Business Risks

In order to prevent and minimize any loss, the AMADA Group has established the Basic Risk Management Rules covering the basics of risk management and is striving to manage risks by, among others, examining countermeasures on a regular basis. The Internal Control and Risk Management Committee centrally manages risks the Group is exposed to and implements measures across the organization. Individual risk management is managed and handled by expert committees such as the Health and Safety Committee, the Export Management Headquarters, and the AMADA Group Environmental Ecological Promotion Committee. In addition to the above, the risk management division set up under the Internal Control and Risk Management Committee has established policies on important risks at the Group level related to people, goods, money, information, etc. and is working to respond to them. Furthermore, in the event of a serious incident, accident, natural disaster, or other emergency that is deemed to require a company-wide response, the Group will establish emergency headquarters, etc. for prompt crisis management.

(Summary of Risk Management Activities)

The risk management division or the department in charge of risk management identifies and assesses risks and specifies countermeasures, their scope, goals, deadlines, etc. It then implements each of these countermeasures, monitors their implementation status and effectiveness, and takes necessary corrective and improvement measures. The Internal Control and Risk Management Committee centrally manages the identified risk items and the implementation status of their countermeasures as company-wide risk management activities and reports major risk items to the Board of Directors.

The main risks that could affect AMADA operating results and financial position are as follows.

The matters described below do not represent all of the potential risks relating to the AMADA Group's business.

(1) Trends in the economy and market environment

The products the AMADA Group sells are used as production equipment for manufacturing processes in a wide range of areas, including transport equipment, home appliances, information and communication equipment, general machinery and building materials. As a result, the Group tends to be less exposed to changes in the business climate in any one industry, but a shift in capital investment in the industry as a whole may affect its performance.

(2) Overseas development

The AMADA Group has responded to the globalization of its markets by developing production and sales bases overseas in North America, Europe, Asia and other regions. The ratio of overseas sales to total consolidated sales for the year ended March 31, 2022 was 59.4%. As a result, there is a possibility that conflicts (wars, civil wars, coups d'état, etc.), acts of terrorism, fluctuations and changes in economic trends and the political and social environment, as well as unexpected changes to laws and regulations in countries where the Company does business or other factors could affect the Group’s operating results.

The Group has a subsidiary in the Russian Federation (Moscow) that sells and services its products and parts in the Russian market. The situation in Russia and Ukraine is expected to affect the Group's operating results due to sanctions imposed against Russia by various countries. The sales, operating income, and net assets of said subsidiary accounted for 0.4%, 0.1%, and 0.0% of the Group's consolidated sales, operating income, and net assets, respectively, for the year ended March 31, 2022, and 0.7%, 0.2%, and 0.0% in the year ended March 31, 2021, thus its impact on the Group's consolidated operating results is insignificant.

(3) Price competition

The markets where the AMADA Group is developing its business are subject to intense price competition. Although the Group strives to maintain proper sales prices by introducing new products, focusing resources on its solution proposal-type engineering business and other efforts, there is a possibility fluctuations in sales prices as a result of increasingly aggressive or prolonged price competition could affect the Group's operating results.

(4) Fluctuation of exchange rates

The AMADA Group exports its products mainly denominated in local currencies, including US dollars and Euros. It strives to hedge exchange risk by using forward foreign exchange contracts and increasing the overseas production ratio in preparation for fluctuations in exchange rates. In case of fluctuation of an exchange rate beyond our expectations, however, the Group may incur foreign exchange gains or losses, or our product competitiveness may change, which could affect the Group’s operating results.

(5) Procurement of materials

The AMADA Group purchases parts and materials from more than one supplier. Purchase prices of these materials may fluctuate depending on changes in prices of raw materials and energy prices, including the price of crude oil. In addition, the supply and demand situation in the industry and conditions of suppliers, as well as natural disasters may become an obstacle to the stable supply of materials, which is expected to lower our productivity. These factors could affect the Group’s operating results.

Since the COVID-19 pandemic is making it difficult to procure semiconductors and other control parts, the Group is taking measures to minimize the impact on production, such as placing advance orders, substituting products, and changing designs.

(6) Quality of products

The AMADA Group has established a thorough quality control system based on the quality management system of the International Organization for Standardization (ISO) and strives to design and manufacture products by minimizing the occurrence of defects. In design reviews, the Group conducts risk assessment and product safety checks using prototypes. If recall costs in the event of product defects, or a damages claim due to product defects resulting in an accident that is not covered by the Group’s insurance, should occur, such could affect the Group’s operating results.

