Kioxia Holdings Corporation

The flash memory market exhibits pronounced cyclical fluctuations in supply and demand, and experienced a sharp price decline from the second half of 2022 through 2023. If the supply-demand balance breaks down, this could result in decreased sales and deterioration of gross profit margin due to lower factory utilization rates. The Company monitors market conditions and supply-demand status on a monthly basis and reflects this in management decisions, but there is no guarantee of accurate forecasting or timely response.

Tightening of import/export regulations stemming from US-China trade friction could result in sales restrictions to major customers located in China or transaction constraints with customers located in the US. There is also a risk that suppliers of raw materials and production equipment for the Company's group could become subject to regulations. The Company strives to obtain early insight into regulatory trends through industry associations and law firms, but there is no guarantee that countermeasures will function effectively.

The Company's group is exposed to global competition with large-scale competitors that also handle DRAM, as well as Chinese manufacturers receiving government subsidies, making it essential to maintain superiority in sales price, performance, and production efficiency. Industry restructuring is also progressing, such as SK hynix's acquisition of Intel's flash memory business and Sandisk's spin-off listing, creating a risk that the competitive environment will change significantly. The Company is working on R&D, production efficiency improvements, and higher integration, but falling behind competitors could lead to loss of market share.

Substantial capital expenditures for the Yokkaichi and Kitakami plants are made based on demand forecasts, but because lead times for ordering manufacturing equipment are long, if the market fluctuates significantly by the time production begins, excess or insufficient equipment capacity could lead to deteriorated profit margins, impairment of fixed assets, or lost sales opportunities. Given the structurally high proportion of fixed costs, even a relatively minor decline in sales revenue can have a relatively large impact on operating profit and cash flow. The Company conducts up-to-date demand forecasting and risk assessment when deciding on capital expenditures, but there is no guarantee of accurate forecasting.

The joint venture business with the Sandisk Group, conducted through three manufacturing joint venture companies, provides scale benefits, but there is a risk that substantial funds would be required to buy out equity interests in the event of a breach of contract or deterioration in the financial condition of the Sandisk Group. In addition, the joint venture agreement is valid through 2034, with the conditions for continuation after that period undetermined; if the joint venture is not continued, the joint venture companies would be dissolved and liquidated. If a divergence arises in the management policies of the two companies, this could also cause disruptions to joint venture operations, such as delays in decision-making.

Goodwill as of the end of the current consolidated fiscal year was ¥395,585 million (10.7% of total consolidated assets), primarily recognized upon the acquisition of all shares of the former Toshiba Memory Corporation in 2018. Since IFRS does not amortize goodwill but instead requires an impairment test each period, a decline in business profitability or cash-generating ability could result in a substantial impairment loss being recognized, compared to Japanese GAAP. In addition, deferred tax assets (net amount of ¥176,784 million) may need to be reduced if their recoverability declines due to significant changes in the business environment or tax reform.

Flash memory production is concentrated at two domestic sites, Yokkaichi and Kitakami, both located in regions with high risk of large-scale disasters such as earthquakes and floods. The power outage at the Yokkaichi plant in June 2019 resulted in a loss of ¥34.5 billion in the fiscal year ended March 2020 (a loss of ¥33.4 billion after taking insurance income into account), and damage to production equipment or operational shutdowns could have a material impact on business and operating results. The Company has implemented measures such as formulating a BCP and promoting multi-vendor procurement, but the risk of geographic concentration of production sites remains structural.

As a company specializing in flash memory, the Company's group depends on sales to a limited number of customers and industries, such as major smartphone manufacturers and hyperscalers, and in FY2026 (ending March 2026), sales to the Apple group accounted for more than 10% of consolidated sales revenue. If major customers reduce order volumes, change transaction terms, or discontinue adoption, this could result in effects such as reduced sales scale, excess inventory, and price revisions. If US-China trade friction or changes in tariff policy affect the business of major customers, there is also a high risk of spillover effects to the Company's group.

Flash memory undergoes extremely rapid technological innovation in terms of generational change, increased capacity, and improved characteristics, requiring long-term, continuous, and substantial R&D investment to maintain competitiveness. The Company is working on increasing the number of layers in BiCS FLASH™, transitioning to QLC, and developing OCTRAM, but falling behind competitors or alternative technologies could result in loss of technological superiority, loss of customers, and declining market share. There is also a risk that AI-related demand could flow to other memory semiconductors such as DRAM rather than leading to expanded demand for flash memory.

While sales revenue is basically denominated in foreign currencies, a significant portion of operating expenses is denominated in yen because front-end manufacturing sites are located domestically, resulting in an adverse impact on operating results and financial condition when the yen appreciates. The Company conducts foreign exchange hedging for several months, but its effect is limited and cannot fully address sharp exchange rate fluctuations. In addition, while continuing substantial capital expenditure and R&D investment, if fundraising at the desired timing, amount, and terms becomes difficult due to deterioration in financial market conditions or changes in credit conditions, the Company may be unable to make necessary investments.