Among risks inherent to the UBE Group's business and other risks, the following may exert an important influence on the decisions of investors. The UBE Group is fully dedicated to a policy of recognizing these risks, avoiding and preventing their actualization, and minimizing and dealing with related problems should they arise. Statements below concerning the future represent the judgment of the UBE Group as of May 12, 2015. Business and other risks not covered here may arise.
1. Fluctuations in the Raw Material and Fuel Markets
Purchase costs of raw materials used in the main products of the UBE Group's Chemicals & Plastics business are influenced by factors including international market conditions and fluctuations in crude oil and naphtha prices. Depending on supply and demand conditions for products, increases in prices of these raw materials may exert a material impact on the performance and financial position of the UBE Group if increased costs cannot be reflected in selling prices in a timely manner. In addition, increases in the procurement costs of overseas coal, which the UBE Group purchases for use in cement production and for in-house power generation, may also exert a material impact on the performance and financial position of the Group.
2. Earnings in the Chemicals & Plastics Business
Earnings in the Chemicals & Plastics business are highly dependent on demand trends and supply and demand conditions in Japan, Asia and Europe, the primary markets for this business's main products. Consequently, a substantial decrease in demand in these regions due to economic fluctuations, or worsening supply and demand conditions due to expansion of production capacity by other companies, an influx of products from other regions or other factors, could result in stagnant market prices or a significant narrowing of price spreads, which may exert a material impact on the performance and financial position of the Group.
3. Earnings in the Specialty Products Business
In the specialty products business, timely development of materials that meet customer needs is paramount in supplying materials for use in products with quick turnovers, particularly in the core information technology (IT) and digital home appliance fields. Failure to meet customer needs due to delayed development or other factors may exert a material impact on the performance and financial position of the Group, as may decreased demand for information technology related products, which are particularly susceptible to market fluctuations.
4. Earnings in the Pharmaceutical Business
The Pharmaceutical business comprises a custom manufacturing business through which the UBE Group manufactures pharmaceutical bulk ingredients and intermediates on consignment for pharmaceutical companies and an in-house business through which the Group conducts research and development for new drugs either independently or jointly with pharmaceutical companies. The custom manufacturing business requires forward expenditures including those for production facilities of a certain scale that meet standards, though research and development expenditures are limited. New drugs handled by the custom manufacturing business may be unable to be commercialized due to the long lead time needed by the pharmaceutical companies to obtain production approval and to the possibility of delays in full-scale launch should approval be revoked after completion of custom manufacturing due to side effects or other factors. In addition, factors including the launch of generic drugs due to intensified competition in the market for pharmaceuticals manufactured from pharmaceutical bulk ingredients and intermediates under custom manufacturing and lapsed patents may lead to sluggish sales. Drug discovery is broadly divided into independent research and joint research with pharmaceutical companies. Although the UBE Group minimizes the risk of large clinical trial outlays and low success rates through a basic strategy of licensing out research in the final stages regardless of drug type, necessary research and development costs before that stage entail risk associated with possible failure of the research and market launch. In addition, authorization may be revoked and launch delayed, as is the case of development for new drugs by pharmaceutical companies. Materialization of these risks in the consignment production and in-house businesses may exert a material impact on the performance and financial position of the Group.
5. Export prices for cement
Cement is a core product of the cement and construction materials business. In Japan, there is expected to be a certain degree of demand with the start of construction related to the Tokyo Olympics and Paralympics. In export markets, a decrease in domestic demand in China and increased production capacity for cement in Southeast Asian countries are causing a rapid deterioration in the balance of supply and demand. This in turn may cause export prices to decline sharply and may place downward pressure on revenues. In response, the UBE Group is increasing its waste processing in cement manufacturing process to generate waste processing revenues, and is implementing various cost reductions. However, a further steep decline in export prices for cement could have a negative impact on the business results and financial position of the UBE Group.
