The following summarizes the risks that could affect the operating results and financial conditions of Seiko Group. Items based on future assumptions are determined as of the consolidated fiscal year ended March 31, 2014.
(1) Risk of Economic Fluctuations
The Group partly deals in products directly related to personal consumption, including watches, clocks, electronic components for digital products, high-end jewelry, apparel and fashion accessories and much more. Ultimately, the consolidated performance is strongly influenced by economic fluctuations inside and outside of Japan, especially trends in personal consumption.
(2) Dependence on Specific Suppliers
Many of the materials and components used to produce our watches are procured from a limited number of suppliers, hence the performance of our Watches Business may be strongly influenced by changes in the terms and conditions or other agreements we have with those suppliers.
(3) Business Environment of the Devices Solutions Business
The performance of the Devices Solutions Business is influenced by demand trends for devices solutions business and other goods inside and outside of Japan. Given the severe price competition and fast development and mass production of new technologies in this business, any delays by our company in meeting changes in the market environment could strongly influence our performance.
(4) Country Risks of Manufacturing Bases Overseas
The manufacturing facilities of our Devices Solutions Business and Clocks Business are based in Thailand and China, where fluctuations in political, economic, or other social conditions may strongly influence their production activities.
(5) Dependence on Major Customers
A part of the Devices Solutions Business tends to be dependent on a select number of major customers. A reduction in order quantities from any one of these customers could affect the performance of these businesses.
(6) Steep Rise in Material Costs
A steep rise in the prices of crude oil or other raw materials arising from changes in the demand/supply environment could increase manufacturing costs and influence our performance.
(7) Quality Issues and Product Liability
No product the Group manufactures and sells will produce a physical effect during normal use. However, more stringent legal regulations on product accidents or other changes in the social environment or changes in the business environment could raise the costs we incur in relation to product recall, indemnity liability, other quality issues, or product liability.
(8) Intellectual Property Rights
The Group patents inventions, rigorously protects its confidential information, and takes other steps to protect its important and unique development technologies. Even so, sufficient protection is believed to be unachievable in certain regions of the world. Even when the aforesaid measures are thoroughly taken, the Group may fail to effectively eliminate third party products similar to those of the Group. Any such products could imperil the superiority of the products of the Group.
The Group also takes countermeasures such as patent surveys to prevent the Group from violating the intellectual property rights of other companies when developing new products. In practical terms, however, there is no reasonable way to eliminate every single possibility of violation. A violation of the intellectual property rights of another company could result in claims for injunctions or damages that influence our performance.
(9) Exchange Rate Fluctuations
Mainly, the Watches and Devices Solutions Businesses in the Group operate in overseas markets. In the Watches Business, sales in foreign currency are roughly offset by foreign currency purchases, which limits the remaining net exchange risk. Meanwhile, the Devices Solutions Business carries out business overseas for some devices produced at its domestic manufacturing plants and therefore exchange rate fluctuations could affect product prices. At the same time, for the Systems Solutions Business and Clock Business that operate mainly in Japanese markets, the costs for procuring from overseas manufacturing bases in foreign currency may be affected by exchange rate fluctuations. All accounting items handled in local currencies outside of Japan, including profit and loss and the assets of overseas subsidiaries, are converted into yen to prepare the consolidated financial statements, and the exchange rates used at the time of conversion may influence the values converted into yen. In particular, exchange rate fluctuations of the yen against US dollars, Euros, and other currencies constituting important portions of Group sales could influence the performance and financial conditions of the Group, including foreign currency translation adjustments in relation to the conversion of the net assets section of overseas subsidiaries.
(10) Interest-rate Fluctuations
The Group has highly favorable relationships with financial institutions and can successfully raise all the funds necessary for operating its businesses inside and outside of Japan. Yet the present circumstances in no way guarantee the availability of successful funding in the future. Because of the trend of low market interest rates, over 80% of the interest of the Group's existing long-term debt has been fixed and thus there is no significant risk from interest-rate fluctuations. Yet interest-rate trends in future procurement could influence the Group's performance.
(11) Current Value Variations of Assets Held
The Group is undertaking the possible sale or other disposition of non-operating assets in order to further constrict interest-bearing debt and expand shareholders' equity. Even so, significant fluctuations in the current value of real estate or securities to be sold off could influence the planned performance and financial conditions of the Group.
(12) Environmental Issues
The Devices Solutions Business and Clocks Businesses operate under various environmental laws regulating energy conservation, air and water pollution, the use of chemical substances, waste disposal, recycling, chemical substances contained in products, soil and groundwater pollution, and so on. These businesses see environmental conservation as a management issue for business, and in response engage in various environmental conservation activities geared to satisfy not only legal regulations, but also stringent voluntary goals. In the future, however, an increase in costs to meet tighter regulations or the occurrence of environmental issues could incur compensation costs or require expenditures for countermeasures.
(13) Information Management
The Systems Solutions Business protects against the leakage of personal and confidential information obtained in the course of business by establishing internal regulations, educating employees, and similar means. There is still a chance, however, that information will leak as a result of unforeseen situations. If this occurs, a decline in the social credibility of the Group or large expenses for corrective action may influence the performance of this business.
(14) Natural Disasters
If the manufacturing bases and other Group facilities inside or outside of Japan are damaged by natural disasters such as earthquakes or typhoons, the Group's performance could be influenced by suspensions and setbacks in manufacturing operations or sales, distribution, or procurement functions.
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