(1) Risks Related to Operating Environment
1. Changes in Economic Situation
Demand for TOTO's products and services may be affected by general economic trends in the countries or regions in which they are sold. Economic downturns and resulting declines in demand in TOTO's markets worldwide may thus adversely affect the Group's business, financial condition and operating results.
2. Currency Exchange Rate Fluctuations
Foreign exchange rate fluctuations may adversely affect the TOTO Group's business, financial condition and operating results because the Group conducts international business transactions, while production, sales and other operating activities overseas are handled in foreign currencies. In addition, the assets and liabilities of overseas consolidated subsidiaries are translated into yen on the consolidated balance sheets.
3. Decrease in Stock Value
The TOTO Group holds stock as part of its investment securities. If the book value of such stocks drops significantly, this would cause the Company to record losses on the valuation of the stock, which may adversely affect the Group's business, financial condition and operating results.
4. Interest Rate Fluctuations
TOTO is exposed to interest rate fluctuation risks, which may affect its operational costs, interest expenses, interest income and the value of financial assets and liabilities. Accordingly, interest rate fluctuations may adversely affect the Group's business, financial condition and operating results.
5. Changes in Market Environment
Drastic fluctuations in demand in housing-related fields, in which the TOTO Group conducts its main business activities, may adversely affect the Group's business, financial condition and operating results.
(2) Risks Related to TOTO's Business Activities
1. Competition in the Industry
The TOTO Group develops, produces and markets a broad range of products and services, and therefore faces many different types of competitors. Although the Group will implement various measures to maintain and strengthen competitiveness going forward, it may not be able to maintain a dominant position in the market in the future.
2. Rapid Declines in Product Prices
The TOTO Group works aggressively to develop high value-added products and reduce costs. However, the Group is also subject to fierce competition in markets worldwide, and if downward pressure on prices outweighs corporate efforts, this may seriously affect the ability of the Group to secure profits.
3. Barriers to International Business Operations
One of the TOTO Group's business strategies is business expansion in overseas markets. In these markets, TOTO may face various political, economic and legal barriers such as currency exchange risk, political instability, economic uncertainty, religious and cultural differences, barriers related to business practices, revisions to regulations regarding, for example, investment, international money transfer, import/export and foreign currency exchange, as well as changes in tax systems, which may affect the Group's business, financial condition and operating results.
4. Importance of Technological Innovation
Technological innovation driving development of new technologies and products is critical to enable sustained growth and enhance competitiveness of the TOTO Group. Inability to respond suitably to changing market needs in the future may affect the future growth and profitability of the Group.
5. Corporate Acquisition and Business Alliances with Other Companies
The TOTO Group develops its business by forming alliances and making investments in other companies that include corporate acquisition and capital participation in order to increase business efficiency and reinforce competitiveness. While such partnerships are crucial to the TOTO Group's goal of introducing new products and services, the Group may not be able to successfully collaborate or achieve expected synergies with its partners. In addition, if these partners change their business strategies, the TOTO Group may have difficulty maintaining these relationships or equity investments.
6. Procurement of Materials, etc.
The TOTO Group's manufacturing operations depend on obtaining materials and parts of high quality and in a stable and timely manner. For that purpose, the Company promotes procurement activities after selecting suppliers that it can trust. However, if a supplier ceases supply, or there is a sudden increase in industry demand, or changes in the supply and demand situation, purchase prices may rise steeply. In such cases, it may be difficult for the TOTO Group to substitute one supplier for another, increase the number of suppliers or change one component or material for another in a timely manner, which may adversely affect the Group's business, financial condition and operating results.
7. Risks Related to Information Systems
The TOTO Group is supported by information and telecommunications systems in almost all of its operations. In addition, such systems are becoming increasingly complex and sophisticated each year. Although the TOTO Group undertakes various measures to improve the reliability of these systems as well as upgrades them to enable the ongoing execution of its operations, external factors such as a terrorist attack, natural disaster or computer hacking as well as human error or a computer virus could create problems in the systems or cause them to break down.
A resulting temporary disruption to operations may adversely affect the Group's business, financial condition and operating results.
8. Financial Condition of Distributors, etc.
Distributors of the TOTO Group purchase their products and services on payment terms that may not provide for immediate payment.
If distributors from whom the Group has substantial accounts receivable encounter financial difficulties and are unable to make payments on time, the Group's business, financial condition and operating results may be adversely affected.
9. Acquiring talented human resource
The TOTO Group believe that human resource is the most valuable asset and our continued success in future depends on talented human resource, and their continuous contribution to the Group through the growth of their talents. The Group strives to strategically acquire talented human resource that empathize with our corporate philosophy and develop self-directed human resource. If the Group cannot acquire or lose talented human resource, the Group's business, financial condition and operating results may be adversely affected.
(3) Risks Related to the TOTO Group's Mid- to Long-Term Management Plan
1. Achieving Objectives of Mid- to Long-Term Management Plan
Having celebrated its 100th anniversary in 2017, the TOTO Group will increase its fan base around the world as it embarks on the next century. To achieve that goal, the TOTO Group is is implementing TOTO WILL 2022, the five-year mid-term management plan that begins from FY2018. Despite executing various measures to achieve the goals of this plan, the Group may not be successful in achieving all targets or in realizing the expected benefits because of various factors including, among other conditions, further deterioration of the business environment.
2. Business Structural Reforms
In order to drive sustained growth and further enhance profitability, the TOTO Group promotes the selection and concentration of business and works towards more efficient management operation. Expenses may increase in the process of implementing business reorganization or business structural reforms, however, which may adversely affect the Group's business, financial condition and operating results.