6. Earnings in the Machinery Business
Amid decreasing automobile industry demand for facilities stemming from lower sales volumes in developed countries, the molding machinery business of the Machinery & Metal Products business is working to enhance sales and services in newly industrialized countries, where automobile production is increasing rapidly, and to expand into non-automotive markets. However, the materialization of risks such as a decline in sales prices due to intensifying competition, soar of raw material or construction price may exert a material impact on the performance and financial position of the Group.
7. Exchange Rate Fluctuations
The UBE Group minimizes exchange rate risk related to exports paid for in foreign currencies through hedge transactions such as balancing of debts and credits and foreign currency contracts. However, short- and medium-term exchange rate fluctuations that exceed forecasts may exert a material impact on the performance and financial position of the Group. UBE Group overseas subsidiaries record financial statements in local currencies, leading to exposure to the influence of exchange rates when these amounts are converted into yen. In addition, losses on exchange rate fluctuations may occur at the time of conversion into local currencies for redemption, interest payment and settlement of liabilities of U.S. dollar denominated interest-bearing liabilities held by Group production companies in Thailand.
8. Fluctuations in Financial Markets
Fluctuations in financial markets at the time of capital procurement exert a material impact on the performance and financial position of the UBE Group. The UBE Group minimizes risk related to interest rate fluctuations through interest swaps and other hedges, but short- and medium-term interest rate fluctuations that exceed forecasts may exert a material impact on the performance and financial position of the Group.
9. Overseas Business Activities
The UBE Group manufactures and sells products in Asia, North America and Europe. Overseas operations entail economic risks related to factors including unforeseen changes to laws and regulations, weakening of the industrial base, the ability to secure personnel and acquire technical proficiency and labor union issues, in addition to social and political confusion resulting from terrorism, war and/or other factors. Emergence of these risks may impede overseas operations and exert a material impact on the performance and financial position of the UBE Group.
10. Intellectual Property/Product Liability
The UBE Group recognizes the importance of intellectual property and works to protect it, but failure to do so properly and/or violation of UBE's intellectual property rights, or dispute violation of the third party’s intellectual property rights and inability to cover costs of product recalls or damages in the event that these risks materialize in connection with product flaws may impede operations and exert a material impact on the performance and financial position of the Group.
11. Industrial Accidents and Disasters
In the event that a large-scale industrial accident, earthquake, windstorm or flood should occur and cause substantial damage to the production facilities at any of the UBE Group plants that handle hazardous materials or high-pressure gas, factors including compensation and other costs, loss of opportunities caused by cessation of production activities, compensation for customers and erosion of public trust may exert a material impact on the performance and financial position of the Group.
Additionally, an accident or disaster at a supplier of a key raw material could impede business activities and negatively influence the performance and financial position of the UBE Group.
12. Public Regulations
The UBE Group conducts its businesses according to the laws, rules and other regulations of the countries and regions where it operates. However, any modification or strengthening of these regulations may exert a material impact on the performance and financial position of the Group due to restrictions on the Group's business activities, increased costs of regulatory compliance, accounting and tax responses to the regulations, or other effects.
In the past, the UBE Group manufactured and sold products containing asbestos, and used construction materials containing asbestos in plant facilities. In order to eliminate asbestos from plant facilities, the UBE Group plans to institute a series of complete or partial changes of facilities, for which certain expenditures are expected until the changes are complete. Moreover, in the event that employees (including retired employees) or residents in the vicinity of the plants face health hazards, an increase in employees receiving workers' compensation, lawsuits, efforts to further strengthen regulations and other factors may exert a material impact on the performance and financial position of the Group.
The UBE Group strives for strict legal compliance, but the possibility exists that lawsuits may be brought against the Group in any of its various business operations. Pending lawsuits are as follows. No prediction of the final outcome of these lawsuits or the time required for resolution is possible at this time.
