The following are the main foreseeable risks that have the potential to affect MGC Group’s operating results, stock price and financial condition. Please note that the following does not represent an exhaustive list of risks. All forward-looking statements in the text are based on the judgment of MGC Group as of the date of submission of financial statements (June 26, 2018).
1. Economic Conditions
The business revenues of MGC Group are affected by economic conditions in the countries and regions where the Group’s products are sold. In particular, market-sensitive commodities such as methanol, methanol derivatives, general-purpose aromatic chemicals, and polycarbonate resin are generally prone to declines in sales volume and selling prices during times of economic downturn, which adversely affects MGC Group’s operating results and financial condition. In addition, rapid increases in raw material prices could also have an adverse effect on MGC Group’s operating results and financial condition.
2. Overseas Business
MGC Group has established subsidiaries and conducts manufacturing and sales in Asia, North America, South America, the Middle East and other regions. MGC Group makes large investments in plant and equipment at overseas subsidiaries. The Group takes various measures to mitigate risks, but the situation in each country, such as political instability including war, terrorist attacks, and riots, or social or economic turmoil, can cause difficulties for local manufacturing activities, remittance of dividends, and recovery of investment.
Other risks that could have an adverse effect on MGC Group’s operating results and financial condition include problems due to differences in legal systems, the possibility of restrictions on investments or nationalization or expropriation of assets by foreign governments, and personnel or labor issues.
3. Business Characteristics
MGC Group manufactures and sells a variety of products ranging from chemical and material products to functional products including those in the information communication and medical- and food-related fields, and conducts its business in a competitive environment. The Group competes mainly on the basis of price in commodity products, and on the basis of categories including price, market trends, quality, function, delivery time and customer service in specialty products and high-value-added products. A rise in the level of competition in these areas could lead to lower selling prices or a decrease in sales volume.
In addition, because of their characteristics, the businesses of MGC Group have risks such as those described below.
For example, MGC Group purchases raw materials including mixed xylene and electric power from outside suppliers. The Group takes measures such as purchasing from various suppliers to reduce the risk that procurement will become impossible. However, the inability of a major supplier to deliver necessary raw materials or other items could be detrimental to the Group’s production activities.
Many of MGC Group’s manufacturing bases have multiple production facilities that share electricity, water supply, steam, and other utilities. Consequently, if a shared utility at any base shuts down due to an accident or other trouble, the production activities of the entire base could be suspended.
The products manufactured and sold by MGC Group include some products that are sold only to specific customers. MGC Group reduces risks with measures such as entering into long-term supply contracts with these customers; however, sales could decline if customers discontinue using these products.
Electronic material products, for which the electronics industry is the primary customer segment, typically have a short product life and are constantly exposed to competition in technological innovation. Therefore, sales could decline if existing products become obsolete or if new product development is delayed.
For products other than commodity and basic chemicals, including engineering plastics and electronic materials, selling prices could drop and sales volume could decline due to the emergence of alternative products offering the same functions.
MGC Group takes all possible measures to mitigate these risks, but they could have an adverse effect on the Group’s operating results and financial condition.
4. Product Defects
As stated earlier, MGC Group is engaged in a wide range of businesses and nearly all of its manufacturing bases conduct production activities in accordance with globally recognized quality management standards and ship products that conform to specifications agreed upon with customers. However, the possibility exists that defective products could be manufactured or shipped. In the event that a product with a quality defect is shipped, MGC Group may have to compensate the customer who used the defective product, users of final products, or others not only for direct damages but also for opportunity loss. In addition, MGC may lose social credibility.
To deal with this type of risk, MGC Group has obtained product liability insurance and other liability insurance.
However, the full amount of the damages for which MGC Group is ultimately liable may not be covered by this insurance, and therefore MGC Group’s operating results and financial condition could be adversely affected.
5. Exchange Rate Fluctuations
The Group’s business results and financial situation have been affected by exchange rate fluctuations. With regards to the impact of exchange rate fluctuations on transactions in foreign currencies such as imports and exports, MGC Group has, to a degree, hedged risk through forward exchange transactions. However, it is impossible to completely hedge the risk of exchange rate changes. Depending on the trend of exchange rates, there is the possibility of a negative impact on the Group’s business results and financial situation such as decreased sales or increased losses.
