1. Concerning external circumstances
(1) Business in Japan
SATO provides optimal solutions utilizing auto-ID technologies like barcodes, 2D codes, and RFID which it integrates with hardware products, consumables and software applications. Since our main consumables business spans a broad range of industries including not only logistics and retail but also manufacturing, transport, health care and food processing, SATO is generally resilient to economic developments. However, as a large portion of our operating revenues goes into sales, general and administrative (SG&A) expenses used for accumulating know-how and developing sales collaterals that add value to our solutions business, a sudden drop in net sales due to broad-reaching and severe economic downturns may significantly affect our group’s business performance and financial standing.
(2) Business outside Japan
We possess multiple production and sales subsidiaries in various regions including the Americas, Europe, Asia and Oceania. The following risks could impact our business in these markets and significantly affect our group’s business performance and financial standing.
- Unexpected changes in laws and regulations
- Unexpected political or economic developments
- Disadvantageous changes to the tax system or tax rate
- Social unrest caused by terrorist attacks, war, natural disasters, epidemics or pandemics or other factors
Additional information
In view of the Russia–Ukraine war that began on February 24, 2022, we have discussed our group’s approach to business with and within Russia as well as financial outlook. We announced on March 15, 2022 that, as an immediate response, our European sales subsidiaries will halt businesses with Russia, and we would follow the situation for our Russian subsidiaries closely, keeping all possible options on the table. With mounting tension and increasing uncertainty, we have excluded projected earnings from our Russia business in our financial targets and business plans for FY 2022 and beyond. We will promptly disclose any material impact on our financial results related to the ongoing conflict.
(3) Supply chain
SATO procures raw materials and parts from numerous external sources. Should anything deter us from obtaining these materials or parts at the planned quantity or price and we fail to adequately cover for the cost increase by cutting other costs or raising product pricing, or should supply chain disruptions hinder us from supplying products to customers, our group’s business performance and financial standing could be affected significantly.
Additional information
Supply chain disruptions have hampered procurement of printer parts, driven up label material prices and prompted shipping costs to rise following a shift from sea to air shipments, resulting in an unforeseen negative impact of approximately 30 million yen on our FY 2021 consolidated operating income. We took group-wide action to cover for the extra cost by passing it onto product prices in and outside Japan and cutting SG&A expenses, ultimately shaving the net negative impact down to approximately 10 million yen.
As we expect supply chain issues to linger for some time, we will continue with these actions to fulfill our responsibilities to customers and minimize any impact on our group’s business performance and financial standing.
(4) Currency fluctuations
SATO carries out manufacturing and sales on a global scale and conducts internal transactions among our overseas subsidiaries in multiple foreign currencies. A considerable currency fluctuation could significantly affect price competitiveness, profitability and other aspects of our financial results at the group level.
(5) The pandemic
The COVID-19 pandemic has impacted our group as it has other firms, with lockdowns in some countries and markets causing sales to drop and printer factories to slow production. We place foremost priority on the health and safety of our employees and their families, while taking necessary steps to sustain our business and resume revenue-generating operations. As the pandemic is not over, a new wave of infections or the emergence of a stronger, longer-lasting variant could further affect our group’s financial results and business management.
(6) Climate change
The SATO Group recognizes that climate change has pronounced impacts on the society and that it is critical for us to act on climate issues when managing our business. In 2021, we declared our support for the Task Force on Climate-related Financial Disclosures (TCFD) established by the Financial Stability Board and started applying TCFD recommendations to our climate actions. Under two publicly available scenarios — a 1.5°C scenario aligned with the Paris Agreement and a 4.0°C “too little, too late” transition scenario — we developed two scenarios on the medium and long term (2030 and 2050) future of key sectors that our customers operate in and of our AIDC (automatic identification and data capture) industry.
In both scenarios, we expect soaring raw material costs (due to competition for critical energy minerals that become increasingly necessary amid emission controls and electrification trends, and for recyclable materials and fast-depleting forest resources) to significantly impact our group’s business and finance. The 4.0°C scenario would also see additional impact from considerable cost increases associated with physical risks, in the event when we need to, for example, restore facilities damaged by extreme weather events and natural disasters or pay for water resources during droughts.
We will heighten our resilience by continuing to consider and implement measures to counter the anticipated risks and by developing more eco-friendly products and solutions to realize climate-related opportunities.
2. Operational risk
(1) Intellectual property rights
We engage in investigations and negotiations to avoid intellectual property disputes, and proactively pursue acquisition of intellectual property rights. While there are no cases of SATO infringing the intellectual property rights of any third party at present, we are subject to possible risks of intellectual property lawsuits in the future. A situation whereby we are disadvantaged by such legal suits could significantly affect our group’s business performance and financial standing.
(2) Disposal or loss on valuation of inventories
SATO pays due attention to quality, environmental standards and inventory management for our products and product parts. However, we may need to revise the values of work-in-process or finished goods and record disposal or loss on valuation of these inventories if there are sudden changes in market trends, technological advances or product lifecycles. These could significantly affect our group’s business performance and financial standing.
(3) Compliance
We have adopted a framework for internal control based on the basic policy that was approved by the board of directors to help us enforce our corporate values and ensure proper business operations. We also provide training sessions for executives and employees as necessary, with the aim of improving business ethics and regulatory compliance. These actions, however, may not fully prevent compliance-related risks. Should a legal incident occur, the loss of brand reputation and payment of damages could impact our group’s business performance and financial standing.
(4) Information security
We handle personal and confidential information in our business operations. Should a cyberattack or a security breach occur concerning such information, loss of brand reputation and payment of damages or fines could impact our group’s business performance and financial standing.
(5) Quality of products and solutions
With a mission to create new value for our customers through products and services of superior quality and to contribute towards a better and more sustainable world, we have developed a safety and quality assurance system covering every in-house process from R&D, parts procurement and manufacturing to the shipping of our finished products. Our maintenance services also allow us to prevent any major quality and safety failures in SATO products. But as we pursue and innovate our sales approach of selling not the product but the solution (as a combination of hardware, consumables, software and servicing), we procure an increasing number of third-party products and develop custom software with ever increasing technical complexity. This raises the quality and safety risks of our products and solutions, which may cause unexpected issues that could impact our group’s business performance and financial standing.
