Business Risks

The following are the main risks that management recognizes as having the potential to significantly impact the financial position, business performance, and cash flow of the Company and consolidated subsidiaries, among other issues related to the business and accounting conditions described in the annual securities report.
The following text contains statements about the future. Note that this information is based on the judgment of the Group at the end of the current fiscal year.

(1) Risks associated with market changes

The PILOT Group’s performance and financial position could be adversely affected if the following conditions occur in the stationery products business, the Group’s main business: if product prices decline more than expected due to factors such as intensifying competition with other companies in each country or regional market, if there is a sales oligopoly or restructuring by major online sellers and distributors, or a market restructuring; if sales to children and students, who account for a large proportion of end users, fluctuate more than expected due to changes in the birthrate in each country; if the market environment changes rapidly due to the development and spread of digital devices that can replace writing instruments; or if demand for office space declines more rapidly than expected due to changes in the social structure and other factors. The Group’s performance and financial position could also be adversely affected through the toy business if Japan’s birthrate continues to decline.
The PILOT Group is working to develop attractive products with high added value that will please our customers, and to “improve corporate value and brand strength” by developing sales channels.

(2) Risks associated with procuring raw materials, etc.

The purchase prices of metals and resins, the main raw materials for the Group’s products, are affected by domestic and overseas market conditions and forex rates. Unexpected and unusual fluctuations in these factors could affect the Group’s performance and financial position. In addition, we depend heavily on specific business partners to purchase some manufacturing machinery and to procure raw materials in an efficient and consistent way. If those supplies are interrupted, production could be seriously harmed, which could affect the performance and financial position of the Group.

(3) Risks associated with foreign exchange rates

The PILOT Group conducts sales activities all over the world; the overseas sales ratio is extremely high: around 75%. On the other hand, most manufacturing is done in Japan, so the cost of products in each country fluctuate due to the foreign exchange rates, which in turn affect sales. In preparing the consolidated financial statements, the foreign currency-denominated financial statements of overseas consolidated subsidiaries are converted into yen. Therefore, forex rate fluctuations affect the conversion of the foreign currency-denominated financial statements and could affect the Group’s performance and financial position. In addition, the Group bears the risk of forex rate fluctuations, as some transactions within and outside the Group are settled in foreign currencies. The Group hedges against forex rate fluctuation risk based on the settlement amount of each company, but if the yen appreciates more than expected against other currencies, the Group’s performance and financial position could be affected.

(4) Risks associated with investment capital

The PILOT Group could acquire other companies, form joint ventures with third parties, make capital expenditures, or other strategic investments for acquiring technology, efficiently developing new businesses, or enhancing the competitiveness of businesses. Consequently, the Group’s performance could be affected by acquisition or integration costs, failure to achieve synergies, failure to generate expected earnings and cost improvements, loss of key personnel, and the assumption of debt. In addition, the Group’s performance and financial position could be affected when the Group establishes a joint venture with a third party or builds a strategic partnership; when there are differences in strategy or cultural differences with the partner; conflicts of interest; the inability to achieve synergies; a need for additional funds or debt guarantees to maintain the joint venture or partnership; obligations to buy out equity from the joint venture partner; obligations to sell the equity held by the Group in a joint venture; obligations to dissolve a partnership; ineffective business management including cash flow management; loss of patented technology and know-how; impairment loss; and reputational damage caused by the joint venture’s actions or business activities.

(5) Risks associated with business development

The PILOT Group operates in more than 190 countries and regions, including Japan, the Americas, Europe, and Asia. The Group’s performance and financial position could be affected if business activities are restricted due to unpredictable circumstances, for example, if there are changes in the political and economic environments of Japan, the United States, major European countries, and China, which together account for most of the Group’s sales, as well as other countries and regions; there are changes in the legal regulations unique to each country, including environmental regulations; social turmoil breaks out due to war, riots, terrorism, or the like; or there is an outbreak of an infectious disease.

(6) Risks associated with R&D investment

The PILOT Group continues to invest in R&D, necessary for maintaining competitiveness, stimulating consumer demand, and achieving innovations in products and services. However, if competitors’ products and services appear with outstanding growth potential that would make our product lines obsolete, or if we are unable to identify or grasp market trends, our R&D investment would not be successful, and the Group’s performance and financial position could be affected.

(7) Human resources risks associated with securing, developing, or leaving employment

Japan suffers from a chronic labor shortage, and there is real concern that human resources will be more mobile. Based on the assumption that the number of employees who leave will increase as the difficulty of hiring new people continues, the Group is striving to restructure and make the employment system more attractive to steadily secure human resources. However, despite these actions, if we are unable to secure and develop human resources as planned, or if the number of job leavers increases, the Group’s performance and financial position could be affected.

(8) Risks associated with product quality and safety

The Group works to improve product quality and ensure safety based on internal quality control standards. In the event of a serious product safety or quality problem, the need to offer compensation based on the Product Liability Act or to carry out a recall would reduce the Group’s brand value and we would incur a large cost, which could in turn affect the performance and financial position of the Group.

