Business Risks

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This website contains information about business conditions, the financial situation, and other factors that may influence investor decisions. Forward-looking statements are based on the judgments of the LIXIL Group's management as of March 2018.
Statements concerning the future and assumptions are subject to uncertainty and risks, and actual results may vary significantly.

(1) Economic Environment Risk

1. Changes in the Economic Environment

Operating revenues of most companies in the LIXIL Group are significantly affected by domestic demand in Japan. In particular, major fluctuations in new housing starts or the level of construction orders received could have a negative effect on business performance and financial positions of the LIXIL Group. In addition, the LIXIL Group undertakes production and sales activities overseas, in Asian countries such as China and Thailand, and also in Europe and North America, etc. War, civil war, unrest, rioting, terrorist attacks etc. in these countries could also have a negative impact on the business performance and financial position of the LIXIL Group. In order to be able to manage this type of situation, the LIXIL Group is working to strengthen its renovation strategy and to develop new products that offer strong potential for successful development of overseas markets, etc. Furthermore, the LIXIL Group strives to ensure that it can recognize early-warning signs of political instability etc. developing in foreign countries, by working with external, third-party organizations to implement regular monitoring of changes in the political situation, government finances, government policies etc.

2. Exchange Rate Fluctuations

Exchange rate fluctuations have the potential to exert a substantial effect on the yen equivalents of assets and liabilities resulting from the foreign currency denominated transactions of the LIXIL Group. Where transactions are denominated in foreign currencies, the prices of goods and amounts of sales could also be substantially affected. In order to be able to manage this type of situation, in addition to LIXIL's finance department in Japan, the LIXIL Group has also established four Regional Treasury Centers (RTCs) in LIXIL offices in China, Singapore, Germany and the US. Besides implementing monitoring of exchange rates on a monthly basis, each RTC also implements hedging when necessary, in order to minimize the negative impact of exchange rate fluctuations.

3. Interest Rate Fluctuations

The Group's fund procurement is primarily in the form of interest-bearing debt such as loans from financial institutions. If market interest rates were to increase substantially, it could have a material impact on the Group's business performance and financial position. In order to be able to manage this type of situation, in addition to LIXIL's finance department in Japan, the LIXIL Group has also established four Regional Treasury Centers (RTCs) in LIXIL offices in China, Singapore, Germany and the US. By implementing fund management operations in each region on a consolidated basis, the RTCs are helping to make fund procurement more efficient, with enhanced stability. Besides monitoring interest rates in each country on a monthly basis, LIXIL has also put in place the systems needed to support the use of fixed interest rates, etc. when necessary.

(2) LIXIL Group Business Activity Risk

1. Competition with Competitors, and Falling Product Prices

The LIXIL Group faces severe competition in most of the markets in which it operates. For this reason, it is difficult to always set prices at levels that are advantageous to the LIXIL Group.
Although the Group takes pride in its superior products and services that contribute to improving people's comfort and lifestyles, there is no guarantee that it will enjoy a competitive advantage in terms of pricing. The LIXIL Group's products and services are exposed to intense price competition, which could have a negative effect on business performance and financial positions of the LIXIL Group. In order to be able to manage this type of situation, the LIXIL Group implements cost reduction measures and undertakes the development of new products that have high appeal.

2. New Product Development Risk

In its operations, the LIXIL Group is committed to providing exceptional products and services to satisfy its customers around the globe. The Group creates high-quality living spaces that are healthy, comfortable, and safe by continually developing attractive products based on an accurate understanding of available technology and consumer needs. However, the Group's business performance and financial positions could be adversely affected if a failure to respond appropriately to changes in market or industry needs were to result in a decline in growth and earning potential. In order to be able to manage this type of situation, the LIXIL Group is using collaboration with innovative start-ups and the effective utilization of global information networks in order to put in place the systems needed to be able to respond rapidly to changes in consumer needs. To develop attractive new products that can satisfy these needs, LIXIL is developing advanced new technologies such as AQUA CERAMIC (a new type of ceramic material), and is striving to realize speedy product development through the strengthening of design capabilities and the integration of product platforms.

3. Effectiveness of Tie-ups with Other Companies, and of Corporate Acquisitions etc.

The LIXIL Group may plan to expand its business operations through investments, including corporate acquisitions and capital participation. To maximize the benefits of these acquisitions, the LIXIL Group seeks to integrate them into its corporate culture and management strategies. However, there is no guarantee that the anticipated returns and synergy benefits will be realized. In addition, while the LIXIL Group makes every endeavor to avoid risk in the execution of acquisitions by undertaking detailed prior assessments of the financial conditions, contractual relationships, and other matters relating to the company involved, it is possible that contingent liabilities and unrecognized financial obligations may be revealed following acquisitions. As a result, it is possible that the business performance and financial positions of the LIXIL Group will be adversely affected by these acquisitions and capital participation activities. In order to be able to manage this type of situation, the LIXIL Group has formulated a common global policy on acquisitions, and has designed a process for post-acquisition review and monitoring which is now being utilized. LIXIL is also promoting organizational changes aimed at building an efficient, flat, simple organizational structure that facilitates the post-acquisition generation of synergy.