Since May 2008, the Japanese government and 40 building material manufacturers, including Ube Board Co., Ltd. (a consolidated subsidiary of UBE), have been defendants in lawsuits brought jointly and severally by construction workers and their survivors alleging that the defendants are responsible for asbestos-related disease that affected the plaintiffs because they inhaled asbestos particles from asbestos building materials used at construction sites.The Tokyo District Court dismissed all of the plaintiffs' claims against the building material manufacturers. Plaintiff appeals pursuant to these rulings are pending in the Tokyo High Court and the Fukuoka High Court.
In January 2016, the Kyoto District Court issued a ruling recognizing a claim for damages against certain manufacturers of building materials. However, rulings to date by the court of first instance including the January 26 ruling have dismissed all claims against Ube Board Co., Ltd. At the present time, there are five pending claims in higher courts in Tokyo, Osaka, and Fukuoka pursuant to the dismissal of the claims, and claims have been filed with the district courts of Sapporo, Tokyo, and Yokohama. There are currently 13 pending claims for damages totaling up to ¥24.7 billion.
15. Write-Down Due to Decreased Profitability of Inventories
The Accounting Standard for Measurement of Inventories is applied for fiscal years beginning on or after April 1, 2008. Under this standard, inventories held for sale in the ordinary course of business are carried at their original cost on the balance sheets, but are judged to have decreased in profitability if the net realizable value falls below the original cost at the end of the period. In such cases, the balance sheet value is written down to the net realizable value, and the difference between the original cost and the net realizable value is charged against income for the period in which the loss occurs. If the UBE Group judges inventories to have decreased in profitability because the net realizable value has fallen below original cost as a result of a rise in fuel and raw material purchase prices, a rise in manufacturing costs, an increase in fixed manufacturing costs, a decrease in production volume or a drop in product selling prices, this may exert a material impact on the performance and financial position of the Group.
16. Impairment of Fixed Assets
The UBE Group adopted accounting standards for impairment of fixed assets in fiscal 2003. However, additional impairment losses in the event of further depreciation in the market value of unused land and/or significant deterioration of the operating environment may exert a material impact on the performance and financial position of the Group.
17. Marketable Securities
The UBE Group holds marketable securities, the majority of which are shares of listed stocks. For this reason, a decline in the stock market may exert a material impact on the performance and financial position of the Group.
18. Retirement Benefit Liabilities
The UBE Group calculates its retirement benefit liabilities and retirement benefit payments based on discount and retirement rates used in pension calculations, and on conditions including rate of salary increases and year-end working income ratios for pension assets. For this reason, deterioration of operating interest rates for pension assets, decreases in the discount rate and other factors may exert a material impact on the performance and financial position of the Group.
19. Deferred Tax Assets
The UBE Group recognizes deferred tax assets resulting from temporary differences and operating loss carryforwards for tax purposes, which will reduce taxable income in future periods. Deferred tax assets are recognized in consideration of their probability of recovery based on forecasts of future income. In the event that actual taxable income should differ from projections, payment to adjust deferred tax assets may become necessary and exert a material impact on the performance and financial position of the Group.
20. Medium-Term Management Plan
At the start of fiscal 2013, the UBE Group launched a new three-year medium-term management plan called New Medium-Term Management Plan "Change & Challenge."
The basic strategies of this plan are to strengthen the revenue base to enable sustainable growth; maximize the global strength of the UBE Group; and address and be part of the solution for resource, energy, and global environmental issues. The UBE Group's targeted management indicators for fiscal 2015, the final year of the plan, are operating margin and return on assets of 7% or higher each, and return on equity of 12% or higher.
The UBE Group is working to execute the basic strategies and achieve the targeted management indicators outlined above. However, unforeseen changes in the business environment and the issues discussed in items 1 through 19 above are among the risks that could negatively affect the performance and financial position of the Group and make the Group unable to execute the medium-term management plan as originally conceived or achieve the targeted management indicators of the plan.