Financial balance data that is valued in local currencies for MGC Group overseas subsidiaries are translated into yen when creating the Group’s consolidated balance sheet. Depending on the exchange rate at the time, MGC Group’s business results and financial situation could be adversely affected.
6. Interest Rate Fluctuations
When procuring essential funds, MGC Group considers their terms, financial situation, and financial environment, and determines factors such as the amounts to procure and the period and method of procurement. The Group combines fixed and variable interest rates when procuring funds in order to hedge against future interest rate changes. However, if interest rates rise, the amount of interest payments also rises, which may adversely affect MGC Group’s operating results and financial condition.
7. Marketable Security Market Price Fluctuations
MGC Group’s assets include market priced marketable securities. If the market prices of the Group’s marketable securities were to fall sharply, appraisal losses might occur, adversely affecting the Group’s operating results and financial condition.
8. Legal Restrictions
MGC Group handles hazardous chemical substances including poisonous and deleterious substances, hazardous materials and high-pressure gas as part of its business, and is subject to various legal restrictions, both in Japan and overseas, at each stage, including manufacturing, storage, distribution and sale. In addition, with rising environmental awareness worldwide, regulations on chemical substances are becoming increasingly stringent, which could disrupt MGC Group’s business activities.
Accordingly, the Group’s operating results and financial condition could be adversely affected by penalties, social sanctions, remediation costs and other consequences of the failure of MGC Group to comply with legal regulations related to its business activities as well as restrictions on business that may result in the event of changes in laws and regulations or their interpretation or operation, or the tightening of regulations, and increase in costs to address these changes.
9. Natural Disasters
MGC Group has manufacturing bases not only in Japan but also in the rest of Asia, North America, South America, the Middle East and other regions. The production activities at these bases could be suspended or otherwise disrupted if equipment is damaged or trouble occurs due to the effects of natural disasters such as earthquakes, windstorms and floods. In some cases, material loss or opportunity loss caused by natural disasters may be excluded from the coverage of casualty insurance, and thus could have an adverse effect on MGC Group’s operating results and financial condition.
10. Accidents and Disasters
MGC Group routinely handles hazardous chemical substances including poisonous and deleterious substances, hazardous materials and high-pressure gas as part of its business. Although MGC Group makes efforts to ensure maintenance and stable operation of production facilities while doing its best to construct a security and disaster prevention system, explosions, fires, toxic gas leaks or other accidents may occur as a result of equipment malfunction or human error. Such events could not only damage production facilities and harm employees, but also, depending on the circumstances, damage the area surrounding the production facility, harm customers, or cause environmental pollution and other damage. MGC Group takes out fire insurance, profit insurance, oil pollution insurance, liability insurance and other insurance against these risks. However, MGC Group’s operating results and financial condition could be adversely affected if this insurance does not cover the full amount of the damages for which MGC Group is ultimately liable.
11. Research and Development
MGC Group conducts basic and applied research to develop new products and processes and improve existing products and processes. Research and development is complex and long-term, and results are uncertain. If MGC Group does not continue to develop new products that are accepted in the market, or if the markets for products newly developed by MGC Group do not grow as much as anticipated, the Group’s future operating results and financial condition could be adversely affected.
12. Joint Ventures
MGC Group owns a number of production joint ventures not only in Japan but also overseas including Saudi Arabia, Venezuela, Thailand, China, and South Korea, and procures and sells a variety of other products. Although the Group strives to maintain its profit through joint venture agreements and other business-related agreements, there is no guarantee that the joint venture partners will make decisions that are best for MGC Group or the joint ventures as the Group does not control its joint venture partners. Moreover, these agreements might also not be renewed. Such circumstances could have an adverse effect on MGC Group’s operating results and financial condition.
13. Intellectual Property
MGC Group files and obtains patents in Japan and overseas to protect the research findings used in its businesses and licenses. The Group also imposes confidentiality obligations on the parties of numerous patent licensing agreements and technology agreements in an effort to protect intellectual property while striving not to infringe on the rights of others. However, there is a possibility that MGC Group may fail to protect its own right or get involved in a dispute with a third party. Such circumstances could adversely affect the Group’s operating results and financial condition.
MGC Group faces the risk of lawsuits and other legal risks in its domestic and overseas businesses. If a major lawsuit were to be filed against the Group in the future and if the verdict were unfavorable, it could have an adverse effect on the Group’s operating results and financial condition.