4. Effectiveness of Business Restructuring

In order to enhance management efficiency and competitiveness, the LIXIL Group may conduct business restructuring, including withdrawal from unprofitable businesses; the realignment of subsidiaries and affiliates, manufacturing bases, and sales and logistics networks; and the rightsizing of the workforce. These measures could have an adverse impact on the business performance and financial positions of the LIXIL Group. In order to be able to manage this type of situation, besides using a strengthening of communication between the management teams of the Company and technology businesses, the Board of Directors and Executive Officers of each Group company, and staff in order to ensure thorough dissemination of the LIXIL Group's business strategy, by strengthening the Company's management of businesses and regional portfolios, the LIXIL Group is striving to realize the maximizing of the synergy generated between technology businesses after restructuring, and to bring about an enhancement of strategic effectiveness. In addition, in order to build an organizational structure that will not necessitate large-scale business restructuring, as part of the strengthening of the post-merger integration (PMI) process in relation to M&A activity, LIXIL is striving to strengthen subsidiary governance through the creation and utilization of an effective, appropriate PMI process, by means of updating guidelines and clarifying the PMI implementation process and progress report process.

5. Shortages of Raw Materials etc. and Rising Procurement Prices

The LIXIL Group procures materials, parts, services, and other supplies as required for its production activities. There is a possibility that the amounts paid for these supplies will rise because of increased industry demand or increasing raw material prices. There is also a possibility that the reliability or reputation of the LIXIL Group's products will be adversely affected by defects in or stockouts of materials, parts, services, or other supplies. These factors could, in turn, adversely affect the Group's business performance and financial positions. In order to be able to manage this type of situation, the LIXIL Group is working to build a stable supply system, by implementing measures that include the use of product swaps, multiple sourcing, performing supplier credit checks, maintaining regular communication with suppliers, implementing periodic quality tests, maintenance of safe inventory levels, etc.

(3) Regulatory and Litigation Risk

1. Harm Resulting from Official Regulations

The LIXIL Group is subject to various official regulations, including the need to obtain approvals and permits from the government or official agencies for its business and investment activities, as well as patents and other intellectual property rights, environmental regulations, and other requirements. Such official regulations can be expected to change over time, possibly creating obstacles to business activities or imposing additional costs relating to compliance with new official regulations. These factors could have an adverse impact on the business performance and financial positions of the LIXIL Group. In order to be able to manage this type of situation, the LIXIL Group has formulated the necessary policies and procedures for responding to changes in official regulations. By arranging regular opportunities for the exchange of information with managers at the LIXIL Group's overseas business locations, LIXIL has been able to put in place the systems needed to be able to draw up strategies for obtaining early warning of potential changes in official regulations.

2. Direct and Indirect Costs Associated with Product Liability and Compensation Claims

There is a risk that defects will occur in products and services supplied by the LIXIL Group, or that product recalls may be required. Major compensation claims or product recalls relating to manufacturers' liability issues could result in substantial payments and have a negative effect on the reliability and reputation of the LIXIL Group's products. Such situations could have an adverse impact on the business performance and financial positions of the LIXIL Group. In order to be able to manage this type of situation, the LIXIL Group has established quality management checkpoints for each stage in the new product design and development process, and has formulated rules that ensure that design and development do not proceed until relevant issues have been overcome; in this way, LIXIL is able to reduce the likelihood that large-scale product liability claims or recalls will arise in relation to LIXIL's products and services.

3. Damages Arising Out of Lawsuits and Other Legal Proceedings

The LIXIL Group conducts its business activities in Japan and in countries overseas. Accordingly, there is a risk that it may face lawsuits and legal proceedings. If the LIXIL Group becomes the object of such legal action, there is also a possibility that this may result in major payments for damages. These circumstances could have an adverse impact on the business performance and financial positions of the LIXIL Group. In order to be able to manage this type of situation, the LIXIL Group has put in place systems that enable it to consult external experts such as attorneys etc. when necessary.

