Set out below are risks associated with the AGC Group's operations and other risks that may materially influence the decisions of investors to invest in the AGC Group. Forward-looking statements in this section are based on information available as of March 30, 2022.
This section does not include all possible risks relating to the AGC Group; there may exist additional risks not stated below. Any such risks are also likely to influence investors' decisions.
＜Short- to medium-term risks＞ 1. Economic conditions in markets in which the AGC Group’s products are sold
Demand for the AGC Group's products is impacted by trends in industries such as construction and building materials, automobiles, electronics, displays, and chemicals. The AGC Group's products are supplied throughout the world, for example in Asia, the United States and Europe, as well as in Japan, and sales are therefore influenced by local economic conditions. Although the AGC Group is working hard to build an earnings structure that is resilient to changes in the business environment by improving productivity and reducing fixed and variable costs, through falling sales volumes and prices, its performance and financial position are susceptible to declining demand from the industries mentioned as well as economic downturns in the regions where its products are primarily sold.
The situation in each segment is as follows. 1) Glass In the Glass segment, the AGC Group has established development and production bases in Japan/Asia, Europe and the Americas and supplies products throughout the world. Demand for architectural glass is correlated with construction investment, which varies with economic conditions in each region and country. Accordingly, earnings in this business could be impacted by fluctuations in demand for architectural glass. In addition, demand for automotive glass is influenced by automobile sales volume, which is correlated with factors such as economic fluctuations in each region and country. Accordingly, earnings in this business could be impacted by fluctuations in demand for automotive glass. 2) Electronics Products in the Display Business are used in LCD TVs, smartphones, tablets, and other devices. In this business, it is expected that there will be changes in market trends and fluctuations in the market share of customers. The AGC Group has been working to expand sales based on its customer portfolio. Nonetheless, customer and market trends could have an impact on the profitability of the display business. In the electronic materials business, the AGC Group's main customers are companies involved in industries such as semiconductors and optoelectronics. The performance of these customers depends on market trends in areas such as semiconductors, smartphones, communications infrastructure and industrial equipment. For this reason, earnings in the electronic materials business could be influenced by the impact of these trends. 3) Chemicals In chlor-alkali products, the AGC Group has established production bases primarily in Japan and Southeast Asia, where progress is being made on infrastructure development, and is expanding its business. Demand for these products is mainly correlated with economic growth rates and capacity utilization in core industries in each region and country. Accordingly, earnings in this business could be impacted by fluctuations in demand for chlor-alkali products. In the fluorochemicals & specialty business, the AGC Group's main customers are companies involved in transportation equipment, semiconductor and construction industries. Accordingly, earnings in the fluorochemicals & specialty business could be impacted by market trends in these industries. In the life science business, the AGC Group is greatly impacted by business conditions and the development status of new products in the pharmaceuticals and agrochemicals industries. Accordingly, earnings in the life science business could be impacted by these trends.
2. Expansion of overseas operations
The AGC Group has substantial overseas operations, including exports of products and manufacturing abroad. The risks associated with operating abroad include deteriorating political and economic conditions, the imposition of regulations on imports and foreign investments, unexpected changes in laws, the worsening of public security, economic sanctions between countries, and the occurrence of terrorist attacks and war. The AGC Group is closely monitoring the political and economic situation and the regulatory trends in each country and region, and is striving to take actions according to the situation. However, the occurrence of such events could hinder the business activities of the AGC Group overseas and may significantly impact the AGC Group's performance and financial position.
3. Competitive edge and development and commercialization of new technologies and products
In every field in which the AGC Group operates, there are competitors supplying products similar to those of the AGC Group. Accordingly, to maintain its competitive edge, the AGC Group is striving to identify the needs of customers, and to develop and commercialize new technologies and products. However, should the AGC Group fail to appropriately respond to technical changes and customer needs or take too long to develop and commercialize new technologies and products, growth could be hampered and profitability could decline. This may significantly impact the AGC Group's performance and financial position.
The AGC Group strives to carry out preventive maintenance on all plant equipment and facilities, and it is working to strengthen priorities such as systems for safety review and maintenance and repair of equipment and facilities. If there are any serious production disruptions, this could have a significant impact on the AGC Group's performance and financial position.
5. Procurement of production materials and resources
If there are fluctuations in the prices of electricity, natural gas, heavy oil or raw materials used in the AGC Group's production activities, the AGC Group's performance and financial position could be affected. The AGC Group hedges the risk of price fluctuations for certain raw materials and fuel through instruments such as commodity contracts. Nevertheless, the AGC Group may be unable to completely eliminate the impact of rising raw material and fuel prices. In addition, the AGC Group's manufacturing activities use certain special raw materials and materials that are procured from a limited number of suppliers. We are making efforts to consider alternative materials and to promote multiple purchasing of such raw materials and materials. However, if the supply of these materials becomes tight or delays or price fluctuations occur, this may significantly impact the AGC Group's performance and financial position.
6. Government regulations
In the countries and regions where it operates, the AGC Group is subject to the local government approval and authorization of investments, regulations on exports and imports, and laws governing commercial transactions, labor, patents, taxation, foreign exchange, and other issues. The AGC Group closely monitors changes in relevant laws and regulations and endeavors to collect information. Changes in relevant laws and regulations may significantly impact the AGC Group's performance and financial position.