(7) Addressing environmental problems

The AMADA Group works to build a production system and offer products and services that contribute to environment preservation under its own environment policy, and strives to reduce environmental burden. The Group uses internal standards to evaluate environmentally friendly products, such as resource-saving machines that use less oil and gas, low-noise machines that produce less noise, and energy-saving machines that use less electricity, and markets them as AMADA Eco Products. Depending on environmental regulations in countries where the Group operates, however, it may be difficult to manufacture current products or use existing parts, which may result in an increase in expenses due to changes in design and R&D costs, and could affect the Group’s operating results.

(8) Intellectual property rights

The AMADA Group focuses on research and development to creating new value, and files patent applications for the technologies and knowhow developed for the protection of intellectual property rights. However, deterioration of the Group’s competitive advantage due to a patent infringement by a third party, or any claim for damages or the suspension of sales of products resulting from a third party’s claim against the Group’s patent infringement could affect the Group’s operating results.

(9) Information security

The AMADA Group possesses customer and personal information required for its business activities and has put in place a strict control system to maintain the confidentiality of such information. In case of illegal access or information leakage due to a cyberattack or computer virus, however, confidence in the Group may deteriorate or the Group may be subject to a claim for damages, which could affect its operating results. The Group has strengthened its information security measures, including the introduction of robust systems to respond to cyber-attacks and minimize damage in the event of a computer virus infection. In addition, the Group is working to raise awareness of information security through employee education using e-learning.

(10) Natural disasters, widespread epidemics of infectious diseases, etc.

The AMADA Group is expanding its production and sales bases globally. If a natural disaster such as an earthquake or flood, or widespread epidemics of infectious diseases inflict enormous damage on these surrounding regions where the Group operates, and if restoration and reconstruction take significant time, it could affect the Group’s operating results. As part of its Business Continuity Plan (BCP) measures, the Group has installed seismic isolators in some buildings at Isehara Works and built the Disaster Prevention Energy Center to provide in-house power generation equipment, water supply, food storage, etc. In addition, the Group is working to diversify the risks involved in production activities and supply by promoting the expansion of its domestic and overseas manufacturing bases.

Furthermore, while the global economy is now back to the pre-pandemic level due to the progress in vaccination and other factors, the sluggish capital investment in the manufacturing industry in some countries and regions due to the spread of COVID-19 is expected to have an impact on the Group's operating results. The Group is working on measures to prevent COVID-19 infections and the spread of infections based on the guidelines and requests of the government, local governments, and other authorities. As for sales activities, each office has been conducting sales and service activities as usual while thoroughly implementing infection prevention measures. As for supply systems, domestic production bases, including Fujinomiya, Toki, and Fukushima, as well as tools and blade plants and parts centers that supply consumables, are taking measures to prevent the spread of infections so that products can be delivered to customers without delay. In addition, as for responses to employees and other matters, the Group is using telework to the maximum extent possible in areas subject to the declaration of a state of emergency, and uses staggered working hours when employees come to work and refrains from taking business trips, thus minimizing the risk of infection for employees as much as possible.

(11) Changes in the financial market

Although certain bases of the AMADA Group have introduced a cash management system to optimize interest-bearing liabilities held, a drastic rise in interest rates will increase the Group’s interest payments. Meanwhile, a decline in interest rates or fluctuations in the stock market may lower yields of securities held, change their fair values, or may affect the discount rate of plan assets to increase retirement benefit liabilities and obligations. These factors could affect the Group’s operating results.

(12) Human resources

The AMADA Group strives to recruit and develop excellent personnel engaging in manufacturing, development and sales of the Group’s products to ensure the expansion of global business activity and maintain competitiveness. In the event that the Group fails to recruit or develop, talented employees retire, or the Group fails to retain such employees, the Group’s competitiveness may deteriorate, which could affect its operating results.

Basic Views on Eliminating Anti-Social Forces

The AMADA Group states in its code of conduct that “we do not and will not have any connection with antisocial forces or organizations, which threaten the order and safety of civil societies, and deal with unreasonable demands with a resolute attitude and without making compromises,” and ensures that all its employees are aware of this statement.

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