Risk Factors

For the current consolidated fiscal year, the overseas sales of The group account for about 70% of sales, and tend to be affected by the fluctuation of exchange rates. We take measures for alleviating the effect of the exchange rate fluctuation with exchange contracts, etc., but these measures cannot eliminate this risk fully. A steep change in exchange rates that exceeds expectations, etc. would affect the performance and financial standing.

The group makes efforts to improve profitability, while pursuing the speedy development of new products and the cost reduction through cost management. However, as a characteristic of this business field, selling prices fluctuate considerably, and there is a possibility that selling prices will drop more steeply than expected, due to clients’ request for price cutting and the price war with competitors. In recent years, the price war has become fierce, as our business field has matured, new competitors have emerged. We will make the utmost effort to meet clients’ demand for cost reduction, but we cannot always meet this demand to lose a selling opportunity. These events would affect the performance and financial standing.

The group purchases raw materials, semi-finished products, etc. from several business partners inside and outside Japan. The purchase prices of raw materials we procure are affected by market fluctuations. If we cannot sufficiently reflect the increase in prices of raw materials in the selling prices of our products or reflect the cutting of the selling prices of our products in the purchase price of raw materials, this would affect our business performance.

The products of the group are used for various digital devices, and the sales of our products vary with the sales of applications of our clients that adopt our products. If the shipping volume of these products decreases considerably due to the economic situation, etc., inventory adjustment is conducted, or the like, this would affect the performance and financial standing.

In addition, the shipping volume of these products may vary with season, in that case sales may increase or decrease in a specific period.

The group makes the utmost effort to manage the quality of our products as a maker, but cannot guarantee that all of our products are free of defects and none of our products will be recalled. In order to cope with these risks, the group tries to hedge our risks by taking out liability insurance, such as products liability insurance when necessary. However, if there is a serious defect or the like in our products, this would affect the performance and financial standing.

As a whole, the products provided by the group are amid global competitions. In addition, the period of the season of each digital device is shortening due to rapid technological innovations. In order to cope with this, We develop new technologies, adopts new methods, and develops products to meet market needs, but competitors may possess more advanced technologies, greater capability of supplying products, or closer connections than us in some business fields. In addition, the needs of clients are becoming more diverse and sophisticated year by year, and We may be unable to meet the needs. In these circumstances, the performance and financial standing may be affected.

“Analog power supply ICs,” which are the core products of the group, differ from “digital semiconductors”. In that environment, production sites affects the performance of the products significantly. Accordingly, their production lines cannot be changed easily for the following reasons:

• It takes about 2 years to adjust production processes, etc.
• If production line of products is migrated, we need to obtain change approval from clients.

The group carries out fabless production, except the production of some subsidiaries. In order to secure over a certain level of technology and quality that would be highly evaluated in the market, we set certain standards for quality control, check whether the standards are satisfied when selecting a production site, and implement some measures, such as giving meticulous technical guidance after selection. However, it sometimes becomes difficult to secure production output according to the fluctuation (growth) of demand, because of the manufacturing characteristics of our products. We have fostered close relations with each production site based on demand forecasts, but the change in managerial strategies, considerable revisions to transaction conditions with factories, and the fluctuation in business performance would affect the performance and financial standing.

The group sells products in the markets of not only Japan, but also other countries in Asia, North America, and Europe, and conducts business in not only advanced countries, but also emerging countries. Therefore, if legal or taxation systems change, economic or political situations worsen, or there occur emergencies, such as terrorism, political instability, and riots, or turmoil due to an epidemic in the country or region of our client or its end users, this would affect the performance and financial standing.

For “Analog power supply ICs,” which are the core products of the group, we outsource the production of wafers to Phenitec Semiconductor Corp. with high ratio. Since it is difficult to change manufacturing processes due to the characteristics of the production of our products, the bias of outsources may hinder the stable supply of products.

In February 2019, Torex Semiconductor made Phenitec Semiconductor Corp. a wholly owned subsidiary, and this has further strengthened our relationship with Phenitec as a contracted manufacturer. We have several wafer fabrication contractors other than Phenitec and make every effort to ensure a stable supply, but in the event that a natural disaster or other emergency were to befall Phenitec, it could impede the production of Torex Semiconductor products and have a negative impact on our performance and financial standing.

The subsidiary Phenitec Semiconductor Corp. manufactures wafers based on the specifications of clients, and sells them to us and other company. The factories of that company are located in Okayama and Kagoshima Prefectures, and strive to supply products stably by securing appropriate inventory based on order forecasts, developing systems for business continuity, etc. However, if the production line is shut down due to an unexpected natural disaster, the delay of delivery of raw materials, serious failure of manufacturing equipment, or the like, this would slow down the supply of products to its clients, including us. In this case, the decline in sales, the compensation for damage to the clients, etc. would affect the performance and financial standing.

