AZEARTH Corporation

The company's mainstay product, DuPont™ Tyvek® chemical protective clothing, is sourced from Asahi-Dow Flash Spun Products Co., Ltd., and no long-term supply contract has been concluded. Should there be a change in transaction terms with this company or a disruption in continued supply, this could have a material impact on business results. As a countermeasure, the company is working to rebuild its domestic and overseas procurement networks.

There is a risk that sales and profits may surge in a particular fiscal year due to the occurrence of environmental and safety issues such as COVID-19, classical swine fever (CSF), avian influenza, and asbestos problems, followed by a rebound decline in the subsequent year. The performance of the protective clothing and environmental equipment/materials business is structurally susceptible to swings driven by such special demand. The company aims to build a stable earnings base by deepening its proprietary solutions business that combines personal protective equipment with know-how proposals.

The company has taken out product liability insurance to prepare for product liability lawsuits arising from defects in products or goods; however, this insurance does not provide unlimited coverage for compensation liabilities. If a large compensation payment obligation arises, it could have a material impact on financial position and business results. It should be noted that certain risks remain that cannot be fully covered by insurance.

Although the company has established a quality management system compliant with ISO9001, if non-conformance with Japanese Industrial Standards or the national certification standards of the Ministry of Health, Labour and Welfare occurs due to unforeseen factors, additional costs such as recall expenses, complaint response costs, and repair costs may arise. There is also a risk that products may fall out of compliance due to amendments to laws and regulations, as well as reputational risk associated with deteriorating business performance.

In the functional building materials business, demand for tatami materials is on a downward trend due to consumers' move away from tatami as lifestyles become more Westernized. In the apparel business as well, the domestic market is shrinking due to the impact of COVID-19 and the relocation of business partners' production bases overseas, among other factors. The company is promoting the launch of the new product "ReFace®" and a shift toward the safety apparel field, but if these initiatives prove insufficient, a decline in revenue and deterioration in business results is expected.

Some products use natural resources such as petroleum, and since production depends on overseas sources, a surge in resource prices and a weakening yen—driven by factors such as the situation in Russia and Ukraine and interest rate and price fluctuations in various countries—could lead to higher procurement prices and logistics costs. Such fluctuations in market conditions could directly affect the company's business results.

Each business segment has a high degree of dependence on China, including outsourced processing contractors for the protective clothing and environmental equipment/materials business and Chinese-made tatami surface suppliers for the functional building materials business. Should unforeseen circumstances arise—such as political instability, rising anti-Japanese sentiment, deterioration of the economic environment, eviction orders resulting from authorities' urban development policies, soaring labor costs, or lockdowns—this could affect procurement prices and supply arrangements, as well as disrupt the operations of Chinese subsidiaries.

The company applies accounting standards for impairment of fixed assets, and if the recoverable amount falls below book value due to deterioration in the performance of a particular business, recognition of impairment loss becomes necessary. At present, there are no specific facts requiring recognition of impairment loss other than for idle assets, but in a future scenario of deteriorating business performance, this could adversely affect financial position and business results.

If a disaster such as an earthquake, fire, or terrorist attack occurs, or if an infectious disease spreads among employees, this could have a material impact on financial position and business results due to temporary production suspension, voluntary restraint of sales activities, and temporary suspension of shipment of goods and products. As a countermeasure, the company has formulated a business continuity plan (BCP) and is developing systems for establishing an emergency information-gathering framework and ensuring employee safety.

There is a risk that overseas supply chain networks could be disrupted due to deteriorating political and economic conditions, political upheaval, worsening security, the occurrence of terrorism or war, or the spread of infectious diseases, making it difficult to sufficiently procure goods and raw materials. This dependence on overseas procurement is particularly high in the protective clothing and environmental equipment/materials business, and any supply shortage would directly affect business results. The company is working to build a framework for responding to unforeseen circumstances by rebuilding its domestic and overseas procurement networks.