodies by which to pursue higher competitiveness and profitability in the highly competitive electronics field. However, if the initially expected improvement in profitability through the benefits of synergy is not realized due to reasons such as the Group's management policies or management strategies failing to infiltrate the target company of such M&A activity, then such event could have a significant effect on business results, growth prospects and business development among others.
As part of its business operations, the TDK Group holds confidential information and personal information relating to customers and trading partners as well as confidential information of the Group and personal information. We have constructed a group-wide control system to prevent this information from being leaked to outside parties, falsified or otherwise manipulated. Moreover, we execute measures to ensure thorough management and IT security, improved facility security and employee training. However, there is still a risk that such information could be leaked or falsified through negligence, theft or other causes.
In such an event, the TDK Group could suffer a lowering of credibility and be liable for huge costs relating to the compensation payment to the parties suffering damage. It could also have a significant effect on business results and financial condition.
As a result of the Great East Japan Earthquake, which occurred in March 2011, the TDK Group suffered direct damages including degradation of facilities and buildings due to the earthquake and reductions in operations due to power outages. At present, all facilities that had received damage have been restored. Furthermore, at all domestic facilities, Business Continuity Plan (BCP) is being re-examined and measures against assumed summertime electricity restrictions are progressing. However, in the event that electricity restrictions are more stringent than predicted or large-scale blackouts occur, it could affect our production activities (lowered capacity utilization or halts in production) or sales activities (delayed recovery of orders, etc.).