7. Environmental Regulations and Climate Change Response
The AGC Group has sets "Environment" as one of the "Our Values" in our group vision. In addition to complying with all applicable environmental laws and regulations, we strive to curb the environmental impact of our business activities and protect the global environment by establishing and managing our own management standards, which are stricter than the legal requirements. In addition, to achieve global environmental and business sustainability, we are proactively implementing activities throughout our value chain to address climate change, effectively use resources, and conserve natural capital.
However, if the company is unable to set greenhouse gas emission reduction targets that are consistent with the Paris Agreement, such as through tighter regulations in countries and regions related to climate change, including greenhouse gas emission regulations, or international initiatives, or if it is unable to meet requests from stakeholders to contribute to decarbonization through its business, its reputation and society will be damaged. Opportunities may be lost due to a decline in public confidence. We may incur costs and other expenses necessary to comply with these regulations.
In addition, unintentional environmental pollution caused by chemical substances emitted from our manufacturing processes or contained in our products may affect our group's profit and loss due to loss of public trust, costs for cleanup and compensation for damages, and other expenses. Furthermore, the Group's profit and loss may be affected in the event that additional costs or capital investment are required due to revisions or strengthening of various environmental regulations in each country or region, or if product development, production, sales, or service activities are interfered with.
8. Product liability
The AGC Group is making every effort to ensure that products are of the highest quality, according to their individual characteristics. Despite these efforts, the possibility remains that quality problems may occur because of unanticipated factors, prompting a major recall, for example. This could substantially influence the AGC Group's performance and financial position.
9. Intellectual property rights
The AGC Group endeavors to acquire intellectual property rights that are useful for its present business activities and future operations alike, while investigating the rights and business conditions of third parties, in order to prevent intellectual property issues from arising. However, there is the possibility that the AGC Group will have disputes with third parties over intellectual property or that third parties will infringe the AGC Group's intellectual property rights. This has the potential to materially influence the AGC Group's performance and financial position.
10. Litigation and legal procedures
There is always a risk that other firms, corporate groups, or individuals may take legal actions against the AGC Group with respect to its operations at home and abroad. As of March 27, 2020, there were some lawsuits and legal proceedings pending. If these lawsuits and proceedings result in an unfavorable outcome for the AGC Group, its performance and financial position may be significantly impacted.
11. Effect of natural disasters and accidents
The AGC Group endeavors to prevent occupational accidents and other accidents involving equipment and facilities, such as production machinery, through the establishment and operation of a systematic management system for occupational safety and health, and for industrial safety and security, along with efforts to promote and ensure machinery safety, and to manage inspections, maintenance and repairs. However, the AGC Group faces the risk of unforeseeable events such as a severe occupational accident, serious fire, explosion or leakage incident. Regarding preparedness for natural disasters, the AGC Group has assessed risks concerning earthquakes, high winds, flooding and other natural events at its major bases, and has drawn up business continuity plans for bases that are exposed to significant hazards. Despite these efforts, the Group faces the risk of unforeseeable events such as damage to production facilities and the suspension of product shipments due to severed transportation networks, as a result of natural disasters such as major earthquakes, typhoons, and floods. If production is suspended temporarily or for an extended period in the Group or the Group's supply chain as a result of the occurrence of such unforeseen events, the supply of products to customers may be disrupted given that alternative production is not possible for certain products, and this could have a significant impact on the AGC Group's performance and financial position. The impact of the COVID-19 pandemic and countermeasures are as follows. In response to the COVID-19 pandemic, the AGC Group Emergency Response Headquarters was established in January 2020, headed by the President & CEO, to quickly assess the situation of the entire Group and respond to the crisis. Currently, in accordance with the guidance of the national and local governments in each country and region, we continue our business while working to ensure the health and safety of our employees and their families and to prevent the spread of infections outside the Company. The spread of the pandemic since February 2020 has affected the AGC Group's business results, including a decrease in demand in multiple businesses. At present, the AGC Group expects a moderate recovery in earnings, but the future remains uncertain, and depending on future conditions, the AGC Group's performance may be significantly impacted. The AGC Group will implement measures to improve profitability, such as building a manufacturing system that meets demand and strengthening the balance between cost reduction and investment.
12. Exchange rate fluctuations
The AGC Group manufactures and sells products worldwide, and converts transaction accounts in local currencies, including sales, costs, and assets, into Japanese yen when preparing its consolidated financial statements. Even if the values of these items remain unchanged in local currency terms, they may change when converted into Japanese yen depending on exchange rates. The AGC Group also manufactures products at its facilities worldwide, including Japan, and exports the products to a number of countries. The AGC Group generally procures raw materials and sells products in the local currency of each country/region, but there are some product sales and material purchases denominated in foreign currencies. Therefore, fluctuations in exchange rates affect the price of the raw materials we purchase and the sales prices we set. The AGC Group strives to mitigate risks by taking measures such as hedging transactions to respond to short-term exchange rate fluctuations and by deploying manufacturing bases and conducting manufacturing on a global basis. However, substantial exchange rate fluctuations may significantly impact the AGC Group's performance and financial position.
