The following are major risks that may adversely affect the TOMY Group’s operating results, financial position, brand and/or reputation . Recognizing the probability of the risks occurring, we strive to continuously improve our risk management system , which includes measures to avoid the risks occurring and response to any materializing risks.
(Particularly Significant Risks)
- Impact of hit products
Our mainstay business, the toy business, tends to be affected by the success or failure of specific products and/or specific content. To mitigate such impact, we are taking measures to improve our capabilities for developing long-running hit products, to enhance our product lines, and to develop content. The presence or absence of hit products may affect our financial position and operating results.
- Product safety
We are striving to improve product quality and ensure product safety in accordance with our strict quality control standards. In the event of a serious product safety or quality problem, product liability claim, product recall or other issue, our brand value may suffer, and we may incur a large cost, which may adversely affect our financial position and operating results.
- Disaster risks
We engage in business around the world, including in Japan. In the event of a natural disaster, such as an earthquake, flood, or typhoon, or cyberattack, war, terrorist attack, global infectious pandemic, infrastructure failure including power outages, or other circumstance, our business may be materially disrupted partially or wholly. Although we are working on our business continuity plan (BCP), property and/or personal damage caused by such circumstance may lead to costly expenses, which may materially adversely affect our financial position and operating results.
- Fluctuations in quarterly performance
Sales in our toy business usually tend to be higher in the third quarter, which includes the Christmas and year-end shopping season. Although we are striving to launch priority products in other quarters and expand the toy-periphery business to equalize our performance throughout the year, we expect that such seasonal fluctuations will continue.
- Fluctuations in exchange rates
We import most toys from overseas in U.S. dollars to sell in Japan. We hedge foreign exchange risk by entering into foreign exchange forward contracts or other instruments pursuant to the TOMY Group foreign exchange risk hedging policy. In the event of a decrease in their effectiveness of reducing risk, such as a large fluctuation in exchange rates, our financial position and operating results may be adversely affected, including profits or losses, and assets and liabilities as of the fiscal year-end, of TOMY’s consolidated overseas subsidiaries that are translated into Japanese yen.
- Overseas business
Expanding business in markets outside Japan is one of our priority strategies. We have sales locations in various countries, and most of the products we sell in and outside Japan are manufactured outside of Japan. In countries other than Japan, we are exposed to foreign exchange risk as well as risks associated with global activities, such as unstable political situations, financial instability, cultural and business practice differences, distinctive legal systems, unpredictable changes in investment regulations and tax systems, labor shortages, increased labor costs, and undeveloped systems for protecting intellectual property rights. We are working on expanding business, paying attention to overseas risks, such as by restructing a network of overseas locations, shifting production from the China-dependent system to locations, including Vietnam, and counteracting counterfeit products. A sudden change in politics, economics or legal systems in foreign countries, however, may adversely affect our financial position and operating results.
- Fluctuations in raw material prices
We handle toys made from plastics, zinc die casting alloys or other materials, which are affected by crude oil prices, metal material prices or other prices. To mitigate the effects, we are contriving ways to procure raw materials, including outsourcing manufacturers, and working on enhancing the efficiency of our production and logistics system. In the event of a sharp rise in raw material prices or supply shortage, our financial position and operating results may be adversely affected.
- Material contracts
We entered into some material contracts with third parties. If any such contract is not continued for any reason, our financial position and operating results may be adversely affected
(More details on the material contracts are provided in Part 1. Company information, II. Overview of business, 5. Material contracts, etc. of TOMY’s Annual Securities Report, which is in Japanese only.)
- Information leakage
We retain important business information, and confidential information, personal information and other information of customers, business partners, and other third parties. We take great care in keeping such information in confidence, such as by enhancing and enforcing information security measures. Such information may be leaked because of an unforeseen circumstance. In such an event, our reputation may suffer, and our financial position and operating results may be adversely affected.
- Valuation and impairment of intangible assets
We have a substantial amount of intangible assets, including goodwill, as a result of the acquisition of TOMY International Group. Those intangible assets have been amortized on a straight-line basis, and impairment losses were recognized when necessary. At present, we believe that no additional impairment is required to be recognized. If the performance of TOMY International Group does not meet our expectations, the likelihood of an impairment loss will increase, and our financial position and operating results may be adversely affected.