(9) Risks associated with environmental regulations

Both domestically and overseas, the PILOT Group is subject to environmental laws and regulations, including those related to energy, greenhouse gases, air, water, and soil pollution, hazardous chemical substances, products, batteries, recycling of containers and packaging materials, and waste. Although we take all necessary steps to comply with laws and regulations, liability for past environmental impact could arise. In addition, if drastic reductions in energy consumption on a global scale and countermeasures against global warming to curb climate change are required, the Group will face new tax burdens, and we might face increased expenses to change the materials, fuel, and equipment that we use. If these expenses are large, they could affect the Group’s performance and financial position. Also, if consumers become more environmentally conscious and our products no longer match their purchasing preferences, sales could diverge from the Group’s forecast levels, in turn affecting sales and profit plans.

(10) Risks associated with information systems

The Group’s business development depends on the communication network that connects computer systems among offices and plants. Therefore, if the network breaks down due to unforeseen disasters, this would have a significant impact on production and sales. In addition, although we have implemented effective security measures for our information systems, if malicious access of the computer system is gained by unauthorized means, our website is illegally copied, or important data such as personal information is downloaded or destroyed, or if our information systems suffer major damage due to a ransomware attack or the like, the Group’s performance and financial position could be affected.

(11) Risks associated with outbreaks of infectious diseases

In the event of an outbreak due to the long-term spread of an infectious disease, or quarantine measures against infectious diseases in Japan and other countries and regions becoming more stringent or prolonged than expected, the Group’s performance and financial position could be affected. In particular, if consumption is severely reduced for a long period, the Group’s sales and profits could deviate significantly from forecasted levels. In addition, if a largescale outbreak occurs within the Group, this could affect the execution of business, including production.
The PILOT Group places top priority on ensuring the health and safety of all employees, their families, and other stakeholders. We work to prevent the spread of infection by taking effective action based on requests from each country’s government, and we make every effort to ensure business continuity according to the situation in each country by allocating funds and reducing expenses for Group subsidiaries.

(12) Risks associated with natural disasters

The Group conducts business in various locations in Japan and overseas, and in the event that an unforeseen natural disaster, such as a large-scale earthquake, severely damages production, sales, or distribution bases, the production, sales, and distribution of products could be delayed or suspended. In these cases, the Group’s performance and financial position could be affected.

(13) International tax-related risks

As the PILOT Group operates globally and conducts intragroup transactions, we are exposed to international tax risks such as transfer pricing taxation. We pay taxes by following all the tax laws of each country and pay close attention to international tax risks, but unexpected tax burdens could arise due to changes in the tax system of each country or differences of opinion with tax authorities, which could affect the performance and financial position of the Group.

(14) Risks associated with product liability

In our operations for stationery products, toys, and other businesses, the Group manufactures and sells products properly based on the laws of the countries and regions where they are sold. However, we might not be able to respond to sudden changes in the environment or to new legislation, which could increase the risk of product liability issues. As a result, the Group’s reputation could be affected, and costs arising from product recalls and after-sales service might be incurred. At the same time, the Group’s existing products and services could fail to satisfy customers, could lead to a decline in demand or competitiveness, or become obsolete, which in turn could affect the Group’s performance and financial position.

(15) Risks associated with credit management

Since the Group often collects payments after providing products and services, we follow internal rules for collecting accounts receivable and using credit information from external organizations to effectively manage credit. However, in the event of unforeseen bad debt losses due to unpredictable circumstances, the Group’s performance and financial position could be affected.

(16) Risks associated with pension obligations

The PILOT Group has externally funded retirement pension plans in the Company and some Group subsidiaries. In the future, the discount rate for retirement benefit obligations could be lowered due to falling interest rates or pension assets could decline because of stock market setbacks or other factors. As a result, differences from actuarial calculations (losses) could arise, causing future retirement benefit expenses to rise.

(17) Risks associated with investment securities and fixed assets

The PILOT Group applies several standards for securities and fixed assets: the Accounting Standard for Financial Instruments and the Accounting Standard for Impairment of Fixed Assets. If the market value of investment securities other than stocks with no market price falls significantly below the book value and there is no prospect of recovery, we must record an impairment loss. In addition, if the profitability of fixed assets declines due to a significant deterioration in the business environment, etc., we might need to recognize impairment losses, which could affect the performance and financial position of the Group.

(18) Risks associated with intellectual property (IP) protection and litigation

The PILOT Group has acquired many intellectual property (IP) rights in the course of developing products, so we consider IP an important management resource, and sometimes we license IP rights to other companies.
We do our best to maintain and protect these IP rights, but if the Group files a lawsuit due to the unauthorized use of our IP rights by another company, or if the Group is sued by a competitor for infringement of their IP rights, there could be a significant impact on the Group’s performance and financial position. The following are the main risks that management recognizes as having the potential to significantly impact the financial position, business performance, and cash flow of the Company and consolidated subsidiaries, among other issues related to the business and accounting conditions described in the annual securities report. The following text contains statements about the future. Note that this information is based on the judgment of the Group at the end of the current fiscal year.