Environmental Regulations and Occurrence of Related Issues

The LIXIL Group, based on the Group Environmental Sustainability Principles, engages in a wide range of activities aimed at global environmental preservation. However, the Group cannot guarantee that it will be able to completely prevent or mitigate any risk of environmental pollution. Should serious environmental pollution occur as a result of the Group's business activities, it could have an adverse impact on the Group's business performance and financial positions. In order to be able to manage this type of situation, the LIXIL Group has formulated inspection rules regarding the clarification of and compliance with environment rules, in relation to ISO 14001 and environmental management systems; LIXIL also implements periodic review in light of current implementation status.

(4) Information Security Risk

In the course of carrying out its business activities, the LIXIL Group has occasion to handle various types of personal data, including customer data, necessitating rigorous information management. In the event that a personal data leak were to occur because of some unforeseeable circumstance, there is a possibility that the Group might suffer severe harm to its reputation, as well as possibly incurring significant monetary loss; this in turn could have an adverse impact on the Group's business performance and financial position. In order to be able to manage this type of situation, the LIXIL Group is working to strengthen personal data management, through the establishment of a dedicated unit for promoting rigorous personal data management, the putting in place of relevant regulations, ongoing implementation of appropriate training, etc. The Group has also established a Computer Security Incident Response Team (CSIRT) to deal with all types of cyber-attack; the Group thus has a system in place not only for ongoing monitoring of external attempts to gain unauthorized access, but also for implementing appropriate measures in the event of an incident occurring.

(5) Disaster and Accident Risk

The LIXIL Group undertakes production and sales activities at many facilities in Japan and in other countries around the world, so there is a possibility that an earthquake, typhoon or other natural disaster occurring in one of these areas could cause serious damage to the Group's production, logistics, sales or information management facilities. If a large-scale natural disaster such as a major earthquake did occur in Japan or in another country, it might result in the suspension of production operations or in delays in the supply of products, etc., which could have an adverse impact on the Group's business performance and financial position. There is also a possibility that industrial accident, equipment breakdown etc. could result in the suspension of, or placing of constraints on, the Group's business activities. While there is no guarantee of being able to prevent or mitigate the impact of such natural disasters etc., in order to manage this type of situation, the Group has formulated business continuity plans (BCP) and updates them regularly; particularly with regard to the Group's business locations in Japan, the LIXIL Group aims to reduce the potential operational and financial impact by implementing geographical dispersal of production facilities, implementing seismic reinforcement work, etc., so that if a natural disaster does occur the negative impact will be kept to a minimum, and operations can be restored to normal as soon as possible.

(6) Risk Relating to Accounting Estimates

In cases where it is necessary to make accounting estimates in order to draw up financial statements, the LIXIL Group makes such estimates on the basis of reasonable criteria. However, due to the inherent uncertainty that characterizes estimates, amounts may need to be adjusted and actual results may differ from the estimates, which could have an adverse impact on the Group's business performance and financial position.

1. Default on Receivables

In order to prepare for losses due to default on receivables by business partners, the LIXIL Group records the amount considered to be uncollectible as a provision for doubtful accounts. Should the actual default level significantly exceed assumptions, the provision for doubtful accounts could be insufficient. Moreover, as a result of reviewing assumptions due to the worsening of overall economic conditions and uncertainty in the credit standing of business partners, the Group could make additional provisions to this allowance. These developments could have an adverse impact on the Group's business performance and financial positions. In order to be able to manage this type of situation, within Japan, the LIXIL Group has drawn up rules and manuals relating to credit checks and the setting of credit facilities. Receivables review meetings are held on a regular basis, and in the case of business partners where it is judged that there is a strong possibility of receivables being uncollectible, the Group implements monitoring of management improvement status and risk reduction strategies at the level of individual business partners.

2. Changes in Pension Plan Obligations

The employee defined benefit pension plan obligations and related service costs of the LIXIL Group are calculated based on discount ratios and other underlying ratios. Changes in these basic ratios could cause a significant impact on business performance and financial positions. In particular, a fall in discount rates could have an adverse impact on the Group's business performance and financial position. In order to be able to manage this type of situation, the Group has implemented various measures, including the returning to the government of the substitutional portion of the Employees' Pension – in respect to which there is a particularly strong need to minimize potential negative impacts – and the adoption of defined benefit contribution pension plan and cash balance pension plan systems, etc.

3. Fixed Asset Value Reduction

The LIXIL Group periodically uses asset impairment accounting to calculate future cash flows relating to property, plant and equipment (PP&E), goodwill and other intangible assets, etc., and implements impairment measurement and impairment testing. It is therefore possible that the Group's business performance and financial positions could be adversely affected if fixed asset impairment losses are shown in the accounts. In order to be able to manage this type of situation, the Corporate Financial Governance Office (which is supervised directly by the CFO) is implementing a performance management process with respect to both subsidiaries in Japan and those outside Japan, as part of its measures to strengthen financial governance; this makes it possible to obtain advance warning of potential fixed asset impairment losses arising in relation to idle assets or deterioration in performance, and to put in place a system that makes it possible to implement timely measures in cases where there are early-warning signs of performance deterioration.