(4) Risks Related to Legal Restrictions and Litigation
1. Product Defects
The TOTO Group pays particular attention to ensuring product quality based on strict, independent quality standards. The occurrence of defects in TOTO products, however, could make the Group liable for damages, caused either directly or indirectly by the defect, which are not covered by product and liability insurance, whereby the Group could incur significant expense for undertaking countermeasures. Negative publicity concerning these problems could also lead to a decline in the TOTO Group's brand image and the loss of customers, which may adversely affect the Group's business, financial condition and operating results.
2. Protection of Intellectual Property Rights
The TOTO Group strives to protect its intellectual property rights concerning the products and technologies it develops in order to secure a competitive edge in business. However, patents may not be granted or may not be of sufficient scope or force to provide the TOTO Group with adequate protection. Third parties may also develop technologies that are protected by intellectual property rights, which make such technologies unavailable or available only on terms unfavorable to the Group. Litigation may also be necessary to enforce the Group's intellectual property rights or to defend against intellectual property infringement claims brought against the Group by third parties. In such cases, the TOTO Group may incur significant expenses for such lawsuits. Furthermore, the Group may be prohibited from using certain important technologies or be liable for significant damages in cases of where the Group is found to be in violation of intellectual property rights of other parties.
3. Changes in Accounting Standards and Tax Systems
Introduction of new accounting standards or tax systems, or changes thereof, may have an adverse effect on the TOTO Group's financial condition and operating results. In addition, due to revisions to tax systems or if tax authorities have different opinions from the Company's tax declarations, the TOTO Group may need to make larger tax payments than estimated.
4. Environmental Laws and Regulations
The TOTO Group is subject to environmental laws and regulations such as those relating to air pollution, water pollution, soil and groundwater contamination, handling and elimination of harmful substances and waste management. Although the Group pays close attention to these laws and regulations in conducting its business activities, an increase in expenses related to environmental preservation or the payment of compensation for past, present or future business activities may adversely affect the TOTO Group's business, financial condition and operating results.
5. Regulations Related to Climate Change
Laws and other regulations are being strengthened in order to minimize climate change, including streamlining of energy consumption and measures to combat global warming worldwide. New tax burdens and increased expenses incurred in responding to changes to materials, fuel or facilities in business activities in line with tighter regulations may adversely affect the Group's business, financial condition and operating results.
6. Information Leaks
In the normal course of business, the TOTO Group possesses confidential information mainly about customers regarding credit worthiness and other information, as well as confidential information about companies and other third parties. Although the Group pays close attention to protecting this confidential information and works to the best of its ability to appropriately manage said information so that it is not leaked, such information may be leaked due to an unforeseen event. If such is the case, it may result in significant expense to compensate for the damage and adversely affect the TOTO Group's business activities and brand image. Moreover, there is a risk that the TOTO Group's trade secrets may be illegally leaked to a third party, which may adversely affect the Group's business, financial condition and operating results.
7. Other Laws and Regulations, etc.
The TOTO Group is subject to governmental laws and regulations in Japan and other countries and regions in which it conducts its business. The business activities of the TOTO Group may be restricted as these laws and regulations tighten and licensing procedures become stricter, whereby expenses may increase in order to comply with stipulated laws and regulations. In addition, if the TOTO Group responds in an inappropriate manner or is in gross violation of a regulation, the Group's business and brand image may be adversely affected.
(5) Risks Related to Disasters or Other Unpredictable Events
TOTO Group's business facilities are located in Japan and other parts of the world. If a natural disaster occurs such as an earthquake, tsunami, typhoon or flood or there is any other calamity such as cyber attack, war or a terrorist attack, infrastructure may be suspended, including power supply, leading to general confusion. In addition, should a major industrial accident occur or a highly-pathogenic influenza strain become a pandemic, it could significantly impact valuable human resources in addition to damaging the TOTO Group's facilities, which may cause partial or substantial disruption to the Group's business operations. As a result, the TOTO Group could incur significant expense to shift business locations and repair damaged facilities, which may adversely affect the Group's business, financial condition and operating results.
(6) Risks Related to Rumors
The TOTO Group strives to respond swiftly and appropriately in case misconduct has been discovered such as legal violations. However, if a malicious rumor regarding the Group spreads through the media or via the Internet, trust from society will decline whether such rumors are based on fact or not, which may adversely affect the Group's business, financial condition and operating results.
(7) Other Risks
1. Pension Plans
TOTO and certain Group companies have contributory, funded benefit pension plans. A decline in interest rates may cause a decrease in the discount rate on benefit obligations. A decrease in the stock value may also affect the return on plan assets. As a result, the actuarial loss may increase, leading to an increase in future net periodic benefit costs of these pension plans.
2. Impairment Loss on Fixed Assets
The TOTO Group periodically calculates future cash flows from the assets it holds, and recognizes and measures impairment losses in accordance with accounting standards related to the impairment of fixed assets. As a result, the Group may record impairment losses on fixed assets, which may adversely affect the Group's financial condition and operating results.
3. Deferred Tax Assets
The calculation of deferred tax assets is based on various forecasts and assumptions, including future taxable income. Actual results may differ from forecasts and assumptions due mainly to deterioration in business conditions or the results of tax inspections. Accordingly, in case it is deemed difficult to recover all or part of deferred tax assets based on forecasts and assumptions of future taxable income, the value of such deferred tax assets will be written down, which may adversely affect the Group's financial condition and operating results.