The subsidiary Phenitec Semiconductor Corp. strives to keep factory operation rate appropriate, based on the outlook for demand from clients. However, there is a possibility that factory operation rate will decrease due to the steep drop in the number of orders because of clients’ sales trend and inventory adjustment and we would lose selling opportunities due to the lack of production capacity when orders increase rapidly.  Therefore, if the above-mentioned events occur concurrently, this would affect the performance and financial standing.

The group owns a production site in Vietnam, for the purpose of differentiating our products and reducing cost, and that production site is characterized by relatively high mobility of human resources. If the augmentation of personnel and labor costs through the economic growth of Vietnam generates more production cost than expected or hinders the securing of personnel, this would affect the performance and financial standing.

The group is exposed to a lot of risks related to overseas commercial transactions, including trade restrictions, tariff changes, unexpected revisions to legislative or regulatory requirements, adverse taxation and infringement on intellectual property rights. These would affect the performance and financial standing.

To improve its competitiveness and growth potential to survive global competition while continually enhancing corporate value, the Torex Group has pursued capital and business alliances as well as M&A activities (collectively “M&A,” hereafter) as needed, and kept in mind the challenge laid down in its medium-term management plan: promoting collaboration & M&A that leads to strong product planning. In implementing M&A activities, we carefully vet target companies in advance, identifying the market trends affecting them, their financial status, competitive edge and potential for synergy with the Torex Group. Post-M&A, we strive to quickly integrate companies with the Torex Group and maximize synergies.

However, the sudden change in the market environment, the augmentation of the burdens for integrating systems and operation processes, the outflow of clients and personnel, and other unexpected events after M&A would degrade the expected synergetic effects and make it impossible to recoup our investments or cause additional expenses. These events would affect the performance and financial standing of the group.

The subsidiary Phenitec Semiconductor Corp. and Torex Vietnam Semiconductor Co., Ltd process and manufacture semiconductors. The two companies are subject to various environmental laws and regulations regarding air pollution, water contamination, industrial wastes, harmful substances, soil pollution, etc. and so they operate their business while paying careful attention to these regulations. However, there is a possibility that they will be held legally or socially responsible for environmental issues regardless of negligence. This would cause a lot of expenses to address the matter and degrade the social credibility of the group, affecting the performance and financial standing of the group.

The group owns tangible fixed assets for R&D, manufacturing, etc. and intangible assets. If these assets are considered to have been impaired due to the change in the market environment, technological innovations, the decline in market prices, etc., impairment loss may be posted based on the amount calculated by subtracting the fair value from the book value of these assets. This would affect the performance and financial standing.

The group evaluates the credibility of each client while comprehensively taking into account its financial conditions, qualitative information, etc. However, it is difficult to fully grasp the financial information of clients, and risks cannot be eliminated completely. Therefore, the sudden worsening of the financial conditions of clients would make it necessary to set unexpected allowance for doubtful accounts, and then affect the performance and financial standing.

The group operates the existing business steadily, but there is a possibility that we will conduct some kinds of business investments, including the establishment of subsidiaries, in order to expand our business. We will have careful investigation regarding business investment, and conduct the investment through internal due process, but it will not always contribute to the business results of the group. This would affect the performance and financial standing.

Since the group is product development-oriented company, it is indispensable for us to develop products that can meet market needs. To do so, it is necessary to secure excellent personnel, including designing and engineering staff. However in particular, due to the technological feature, the development and design of analog power supply ICs are vulnerable to noise, variation, etc. as they become more compact and use low voltage, and it is not easy to adjust them and a broad range of fundamental knowledge and experience are required. Accordingly, it takes time to develop excellent engineers, although it strongly depends on the talents of engineers. We have secured many engineers who possess broad fundamental knowledge and plentiful experience, and concentrates on personnel development through continuous education and training, but if we cannot secure or develop competent personnel, this would affect the performance and financial standing.

If a natural disaster or the like happens to the site of the group and business partners (such as clients and affiliated factories for pre-processing and post-processing), this would hinder the manufacturing and sale of our products and then affect the performance and financial standing.

In the event of disease outbreaks or prevalence at the facilities of the Group or its clients (such as sales destinations, subcontract factories for front-end processes or post processes), manufacturing and sales of products would be impeded and the Group’s performance and financial standing could be negatively affected.

The group holds important intellectual property rights for our business, including trademarks, patents, and trade secrets. If there emerges a dispute about intellectual property rights between the group and a third party, this may hinder our business, and cause a lot of expenses for protecting our rights and defending ourselves against the claims. We take measures in cooperation with experts, in order to protect our intellectual property rights, but the dispute or the like would affect the performance and financial standing.