4. Recoverability of Deferred Tax Assets

The LIXIL Group implement tax effect accounting, and operating loss carried forward for tax purposes and deductible temporary differences are booked as deferred tax assets. Judgements regarding the recoverability of deferred tax assets are made on the basis of forecasts that include estimates relating to future taxable income, etc. In cases where a change in the forecast of future taxable income means that a deferred tax asset calculated based on the forecast of future taxable income may be deemed to non-recoverable, in part or in whole, the deferred tax asset in question will be abated, which could have an adverse impact on the Group's business performance and financial position. In order to be able to manage this type of situation, the Corporate Financial Governance Office (which is supervised directly by the CFO) is implementing a performance management process with respect to both subsidiaries in Japan and those outside Japan, as part of its measures to strengthen financial governance; this makes it possible to obtain advance warning of potential deterioration in performance, and systems have been put in place so that when the Group becomes aware of such a potential future deterioration in performance, LIXIL's finance and accounting department and tax department can formulate timely strategies in response, which may include the need to revise the judgement regarding recoverability of the deferred tax assets in question.

(7) Risk Relating to International Taxation and Taxation Related to Organizational Restructuring

The LIXIL Group undertakes production and sales activities in countries outside Japan, and Group member companies supply raw materials, products etc. to one another; consequently, there is the potential for international taxation risk in relation to transfer pricing taxation etc. In addition, the Group may on occasion need to implement organizational restructuring within the Group in order to improve operational efficiency and strengthen competitiveness, and depending on the restructuring scheme adopted, even though the restructuring is intra-Group, it may be treated as a valuation at current cost transaction for tax purposes, or it may not be possible to carry forward operating loss from the non-surviving company etc., in which case there may be an increased tax burden that could have an adverse impact on the Group's business performance and financial position. In order to be able to manage this type of situation, LIXIL's tax department has formulated the necessary policies and procedures and updates them as necessary, and has put in place a framework that makes it possible to select an appropriate approach when implementing organizational restructuring, by establishing systems that provide for opportunities for regular exchange of information with tax specialists at the Group's overseas business locations, and for timely consultation with experts.

(8) Human Capital Risk

1. Securing and Cultivation of Human Talent

For the LIXIL Group to continue to develop as a business on a sustainable, long-term basis, it is vitally important for the Group to promote the ongoing retention and cultivation of human talent that possesses a high level of specialist skills, and also human talent with first-rate management capabilities in relation to business strategy and organizational management. However, particularly in Japan, the trend towards smaller families and the aging population structure is leading to a shrinking of the workforce; if the competition to secure vitally-important human resources becomes increasingly intense, and if human talent recruitment and cultivation cannot proceed as planned, then over the long term this will degrade the efficiency of the Group's business operations, and there could be an adverse impact on the Group's business performance and financial position. In order to be able to manage this type of situation, besides working actively both to recruit new graduates and to recruit experienced personnel on a year-round basis, and promoting measures to ensure the handing down of skills within the Group, for example by strengthening the human resources and training systems and by recruiting retired technical specialists aged 65 or over as part-time workers, the Group is also promoting unified human resources cultivation planning that applies worldwide throughout the Group's global operations, and is endeavoring to ensure that the implementation of every individual program (including training for overseas assignments, shared e-learning programs etc.) contributes to employee retention and cultivation. In addition, the Group is promoting diversity management (including management efforts directed towards the retention of female employees), and is proceeding with the establishment of the systems and environment needed to enable a wide range of employees to grow as individuals and maximize their capabilities. The LIXIL Group has also established a Shared Services Center in the Asia region; besides working to help strengthen governance in the Asia region, it is also intended that the Center will assist in the building of a flexible organizational structure that will be less vulnerable to changes in the labor environment, both in Japan and in the Asia region as a whole.

2. Labor Issues (Strikes etc.)

There are significant differences in labor practices between the various countries and regions in which the LIXIL Group operates, and there is the possibility of unforeseeable events such as changes in the regulatory environment, a worsening in the economic climate etc. leading to a deterioration in labor relations, possibly leading to strikes or other forms of labor dispute that might continue over an extended period, which in turn could represent an obstacle to the Group's operations and have an adverse impact on the Group's business performance and financial position. In order to be able to manage this type of situation, the Group holds regular labor-management coordination meetings at each business location, and consults with workers regarding improvements to the working environment and working conditions. Currently, the Group enjoys harmonious labor relations.

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