13. Retirement benefit obligations
The AGC Group calculates costs for employee retirement benefits and obligations based on actuarial assumptions of the returns on pension funds and a specific discount rate. If the actuarial assumptions and results diverge substantially because of deterioration in the market environment for pension fund management, future costs for retirement benefits will increase, and this may seriously impact the AGC Group's performance and financial position.
14. Fixed assets, Goodwill and intangible assets
If the recoverable amount of fixed assets, goodwill, and intangible assets recorded in the AGC Group's consolidated statement of financial position falls below their book value due to a decline in profitability or other reasons, an impairment loss may be incurred, which may significantly impact the AGC Group's performance and financial position.
In particular, the European automotive glass business, which is part of the Glass segment, has been suffering from operating losses since the previous fiscal year and a deteriorating business environment due to a decrease in automobile production, mainly caused by the new coronavirus infection and the shortage of semiconductor supply, and the cash-generating unit to which the tangible fixed assets belong may suffer impairment losses. As a result, the Company conducted an impairment test and recognized an impairment loss of 18,668 million yen. In addition, in a part of the printed circuit board materials business, which belongs to the electronic segment, signs of impairment were recognized in the cash-generating unit to which a part of tangible fixed assets, goodwill, and intangible assets belong, based on the decrease in demand in the Chinese market due to the impact of the trade friction between the United States and China, etc. As a result of conducting an impairment test, an impairment loss of 14,761 million yen was recognized. A loss was recognized.
In the super high-end Copper Clad Laminate (CCL) business and the industrial films business, both of which belong to the Electronics segment, the Company conducted impairment tests on the cash-generating units to which the goodwill and intangible assets arising from the acquisition of these businesses belong, and no impairment loss was recognized. Although the Company has not yet been affected by the economic conditions in the market, it may be affected by future economic conditions in the market.
15. Information security
With the importance of information systems in the AGC Group's business activities increasing dramatically, the Group is striving to protect information assets such as systems and data. The Group is also taking measures to prevent security incidents and minimize their impact if they occur. However, the interruption of important operations or leakage of confidential data due to disasters, cyberattacks, unauthorized access, or other unforeseen circumstances may significantly impact the AGC Group's performance and financial position.
＜Long-term risks＞ 1. Responding to climate change issues
Since the Paris Agreement was reached in 2015, the trend toward decarbonization has been accelerating, and energy-related policies and regulations are expected to become stricter, while social demands for companies to achieve net zero greenhouse gas emissions are increasing. With this risk in mind, the AGC Group has set its vision for 2050 to "aim for net zero emissions from our own business activities and contribute to the realization of net zero carbon worldwide through our products and technologies". To realize its vision for 2050, the AGC Group will strive to implement measures to reduce greenhouse gas emissions according to the source of emissions, such as the development of manufacturing technologies and facilities with low greenhouse gas emissions. At the same time, the Group will take this item as an important opportunity to expand sales of products that save or create energy throughout their life cycle and to build business models that contribute to the spread of renewable energy.
2. Effective use of resources
Stricter regulations on the use of depletable resources such as rare earth materials and increased demand for water resources due to the progress of urbanization are expected to have an impact on manufacturing activities. At the same time, social demand for waste reduction and recycling is increasing as the recycling-oriented economy accelerates. With this risk in mind, the AGC Group is striving to utilize recycled raw materials and materials, reduce the amount of landfill disposal, and reduce the amount of waste generated. We will also consider this item as an important opportunity to expand sales of products that contribute to the purification of groundwater and rainwater in water-scarce areas, develop products and manufacturing processes that use less depletable resources, and expand sales of products that are highly recyclable and reusable.
3. Supply chain considering society and the environment
As supply chains become more globalized and complex, it may be expected that illegal employment issues such as forced labor and child labor will occur at suppliers and subcontractors, as well as operational stoppages and regulatory violations due to stricter environmental regulations. With this risk in mind, in addition to the AGC Group Purchasing Policy, which stipulates sustainable procurement and other measures to reduce environmental impact, the Group will also work to add value to the entire supply chain, declare the Partnership Declaration, which aims to build co-existence and co-prosperity with suppliers through collaboration that transcends existing business relationships and corporate scale, and strive to manage suppliers with an emphasis on respect for human rights and environmental protection.
4. Ensuring fair and equal employment and workplace safety
There is a growing need for compliance in employment and respect for workers' rights, as well as a need for safety measures at manufacturing sites due to the increasing number of inexperienced and elderly workers. With this risk in mind, the AGC Group will strive to improve employee engagement and prevent the occurrence of serious and lost-time injuries.
5. Relationship with local communities and environmental considerations
There is growing interest in the expansion of living areas and the maintenance of surrounding biodiversity due to the spread of urbanization around the world, as well as a growing awareness of the need to improve quality of life (QOL) as living standards improve in emerging countries. With this risk in mind, the AGC Group will strive to reduce water consumption, conserve biodiversity, and eliminate environmental accidents, as well as build good relationships with the areas where its work sites are located.